Rafael (RFL) 10-Q 2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-55863

RAFAEL HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	82-2296593
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
520 Broad Street, Newark, New Jersey	07102
(Address of principal executive offices)	(Zip Code)

(212) 658-1450

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Class B common stock	RFL	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of March 2, 2020 was:

Class A common stock, par value $0.01 per share:	787,163 shares
Class B common stock, par value $0.01 per share:	15,031,723 shares

RAFAEL HOLDINGS, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		1
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets as of January 31, 2020 and July 31, 2019	1
	Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended January 31, 2020 and 2019	2
	Consolidated Statements of Equity for the Three and Six Months Ended January 31, 2020 and 2019	3 - 4
	Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2020 and 2019	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	21
Item 4.	Controls and Procedures	21
PART II. OTHER INFORMATION		22
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	23
SIGNATURES		24

i

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAFAEL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share and per share data)

	January 31,			July 31,
	2020			2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	9,522		$	12,024
Trade accounts receivable, net of allowance for doubtful accounts of $170 and $122 at January 31, 2020 and July 31, 2019, respectively		325			450
Due from Rafael Pharmaceuticals		118			280
Prepaid expenses and other current assets		326			507
Total current assets		10,291			13,261
Property and equipment, net		48,250			48,733
Investments – Rafael Pharmaceuticals		70,018			70,018
Investments – Other Pharmaceuticals		2,000			2,000
Investments – Hedge Funds		5,645			5,125
Deferred income tax assets, net		7			19
In-process research and development and patents		1,575			1,575
Other assets		1,450			1,412
TOTAL ASSETS	$	139,236		$	142,143
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Trade accounts payable	$	569		$	795
Accrued expenses		579			605
Other current liabilities		48			27
Total current liabilities		1,196			1,427
Due to Related Party		29			65
Convertible note, net of discount of $0 and $54 – Related Party		—			14,946
Other liabilities		92			292
Accrued interest on convertible note – Related Party		—			649
TOTAL LIABILITIES		1,317			17,379
COMMITMENTS AND CONTINGENCIES
EQUITY
Class A common stock, $0.01 par value; 50,000,000 shares authorized, 787,163 shares issued and outstanding as of January 31, 2020 and July 31, 2019		8			8
Class B common stock, $0.01 par value; 200,000,000 shares authorized, 15,020,485 and 13,142,502 shares issued and outstanding as of January 31, 2020 and July 31, 2019, respectively		149			131
Additional paid-in capital		128,843			112,898
Accumulated deficit		(8,691	)		(5,840	)
Accumulated other comprehensive income related to foreign currency translation adjustment		3,756			3,784
Total equity attributable to Rafael Holdings, Inc.		124,065			110,981
Noncontrolling interests		13,854			13,783
TOTAL EQUITY		137,919			124,764
TOTAL LIABILITIES AND EQUITY	$	139,236		$	142,143

See accompanying notes to consolidated 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 January 31,						Six Months Ended January 31,
	2020			2019			2020			2019
REVENUE:
Rental – Third Party	$	370		$	306		$	716		$	689
Rental – Related Party		527			522			1,047			1,043
Parking		219			189			443			420
Other – Related Party		120			—			240			—
Total Revenue		1,236			1,017			2,446			2,152
COSTS AND EXPENSES
Selling, general and administrative		2,221			1,716			4,262			3,169
Research and development		448			276			693			649
Depreciation and amortization		473			431			939			860
Loss from Operations		(1,906	)		(1,406	)		(3,448	)		(2,526	)
Interest income (expense), net		33			767			(31	)		868
Net loss resulting from foreign exchange transactions		—			—			(5	)		—
Gain on sales of marketable securities, net		—			103			—			330
Unrealized gain (loss) on Investments – Hedge Funds		557			(148	)		520			(52	)
Loss Before Income Taxes		(1,316	)		(684	)		(2,964	)		(1,380	)
(Provision for) benefit from income taxes		(12	)		(17	)		(16	)		14
Net Loss		(1,328	)		(701	)		(2,980	)		(1,366	)
Net (loss) income attributable to noncontrolling interests		(75	)		320			(129	)		136
Net Loss attributable to Rafael Holdings, Inc.	$	(1,253	)	$	(1,021	)	$	(2,851	)	$	(1,502	)
OTHER COMPREHENSIVE INCOME (LOSS)
Net Loss	$	(1,328	)	$	(701	)	$	(2,980	)	$	(1,366	)
Foreign currency translation adjustments		(34	)		80			(28	)		2
Total Comprehensive Loss		(1,362	)		(621	)		(3,008	)		(1,364	)
Comprehensive (loss) income attributable to noncontrolling interests		(18	)		15			(16	)		23
Total Comprehensive Loss attributable to Rafael Holdings, Inc.	$	(1,344	)	$	(636	)	$	(2,992	)	$	(1,387	)
Loss Per Share:
Basic and diluted	$	(0.08	)	$	(0.08	)	$	(0.18	)	$	(0.12	)
Weighted average number of shared used in calculation of loss per share:
Basic and diluted		15,790,400			13,489,583			15,715,442			12,634,389

See accompanying notes to consolidated financial statements.

