Rafael 10Q 2021 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, 2021.

☐ 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 No.)

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, par value $0.01 per share		RFL		New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically 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). 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 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 Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of March 15, 2021 was:

Class A common stock, par value $0.01 per share:	787,163 shares
Class B common stock, par value $0.01 per share:	15,884,473 shares

RAFAEL HOLDINGS, INC.

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)	1
		Consolidated Balance Sheets as of January 31, 2021 and July 31, 2020	1
		Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended January 31, 2021 and 2020	2
		Consolidated Statements of Equity for the Three and Six Months Ended January 31, 2021 and 2020	3
		Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2021 and 2020	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosures about Market Risks	30
	Item 4.	Controls and Procedures	30

Part II. OTHER INFORMATION

	Item 1.	Legal Proceedings	31
	Item 1A.	Risk Factors	31
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
	Item 3.	Defaults Upon Senior Securities	31
	Item 4.	Mine Safety Disclosures	31
	Item 5.	Other Information	31
	Item 6.	Exhibits	32

SIGNATURES			33

PART 1. FINANCIAL INFORMATION

ITEM 1. Financial Statements

RAFAEL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

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

	January 31, 2021			July 31, 2020
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	6,086		$	6,206
Trade accounts receivable, net of allowance for doubtful accounts of $117 and $218 at January 31, 2021 and July 31, 2020, respectively		124			267
Due from Rafael Pharmaceuticals		360			118
Prepaid expenses and other current assets		116			273
Assets held for sale		—			2,968
Total current assets		6,686			9,832

Property and equipment, net		43,760			44,433
Equity investment – RP Finance LLC		383			192
Due from RP Finance LLC		3,750			—
Investments – Rafael Pharmaceuticals		79,141			70,018
Investments – Other Pharmaceuticals		477			1,201
Investments – Hedge Funds		8,943			7,510
Deferred income tax assets, net		—			6
In-process research and development and patents		1,575			1,575
Other assets		1,534			1,580
TOTAL ASSETS	$	146,249		$	136,347

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Trade accounts payable	$	495		$	921
Accrued expenses		643			1,191
Amount due for purchase of membership interest		9,500			3,500
Other current liabilities		162			115
Due to related parties		29			—
Total current liabilities		10,829			5,727

Other liabilities		33			92
TOTAL LIABILITIES		10,862			5,819

COMMITMENTS AND CONTINGENCIES

EQUITY
Class A common stock, $0.01 par value; 35,000,000 shares authorized, 787,163 shares issued and outstanding as of January 31, 2021 and July 31, 2020, respectively		8			8
Class B common stock, $0.01 par value; 200,000,000 shares authorized, 15,664,476 issued and 15,652,120 outstanding as of January 31, 2021, and 15,034,598 issued and 15,028,536 outstanding as of July 31, 2020		155			149
Additional paid-in capital		142,746			129,136
Accumulated deficit		(25,866	)		(16,255	)
Accumulated other comprehensive income related to foreign currency translation adjustment		3,761			3,762
Total equity attributable to Rafael Holdings, Inc.		120,804			116,800
Noncontrolling interests		14,583			13,728
TOTAL EQUITY		135,387			130,528
TOTAL LIABILITIES AND EQUITY	$	146,249		$	136,347

See accompanying notes to consolidated financial statements.

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,
	2021			2020			2021			2020
REVENUE
Rental – Third Party	$	190		$	370		$	426		$	716
Rental – Related Party		527			527			1,047			1,047
Parking		122			219			299			443
Other – Related Party		120			120			240			240
Total revenue		959			1,236			2,012			2,446

COSTS AND EXPENSES
Selling, general and administrative		2,767			2,221			5,359			4,262
Research and development		1,568			448			2,083			693
Depreciation and amortization		441			473			878			939
Impairment – Altira		7,000			—			7,000			—
Loss from operations		(10,817	)		(1,906	)		(13,308	)		(3,448	)

Interest (expense) income, net		(1	)		33			(1	)		(31	)
Net loss resulting from foreign exchange transactions		—			—			—			(5	)
Gain on sale of building		—			—			749			—
Impairment of investments - Other Pharmaceuticals		—			—			(724	)		—
Unrealized gain on investments - Hedge Funds		2,489			557			3,433			520
Loss before income taxes		(8,329	)		(1,316	)		(9,851	)		(2,964	)
Provision for income taxes		(4	)		(12	)		(9	)		(16	)
Equity in earnings of RP Finance		96			—			192			—
Consolidated net loss		(8,237	)		(1,328	)		(9,668	)		(2,980	)
Net loss attributable to noncontrolling interests		(72	)		(75	)		(57	)		(129	)
Net loss attributable to Rafael Holdings, Inc.	$	(8,165	)	$	(1,253	)	$	(9,611	)	$	(2,851	)

OTHER COMPREHENSIVE LOSS
Net loss	$	(8,237	)	$	(1,328	)	$	(9,668	)	$	(2,980	)
Foreign currency translation adjustment		37			(34	)		(1	)		(28	)
Total comprehensive loss		(8,200	)		(1,362	)		(9,669	)		(3,008	)
Comprehensive loss attributable to noncontrolling interests		10			(18	)		(11	)		(16	)
Total comprehensive loss attributable to Rafael Holdings