2

RAFAEL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited, in thousands, except share and per share data)

	Three Months Ended January 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 NOVEMBER 1, 2019		787,163	$	8		14,997,251		$	149	$	128,642		$	(7,438	)	$	3,790		$	13,811		$	138,962
Net loss		—		—		—			—		—			(1,253	)		—			(75	)		(1,328	)
Stock based compensation		—		—		15,863			—		109			—			—			—			109
Stock based compensation to Board of Directors		—		—		12,609			—		208			—			—			—			208
Shares withheld for payroll taxes		—		—		(5,238	)		—		(116	)		—			—			—			(116	)
Conversion of LipoMedix Bridge Notes		—		—		—			—		—			—			—			118			118
Foreign currency translation adjustment		—		—		—			—		—			—			(34	)		—			(34	)
BALANCE AT JANUARY 31, 2020		787,163	$	8		15,020,485		$	149	$	128,843		$	(8,691	)	$	3,756		$	13,854		$	137,919

	Six Months Ended January 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, 2019		787,163	$	8		13,142,502		$	131	$	112,898		$	(5,840	)	$	3,784		$	13,783		$	124,764
Net loss		—		—		—			—		—			(2,851	)		—			(129	)		(2,980	)
Stock based compensation		—		—		20,863			—		203			—			—			—			203
Stock based compensation to Board of Directors		—		—		12,609			—		208			—			—			—			208
Shares issued for convertible debt		—		—		1,849,749			18		15,650			—			—			—			15,668
Shares withheld for payroll taxes		—		—		(5,238	)		—		(116	)		—			—			—			(116	)
Conversion of LipoMedix Bridge Notes		—		—		—			—		—			—			—			200			200
Foreign currency translation adjustment		—		—		—			—		—			—			(28	)		—			(28	)
BALANCE AT JANUARY 31, 2020		787,163	$	8		15,020,485		$	149	$	128,843		$	(8,691	)	$	3,756		$	13,854		$	137,919

3

RAFAEL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited, in thousands, except share and per share data)

	Three Months Ended January 31, 2019
	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 NOVEMBER 1, 2018		787,163	$	8		11,786,397	$	118	$	103,784	$	(1,628	)	$	4,160		$	9,243	$	115,685
Net loss		—		—		—		—		—		(1,021	)		—			320		(701	)
Purchase of Class B Common Shares		—		—		1,254,200		12		8,630		—			—			—		8,642
Stock based compensation to Board of Directors		—		—		12,609		—		107		—			—			—		107
Stock based compensation		—		—		70,718		1		34		—			—			—		35
Stock options exercised		—		—		9,145		—		45		—			—			—		45
Debt discount on convertible debt		—		—		—		—		71		—			—			—		71
Capital contribution from noncontrolling interest		—		—		—		—		—		—			—			4,587		4,587
Foreign currency translation adjustment		—		—		—		—		—		—			(80	)		—		(80	)
BALANCE AT JANUARY 31, 2019		787,163	$	8		13,133,069	$	131	$	112,671	$	(2,649	)	$	4,080		$	14,150	$	128,391

	Six Months Ended January 31, 2019
	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, 2018		787,163	$	8		11,762,346	$	118	$	103,636	$	(1,108	)	$	4,043		$	9,427	$	116,124
Net loss		—		—		—		—		—		(1,502	)		—			136		(1,366	)
Adoption effect of ASU 2016-01		—		—		—		—		—		(39	)		39			—		—
Purchase of Class B Common Shares		—		—		1,254,200		12		8,630		—			—			—		8,642
Stock based compensation to Board of Directors		—		—		12,609		—		107		—			—			—		107
Stock based compensation		—		—		70,718		1		64		—			—			—		65
Stock options exercised		—		—		33,196		—		163		—			—			—		163
Debt discount on convertible debt		—		—		—		—		71		—			—			—		71
Capital contribution from noncontrolling interest		—		—		—		—		—		—			—			4,587		4,587
Foreign currency translation adjustment		—		—		—		—		—		—			(2	)		—		(2	)
BALANCE AT JANUARY 31, 2019		787,163	$	8		13,133,069	$	131	$	112,671	$	(2,649	)	$	4,080		$	14,150	$	128,391

See accompanying notes to consolidated financial statements.

4

RAFAEL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Six Months Ended January 31,
	2020			2019
Operating activities
Net loss	$	(2,980	)	$	(1,366	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		939			860
Deferred income taxes		12			(15	)
Interest income on Series D Convertible Note		—			(848	)
Net gain on sales of marketable securities		—			(330	)
Unrealized (gain) loss on investments – Hedge Funds		(520	)		52
Provision for doubtful accounts		48			9
Non-cash compensation		411			172
Amortization of debt discount		54			5
Change in assets and liabilities:
Trade accounts receivable		77			(78	)
Prepaid expenses and other current assets		181			(186	)
Other assets		(38	)		(82	)
Accounts payable and accrued expenses		(252	)		296
Due to/from related parties		126			588
Other current liabilities		—			39
Other liabilities		42			(15	)
Net cash used in operating activities		(1,900	)		(899	)
Investing activities
Purchases of property and equipment		(456	)		(58	)
Proceeds from sale and maturity of marketable securities, net		—			25,031
Investment in Rafael Pharmaceuticals		—			(55,870	)
Net cash used in investing activities		(456	)		(30,897	)
Financing activities
Contribution from noncontrolling interest of consolidated entity		—			4,587
Repayment of Loan from Rafael Pharmaceuticals		—			3,300
Proceeds from exercise of options		—			163
Proceed from sale of shares		—			7,777
Proceeds from convertible notes payable - Related Party		—			15,000
Payments for taxes related to shares withheld for employee taxes		(116	)		—
Net cash (used in) provided by financing activities		(116	)		30,827
Effect of exchange rate changes on cash and cash equivalents		(30	)		(65	)
Net decrease in cash and cash equivalents		(2,502	)		(1,034	)
Cash and cash equivalents at beginning of period		12,024			15,803
Cash and cash equivalents at end of period	$	9,522		$	14,769
Supplemental Schedule of Non-Cash Investing and Financing Activities
Adoption effect of ASU 2016-01	$	—		$	39
Beneficial conversion feature of convertible debt – Related Party	$	—		$	71
Debt and accrued interest converted to Series D Preferred Stock	$	—		$	10,848
Related Party deposit utilized to purchase Class B Common Stock	$	—		$	864
Conversion of LipoMedix Bridge Note	$	200		$	—
Conversions of related party convertible notes payable and accrued interest	$	15,668		$	—

See accompanying notes to consolidated financial statements.

5

RAFAEL HOLDINGS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — DESCRIPTION OF BUSINESS

Rafael Holdings, Inc. (“Rafael Holdings” or the “Company”), a Delaware corporation, owns interests in commercial real estate assets and clinical stage pharmaceutical companies. The assets are operated as two separate lines of business.

The 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 affiliated entities and an associated 800-car public garage, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel.

The pharmaceutical holdings include preferred equity interests and a warrant to purchase additional equity interests in Rafael Pharmaceuticals, Inc., or Rafael Pharmaceuticals, which is a clinical stage, oncology-focused, pharmaceutical company committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells, and a majority equity interest in LipoMedix Pharmaceuticals Ltd., or LipoMedix, a clinical stage oncological pharmaceutical company based in Israel. In addition, we have more recently established the Barer Institute (“Barer”), a wholly-owned early stage venture focused on developing a pipeline of therapeutic compounds, including compounds to regulate cancer metabolism. The venture is pursuing collaborative research agreements with leading scientists from top academic institutions.

On March 26, 2018, IDT Corporation, or IDT, the former parent corporation of the Company, completed a tax-free spinoff (the “Spin-Off”) of the Company’s capital stock, through a pro rata distribution of common stock to its stockholders of record as of the close of business on March 13, 2018.

The “Company” in these financial statements refers to Rafael Holdings on a consolidated basis from the date of the Spin-Off. All significant intercompany accounts and transactions have been eliminated in consolidation.

All majority-owned subsidiaries are consolidated with all intercompany transactions and balances being eliminated in consolidation. The entities included in these financial statements are as follows:

Company	Country of Incorporation	Percentage Owned
Rafael Holdings, Inc.	United States – Delaware
Broad Atlantic Associates, LLC	United States – Delaware		100	%
IDT 225 Old NB Road, LLC	United States – Delaware		100	%
IDT R.E. Holdings Ltd.	Israel		100	%
Rafael Realty Holdings, Inc.	United States – Delaware		100	%
Barer Institute, Inc.	United States – Delaware		100	%
Pharma Holdings, LLC	United States – Delaware		90	%
CS Pharma Holdings, LLC	United States – Delaware		45	%*
LipoMedix Pharmaceuticals Ltd.	Israel		57.9	%

* 50% of CS Pharma Holdings, LLC is owned by Pharma Holdings, LLC. We have a 90% ownership in Pharma Holdings, LLC and, therefore, an effective 45% interest in CS Pharma Holdings, LLC.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included. 

The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2020 refers to the fiscal year ending July 31, 2020).

6

Operating results for the three and six months ended January 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2020. The balance sheet at July 31, 2019 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, 2019, or the 2019 Form 10-K, as filed with the U.S. Securities and Exchange Commission (“SEC”).

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers (Topic 606) or ASU 2014-09. The objective of the ASU is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the ASU, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. The five-step analysis 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. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s Accounting Standards Codification (“ASC”). The Company adopted ASU 2014-09 effective August 1, 2018 using the modified retrospective approach. The Company reviewed all contracts that were not completed as of August 1, 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.

The Company disaggregates its revenue by source within its consolidated statements of operations. 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 which is also consistent with the guidance under ASC 842, Leases.

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 and Expenses

Research and development costs and expenses 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. 

7

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and will be applied as a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements and intends to adopt the standard on August 1, 2020.

Recently Adopted Accounting Pronouncements

The FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) in February 2016. The new standard, as amended by subsequent accounting updates thereto, replaces historical lease accounting guidance and requires lessees to account for a lease by recognizing right-of-use (ROU) asset and corresponding lease liability on the balance sheet. Lessor accounting under Topic 842 is largely unchanged from historical U.S. GAAP and generally aligns with accounting for revenue from contracts with customers (Topic 606).

The Company initially adopted the new lease accounting standard as of August 1, 2019 and elected the optional transition method to apply the new standard prospectively. The Company elected the package of transition practical expedients, and therefore did not reassess: (1) whether any expired or existing contracts are or contain leases; (2) lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases. Further, as of January 31, 2020 the Company was not a lessee under any leasing arrangements. which had, and will have, the following impacts on the Company:

Topic 842 changed certain requirements regarding the classification of leases that could result in the Company recognizing certain long-term leases entered into or modified after August 1, 2019 as sales-type leases, as opposed to operating leases.

The Company did not have a cumulative-effect adjustment as of the adoption date.

The Company elected the practical expedient to not separate certain non-lease components from the lease component to which they relate because the timing and pattern of transfer for the lease components and non-lease components are the same and the related lease component is classified as an operating lease. As a result, the Company continues to present all rentals and reimbursements from tenants as a single line item Rental Income within the Consolidated Statement of Income. No reclassifications to prior periods for comparability were required.

NOTE 3 – INVESTMENT IN RAFAEL PHARMACEUTICALS

Rafael Pharmaceuticals is a clinical stage, oncology-focused pharmaceutical company committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells.

The Company owns equity interests and rights in Rafael Pharmaceuticals through a 90%-owned non-operating subsidiary, Pharma Holdings, LLC, or Pharma Holdings.

Pharma Holdings owns 50% of CS Pharma Holdings, LLC (“CS Pharma”), a non-operating entity that owns equity interests in Rafael Pharmaceuticals. Accordingly, the Company holds an effective 45% indirect interest in the assets held by CS Pharma.

Howard Jonas, Chairman of the Board and Chief Executive Officer of the Company, and Chairman of the Board of Rafael Pharmaceuticals owns 10% of Pharma Holdings.

Pharma Holdings holds 36.7 million shares of Rafael Pharmaceuticals Series D Convertible Preferred Stock and a warrant to increase the collective 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, and will expire upon the earlier of December 31, 2020, a qualified initial public offering, or liquidation event of Rafael Pharmaceuticals.

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Pharma Holdings also holds certain governance rights in Rafael Pharmaceuticals including appointment of directors.

CS Pharma holds 16.7 million shares of Rafael Pharmaceuticals Series D Convertible Preferred Stock. CS Pharma owned a $10 million Series D Convertible Note, with 3.5% interest, in Rafael Pharmaceuticals which was converted in January 2019.

The Company and its subsidiaries collectively own securities representing 51% of the outstanding capital stock of Rafael Pharmaceuticals and 38% of the capital stock on a fully diluted basis (excluding the remainder of the Warrant).

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, 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 50% (based on current ownership) of such distributions. Similarly, if Pharma Holdings were to distribute proceeds it receives from CS Pharma, it would do so on a pro rata basis, entitling the Company to 90% (based on current ownership) of such distributions.

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 variable interest entity; 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.

Howard Jonas has additional contractual rights to receive additional Rafael Pharmaceutical shares (“Bonus Shares”) for an additional 10% of the fully diluted capital stock of Rafael Pharmaceuticals upon the achievement of certain milestones. The additional 10% is based on the fully diluted capital stock of Rafael Pharmaceuticals, excluding the remainder for the Warrant, at the time of issuance. If any of the milestones are met, the Bonus Shares are to be issued without any additional payment. Howard Jonas has the right to transfer the Bonus Shares, in his discretion, to others, including those who are instrumental to the future success of Rafael Pharmaceuticals.

NOTE 4 — INVESTMENT IN LIPOMEDIX

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.

The Company holds 57.9% of the issued and outstanding ordinary shares of LipoMedix and has consolidated this investment from the second quarter of fiscal 2018.

In July 2018, the Company provided no-interest bridge financing of $875,000 to LipoMedix (the “2018 Bridge Note”), which was converted into 1,650,943 shares of LipoMedix on January 20, 2020 in accordance with its terms, thereby increasing the Company’s ownership from 52.1% to 57.9%.

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In April 2019, the Company provided no-interest bridge financing of $250,000 to LipoMedix (the “2019 Bridge Note”). The 2019 Bridge Note converted into 471,698 shares of LipoMedix on September 28, 2019 which increased the Company’s ownership on that date from 50.6% to 52.1%.

In November 2019, the Company provided bridge financing in the principal amount of $100,000 to LipoMedix with a maturity date of May 3, 2020. Under the terms of the note, as long as it remains outstanding, LipoMedix may not incur any additional debt, make any shareholder distributions, or assume any liens on property or assets.

In January 2020, the Company provided bridge financing in the principal amount of $125,000 to LipoMedix with a maturity date of May 3, 2020. Under the terms of the note, as long as it remains outstanding, LipoMedix may not incur any additional debt, make any shareholder distributions, or assume any liens on property or assets.

NOTE 5 — FAIR VALUE MEASUREMENTS

The Fair Value Measurements and Disclosures topic of the FASB ASC requires disclosures about how fair value is determined for assets and liabilities and a hierarchy for which these assets and liabilities must be grouped is established, based on significant levels of inputs as follows:

Level 1 – quoted prices in active markets for identical assets or liabilities;

Level 2 –quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability;

Level 3 – unobservable inputs for the asset or liability, such as discounted cash flow models or valuations.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following is a listing of the Company’s assets required to be measured at fair value on a recurring basis and where they are classified within the fair value hierarchy as of January 31, 2020 and July 31, 2019:

	January 31, 2020
	Level 1		Level 2		Level 3		Total
Available-for-sale securities:	(unaudited, in thousands)
Hedge Funds	$	—	$	—	$	5,645	$	5,645
Total	$	—	$	—	$	5,645	$	5,645

	July 31, 2019
	Level 1		Level 2		Level 3		Total
Available-for-sale securities:	(unaudited, in thousands)
Hedge Funds	$	—	$	—	$	5,125	$	5,125
Total	$	—	$	—	$	5,125	$	5,125

At January 31, 2020 and July 31, 2019, the Company did not have any liabilities measured at fair value on a recurring basis.

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The following table summarizes the change in the balance of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

	Six Months Ended January 31,
	2020		2019
	(unaudited, in thousands)
Balance, beginning of period	$	5,125	$	12,118
Conversion of Series D Convertible Note		—		(7,900	)
Total gain included in earnings		520		(52	)
Balance, end of period	$	5,645	$	4,166

At July 31, 2018, the fair value of the Rafael Pharmaceuticals convertible promissory notes, which were classified as Level 3, was estimated based on a valuation of Rafael Pharmaceuticals by reference to recent transactions in its securities, the September 2016 Series D Convertible Note investment, as well as utilizing a discounted cash flow technique under the Income Approach and other factors that could not be corroborated by the market. The Note was converted into shares of Series D Convertible Preferred Stock of Rafael Pharmaceuticals in January 2019.

Prior to the Spin-Off, IDT contributed a $2.0 million investment in securities of another entity that are not liquid, which were included in Investments – Other Pharmaceuticals in the accompanying consolidated balance sheets. The investment is accounted for using the cost method; therefore, this investment is not measured at fair value.

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, prepaid expenses and other current assets, and other current liabilities.At January 31, 2020 and July 31, 2019, the carrying amount of these assets and liabilities approximated fair value because of the immediate or short period of time to maturity. The fair value estimates for cash and cash equivalents were classified as Level 1 and other current assets, and other current liabilities were classified as Level 2 of the fair value hierarchy.

Other assets and other liabilities.At January 31, 2020 and July 31, 2019, 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 amount 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 January 31, 2020 or July 31, 2019.

NOTE 6 — TRADE ACCOUNTS RECEIVABLE

Trade Accounts Receivable consisted of the following:

	January 31, 2020		July 31, 2019
	(unaudited, in thousands)
Trade Accounts Receivable – Third Party	$	449	$	561
Trade Accounts Receivable – Related Party		46		11
Less: Allowance for Doubtful Accounts		(170)		(122)
Trade Accounts Receivable, net	$	325	$	450

The current portion of deferred rental income included in Prepaid Expenses and Other Current Assets was approximately $23,000 and $34,000 as of January 31, 2020 and July 31, 2019, respectively.

The noncurrent portion of deferred rental income included in Other Assets was approximately $1.4 million as of January 31, 2020 and July 31, 2019.

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NOTE 7 — PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

	January 31, 2020			July 31, 2019
	(unaudited, in thousands)
Building and Improvements	$	54,676		$	54,241
Land		10,412			10,412
Furniture and Fixtures		1,145			1,145
Other		276			255
		66,509			66,053
Less: Accumulated Depreciation and Amortization		(18,259	)		(17,320	)
Total	$	48,250		$	48,733

Other property and equipment consists of furniture and fixtures, office and other equipment and miscellaneous computer hardware.

Depreciation and amortization expense pertaining to property and equipment was approximately $473,000 and $431,000 for the three months ended January 31, 2020 and 2019, respectively, and $939,000 and $860,000 for the six months ended January 31, 2020 and 2019, respectively.

The Company’s headquarters are located at 520 Broad Street in Newark where it occupies office space in the building owned by its subsidiary.

NOTE 8 — 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 share includes potentially dilutive securities such as stock options and other convertible instruments.

The following table summarizes the Company’s potentially dilutive securities which have been excluded from the calculation of dilutive loss per share as their effect would be anti-dilutive:

	January 31, 2020		July 31, 2019
	(unaudited)
Stock Options		586,874		587,133
Convertible Note		—		1,847,594
Total		586,874		2,434,727

In the three and six months ended January 31, 2020 and 2019, the diluted loss per share computation equals basic loss per share because the Company had a net loss and the impact of the assumed exercise of stock options and conversion of the convertible note would have been anti-dilutive.

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NOTE 9 — RELATED PARTY TRANSACTIONS

The Company has historically maintained an intercompany balance due to/from related parties that relates to cash advances for investments, loan repayments, charges for services provided to the Company by IDT and payroll costs for the Company’s personnel that were paid by IDT. This is partially offset by rental income paid to the Company by various companies under common control to IDT. The Company recorded expense of approximately $142,000 in related party services to IDT, of which approximately $29,000 is included in due to related parties at January 31, 2020.

The Company provides Rafael Pharmaceuticals with administrative, finance, accounting, tax and legal services. Howard S. Jonas serves as a Chairman of the Board of Rafael Pharmaceuticals and owns an equity interest in Rafael Pharmaceuticals. The Company billed Rafael Pharmaceuticals $120,000 during each of the first and second quarters of fiscal 2020. As of January 31, 2020, Rafael Pharmaceuticals owed the Company $120,000 included in “Due from Rafael Pharmaceuticals”.

On November 15, 2018, Howard Jonas entered into an agreement to purchase a convertible note from the Company for $15.0 million convertible into shares of Class B common stock at $8.47 per share. The term of the note was three years with interest on the principal amount at a rate of 6% per annum, compounded quarterly. At issuance, the Company recorded a debt discount of approximately $70,000 related to the beneficial conversion feature of the note and amortized approximately $16,000 of the discount in fiscal 2019 which was recorded as interest expense. In addition, the Company recorded approximately $650,000 of interest expense for the year ended July 31, 2019. In August 2019, the note including accrued interest of approximately $667,000 was converted into 1,849,749 shares of common stock.

On January 10, 2019, Pharma Holdings partially exercised a warrant to purchase 5.1 million shares of Series D Convertible Preferred Stock of Rafael Pharmaceuticals for $6.4 million, of which $640,000 was contributed by Howard Jonas.

On January 23, 2019, Pharma Holdings partially exercised a warrant to purchase 36.3 million shares of Series D Convertible Preferred Stock of Rafael Pharmaceuticals for $34.4 million, of which $3.4 million was contributed by Howard Jonas.

On January 29, 2020, in connection with the vesting of certain restricted shares of Class B common stock held by an officer of the Company, the Company withheld 5,238 shares to pay for the payroll taxes on the officer’s behalf, totalling approximately $116,000.

The Company leases space to related parties which represented approximately 43% and 51% of the Company’s total revenue for the three months ended January 31, 2020 and 2019, respectively, and 43% and 48% for the six months ended January 31, 2020 and 2019, respectively. See Note 14 for future minimum rent payments from related parties and other tenants.

NOTE 10 — INCOME TAXES

On December 22, 2017, the U.S. government enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”, which is commonly referred to as “The Tax Cuts and Jobs Act” (the “Tax Act”). The Tax Act provides for comprehensive tax legislation that, among other things, reduces the U.S. federal statutory corporate tax rate from 35.0% to 21.0% effective January 1, 2018, broadens the U.S. federal income tax base, requires companies to pay a one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”), and creates new taxes on certain foreign sourced earnings.

At July 31, 2019, the Company did not have any undistributed earnings of its foreign subsidiaries. As a result, no additional income or withholding taxes were provided for, for the undistributed earnings or any additional outside basis differences inherent in the foreign entities. The Company reviewed the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT) that became effective August 1, 2018 and has not recorded any impact associated with either.

At July 31, 2019, the Company had federal net operating loss (“NOL”) carryforwards from domestic operations of approximately $22.3 million to offset future taxable income. The Company has state NOLs of $3.2 million. The Company has NOL carryforwards from foreign operations of $1.2 million. As part of the Tax Act, federal NOLs generated in 2018 and later are not subject to an expiration period and are available to offset 80% of taxable income in the year in which they are utilized. The federal NOL carryforwards generated prior to 2018 will begin to expire in 2026. The state NOLs will begin to expire in 2038 and foreign NOLs do not expire.

The Company anticipates that its assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, 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 provisional estimates when the accounting for the income tax effects of the Tax Act is completed.

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NOTE 11 — BUSINESS SEGMENT INFORMATION

The Company conducts business as two operating segments, Real Estate and Pharmaceuticals. The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s President.

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, an office/data center building in Piscataway, New Jersey and a portion of an office building in Israel.

The Pharmaceuticals segment is comprised of preferred equity interests and the Warrant to purchase equity interests in Rafael Pharmaceuticals, a majority equity interest in LipoMedix and Barer. To date, the Pharmaceuticals segment has not generated any revenues.

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 and Barer are tracked separately in the Pharmaceuticals segment. All corporate costs are allocated to the Real Estate segment.

Operating results for the business segments of the Company are as follows:

(unaudited, in thousands)	Real Estate			Pharmaceuticals			Total
Three Months Ended January 31, 2020
Revenues	$	1,236		$	—		$	1,236
Loss from operations		(1,392	)		(514	)		(1,906	)
Three Months Ended January 31, 2019
Revenues	$	1,017		$	—		$	1,017
Loss from operations		(1,109	)		(297	)		(1,406	)

(unaudited, in thousands)	Real Estate			Pharmaceuticals			Total
Six Months Ended January 31, 2020
Revenues	$	2,446		$	—		$	2,446
Loss from operations		(2,668	)		(780	)		(3,448	)
Six Months Ended January 31, 2019
Revenues	$	2,152		$	—		$	2,152
Loss from operations		(1,823	)		(703	)		(2,526	)

Geographic Information

Revenues from tenants located outside of the United States were generated entirely from tenants 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 January 31, (unaudited)	2020			2019
Revenue from tenants located in Israel		6	%		2	%

Six Months Ended January 31, (unaudited)	2020		2019
Revenue from tenants located in Israel		6%		2	%

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
January 31, 2020
Long-lived assets, net	$	46,623	$	1,627	$	48,250
Total assets		135,699		3,537		139,236
July 31, 2019
Long-lived assets, net	$	47,096	$	1,637	$	48,733
Total assets		138,535		3,608		142,143

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NOTE 12 — COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Under a Founders Agreement among LipoMedix and other parties, two of LipoMedix founders would become entitled to consulting payments in the approximate amounts of $385,000 and $358,000, respectively, upon the satisfaction of certain conditions thereto. LipoMedix believes that those conditions have not been satisfied and does not believe that they are likely to be satisfied until LipoMedix is successful in raising significant capital in the future.

On September 17, 2018, LipoMedix was notified of a claim initiated by one of its founders seeking payment of consulting fees in the amount of approximately $377,000 and seeking to place restrictions on LipoMedix’s bank accounts and other assets to protect his claim. LipoMedix did not believe that the individual had the right to receive any payment at the current time. LipoMedix responded to the demand for the placement of restrictions on its assets. On November 26, 2018, the court denied the request by the founder to place restrictions on the assets. In May 2019, LipoMedix received a letter from the other founder requesting payment of his consulting fees. On July 15, 2019, the parties settled the matters and the two founders will be paid a percentage of future investments and certain other proceeds.

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. As part of the Settlement Agreement, the Company agreed to pay a penalty of $127,294 in eight quarterly installment payments through November 2021.

The Company accounts for contingencies when a loss is considered probable and can be reasonably estimated. For the matters disclosed above a legal accrual for approximately $225,000 has been recorded for legal fees and losses believed to be both probable and reasonably estimable, but an exposure to additional loss may exist in excess of the amount accrued.

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. The Company intends to vigorously defend 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, the Company does not expect any of those legal proceedings to have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

NOTE 13 — EQUITY

On November 15, 2018, Howard Jonas entered into an agreement to purchase a convertible note from the Company for $15.0 million that was convertible into shares of Class B common stock at $8.47 per share. The term of the note was three years with interest on the principal amount at a rate of 6% per annum, compounded quarterly.

In August 2019, the note including interest of approximately $667,000 was converted into 1,849,749 shares of Class B common stock.

Pursuant to the Company’s 2018 Equity Incentive Plan, each of our three non-employee directors of the Company was granted 4,203 restricted shares of our Class B common stock in January 2020 which fully vested on the date of the grant. The fair value of the awards on the date of the grant was approximately $208,000 which was included in selling, general and administrative expense.

Stock Options 

A summary of stock option activity for the Company is as follows:

	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at July 31, 2019		587,133		$	4.90		3.66	$	2,877
Granted		—			—		—		—
Exercised		—			—		—		—
Cancelled / Forfeited		(259	)		4.90		—		—
Outstanding at January 31, 2020		586,874		$	4.90		3.15	$	2,876
Exercisable at January 31, 2020		586,874		$	4.90		3.15	$	2,876

During the six months ended January 31, 2020, 259 options were canceled due to employee terminations. At January 31, 2020, there was no unrecognized compensation cost related to non-vested stock options.

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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:

(unaudited)	Number of Non-vested Shares			Weighted- Average Grant-Date Fair Value
Outstanding at July 31, 2019		156,426		$	10.41
Granted		20,863			20.49
Vested		(14,144	)		17.25
Cancelled / Forfeited		—			—
NON-VESTED SHARES AT January 31, 2020		163,145		$	11.91

At January 31, 2020, there was $1.5 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over the next 2.40 years.

NOTE 14 — LEASES 

The Company is the lessor of certain properties which are leased to tenants under net operating leases with initial term expiration dates ranging from 2021 to 2028. Lease income included on the Consolidated Statements of Operations for the three and six months ended January 31, 2020, was $1.2 million and $2.4 million, respectively. 

The future contractual minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of January 31, 2020, under non-cancelable operating leases which expire on various dates through 2028 are as follows:

Year ending July 31,	Related Parties		Other		Total
(unaudited, in thousands)
2020	$	1,006	$	598	$	1,604
2021		2,041		1,115		3,156
2022		2,078		968		3,046
2023		2,117		640		2,757
2024		2,155		538		2,693
Thereafter		1,659		2,494		4,153
Total Minimum Future Rental Income	$	11,056	$	6,353	$	17,409

The Company has related party leases that expire in April 2025 for (i) an aggregate of 88,631 square feet, which includes two parking spots per thousand square feet of space leased at 520 Broad Street, and (ii) 3,595 square feet in Israel. The annual rent is approximately $2.0 million in the aggregate. The related parties have the right to terminate the domestic leases upon four months’ notice, and upon early termination will pay a termination penalty equal to 25% of the portion of the rent due over the course of the remaining term. A related party has the right to terminate the Israeli lease upon four months’ notice. IDT has the right to lease an additional 50,000 square feet, in 25,000-foot increments, in the building located at 520 Broad Street on the same terms as their base lease, and other rights should 25,000 square feet or less remain available to lessees in the building. Upon expiration of the lease, related parties have the right to renew the leases for another five years.

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NOTE 15 — SUBSEQUENT EVENTS

On February 3, 2020, Rafael Pharmaceuticals entered into a Line of Credit Loan Agreement (“Line of Credit Agreement”) with RP Finance, LLC (“RP Finance”), which provides a revolving commitment of up to $50,000,000 to fund clinical trials and other capital needs.

The Company owns 37.5% of the equity interests in RP Finance and is required to fund 37.5% of funding requests from Rafael Pharmaceuticals under the Line of Credit Agreement. Howard Jonas, the Company’s Chairman and Chief Executive Officer, is Chairman of the Board of Rafael Pharmaceuticals and owns an equity interest in Rafael Pharmaceuticals. Mr. 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 is 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 12% of the issued and outstanding shares of Rafael Pharmaceuticals common stock, with such interest subject to anti-dilution protection as set forth in the Line of Credit Agreement.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Rafael Holdings, Inc. (“Rafael Holdings” or the “Company”), a Delaware corporation, owns interests in commercial real estate assets and clinical stage pharmaceutical companies. The assets are operated as two separate lines of business.

The 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 affiliated entities, and an associated 800-car public garage, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel.

The pharmaceutical holdings include preferred equity interests and the Warrant to purchase additional equity interests in Rafael Pharmaceuticals, Inc., or Rafael Pharmaceuticals, which is a clinical stage, oncology-focused, pharmaceutical company committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells, and a majority equity interest in LipoMedix Pharmaceuticals Ltd., or LipoMedix, a clinical stage oncological pharmaceutical company based in Israel. In addition, we have recently established the Barer Institute or Barer, a wholly-owned early stage venture focused on developing a pipeline of therapeutic compounds, including compounds to regulate cancer metabolism.  The venture is pursuing collaborative research agreements with leading scientists from top academic institutions.

Results of Operations

Our business consists of two reportable segments – Real Estate and Pharmaceuticals. We evaluate the performance of our Real Estate segment based primarily on results of operations and our Pharmaceuticals segment based primarily on research and development efforts and results of clinical trials. Accordingly, the income and expense line items below loss from operations are only included in the discussion of consolidated results of operations.

Three and Six Months Ended January 31, 2020 Compared to Three and Six Months Ended January 31, 2019

Real Estate Segment

Revenues.Revenues increased by approximately $219,000 and $294,000 in the three and six months ended January 31, 2020, respectively, compared to the three and six months ended January 31, 2019, due to additional third-party tenants in 520 Broad Street who started rental payments after the start of fiscal 2019, increased parking revenue and revenue from management fees billed to Rafael Pharmaceuticals for services performed on their behalf.

Selling, general and administrative expenses. Selling, general and administrative expenses consists mainly of payroll, benefits, facilities and consulting and professional fees. Selling, general and administrative expense increased by approximately $460,000 and $1.1 million in the three and six months ended January 31, 2020, respectively, compared to the three and six months ended January 31, 2019, due primarily to increased payroll and bonus payments in the first and second quarters of fiscal 2020, as well as increased costs of building maintenance and repairs.

Depreciation and amortization expenses. Depreciation and amortization expenses in the three and six months ended January 31, 2020 increased due to increased fixed assets in place from building improvements compared to the same periods in the prior year.

	Three Months Ended January 31,						Change
	2020			2019			$			%
	(unaudited, in thousands)
Rental – Third Party Revenue	$	370		$	306		$	64			20.9	%
Rental – Related Party Revenue		527			522			5			1.0	%
Parking Revenue		219			189			30			15.9	%
Other – Related Party		120			—			120			100.0	%
Selling, general and administrative		(2,156	)		(1,696	)		(460	)		27.1	%
Depreciation and amortization		(472	)		(430	)		(42	)		9.8	%
Loss from operations	$	(1,392	)	$	(1,109	)	$	(283	)		25.5	%

	Six Months Ended January 31,				Change
	2020		2019		$		%
	(unaudited, in thousands)
Rental – Third Party Revenue	$	716	$	689	$	27		3.9%
Rental – Related Party Revenue		1,047		1,043		4		0.4%
Parking Revenue		443		420		23		5.5%
Other – Related Party		240		—		240		100.0%
Selling, general and administrative		(4,176)		(3,116)		(1,060)		34.0%
Depreciation and amortization		(938)		(859)		(79)		9.2%
Loss from operations	$	(2,668)	$	(1,823)	$	(845)		46.4%

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Pharmaceuticals Segment

To date, the Pharmaceuticals segment has not generated any revenues. The expenses in the Pharmaceuticals segment relate to the activities of LipoMedix and Barer.

	Three Months Ended January 31,						Change
	2020			2019			$			%
	(unaudited, in thousands)
Selling, general and administrative	$	(65	)	$	(20	)	$	(45	)		225.0	%
Research and development		(448	)		(276	)		(172	)		62.3	%
Depreciation and amortization		(1	)		(1	)		—			—
Loss from operations	$	(514	)	$	(297	)	$	(217	)		73.1	%

	Six Months Ended January 31,						Change
	2020			2019			$			%
	(unaudited, in thousands)
Selling, general and administrative	$	(86	)	$	(53	)	$	(33	)		62.3	%
Research and development		(693	)		(649	)		(44	)		6.8	%
Depreciation and amortization		(1	)		(1	)		—			—
Loss from operations	$	(780	)	$	(703	)	$	(77	)		(11.0	%)

Consolidated operations

Our consolidated income and expense line items below loss from operations were as follows:

	Three Months Ended January 31,						Change
	2020			2019			$			%
	(unaudited, in thousands)
Loss from operations	$	(1,906	)	$	(1,406	)	$	(500	)		35.6	%
Interest income (expense), net		33			767			(734	)		(95.7	%)
Gain on sales of marketable securities, net		—			103			(103	)		(100.0	%)
Unrealized gain (loss) on investments – Hedge Funds		557			(148	)		705			(476.4	%)
Loss before income taxes		(1,316	)		(684	)		(632	)		92.4	%
Provision for income taxes		(12	)		(17	)		5			(29.4	%)
Net Loss		(1,328	)		(701	)		(627	)		89.4	%
Net (loss) income attributable to noncontrolling interests		(75	)		320			(395	)		(123.4	%)
Net loss attributable to Rafael Holdings, Inc.	$	(1,253	)	$	(1,021	)	$	(232	)		22.7	%

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	Six Months Ended January 31,						Change
	2020			2019			$			%
	(unaudited, in thousands)
Loss from operations	$	(3,448	)	$	(2,526	)	$	(922	)		36.5	%
Interest (expense) income, net		(31	)		868			(899	)		(103.6	%)
Net loss resulting from foreign exchange transactions		(5	)		—			(5	)		(100.0	%)
Gain on sales of marketable securities, net		—			330			(330	)		(100.0	%)
Unrealized gain (loss) on investments – Hedge Funds		520			(52	)		572			(1,100.0	%)
Loss before income taxes		(2,964	)		(1,380	)		(1,584	)		114.8	%
(Provision for) benefit from income taxes		(16	)		14			(30	)		(214.3	%)
Net Loss		(2,980	)		(1,366	)		(1,614	)		118.2	%
Net (loss) income attributable to noncontrolling interests		(129	)		136			(265	)		(194.9	%)
Net loss attributable to Rafael Holdings, Inc.	$	(2,851	)	$	(1,502	)	$	(1,349	)		89.8	%

Interest (expense) income, net.Interest (expense) income, net decreased in the three and six months ended January 31, 2020 due to a reduction in cash and marketable securities as well as the conversion of interest recorded on the convertible note.

Net loss resulting from foreign exchange transactions.  Net loss resulting from foreign exchange transactions is comprised entirely from changes in movements in New Israeli Shekels relative to the U.S. Dollar.

Gain on sales of marketable securities and unrealized gain (loss) on investments. The Company liquidated all marketable securities in January 2019 in connection with the partial exercise of the Warrant.

Net (loss) income attributable to Noncontrolling Interests. The change in the net (loss) income attributable to noncontrolling interests was due to the net loss attributable to the noncontrolling interests in LipoMedix for the three and six months ended January 31, 2020.

Liquidity and Capital Resources

General

As of January 31, 2020, we had cash and cash equivalents of $9.5 million. We expect our cash from operations in the next twelve months and the balance of cash and cash equivalents and liquid marketable securities that we held as of January 31, 2020 to be sufficient to meet our currently anticipated working capital, research and development, and capital expenditure requirements during the twelve months from the issuance of these consolidated financial statements.

	January 31,
(unaudited, in thousands)	2020			2019
Cash flows (used in) provided by
Operating activities	$	(1,900	)	$	(899	)
Investing activities		(456	)		(30,897	)
Financing activities		(116	)		30,827
Effect of exchange rates on cash and cash equivalents		(30	)		(65	)
Decrease in cash and cash equivalents	$	(2,502	)	$	(1,034	)

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Operating Activities

Our cash flow from operations varies from year to year and quarter to quarter, depending on our operating results and the timing of operating cash receipts and payments, specifically payments of trade accounts payable.

The increase in cash used in operating activities in the six months ended January 31, 2020 as compared to the six months ended January 31, 2019 related to increased operations at the Barer Institute, and increased professional and consulting fees.

Investing Activities

Cash used in investing activities for the six months ended January 31, 2020 related to building improvements made to our real estate holdings.

Financing Activities

Cash used in financing activities for the six months ended January 31, 2020 was due to payments for taxes related to shares withheld for employee taxes on a restricted stock vest.

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. 

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 accounting principles generally accepted in the United States of America, or 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 financial statements included in our 2019 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 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 2019 (“2019 Form 10-K”). There have been no material changes in our critical accounting policies and procedures during the three months ended January 31, 2020.

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.

In connection with the Spin-Off, we and IDT entered into a tax separation agreement, which sets forth the responsibilities of IDT and us with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Spin-Off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. IDT is generally responsible for our federal, state, local and foreign income taxes for periods before and including the Spin-Off. We are generally responsible for all other taxes relating to our business. We and IDT will each generally be responsible for managing those disputes that relate to the taxes for which each of us is responsible and, under certain circumstances, may jointly control any dispute relating to taxes for which both of us are responsible. 

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 2019 Form 10-K.

Item 4. Controls and Procedures 

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of January 31, 2020.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended January 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Legal proceedings in which we are involved are more fully described in Note 12 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

Item 1A Risk Factors contained in our 2019 Form 10-K includes a discussion of risk factors related to investment in our common stock which is incorporated herein. Except as noted below, there were no material changes from the risk factors associated with our business previously disclosed in Part I, Item 1A “Risk Factors” of our 2019 Form 10-K.

Public health threats could have an adverse effect on the Company’s operations and financial results. 

In December 2019, a new Coronavirus, now known as COVID-19, which has proved to be highly contagious, emerged in Wuhan, China. We are actively monitoring the recent coronavirus outbreak and its potential impact on operations and those of our holdings. Although our operations are mainly in the United States, we have assets outside of the United States, and some of our pharmaceutical holdings conduct operations, manufacturing and clinical trial activities in Europe and Asia. Due to both known and unknown risks, including quarantines, closures and other restrictions resulting from the outbreak, our operations and those of our holdings may be adversely impacted. While we do not expect that the outbreak will have a material adverse effect on our business at this time, we are unable to accurately predict the impact that the coronavirus will have due to various uncertainties, including the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and actions that may be taken by governmental authorities. 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.

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 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema Document.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.

* 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.

	Rafael Holdings, Inc.
Date: March 5, 2020	By:	/s/ Howard S. Jonas
		Howard S. Jonas Chief Executive Officer
	By:	/s/ David Polinsky
		David Polinsky Chief Financial Officer

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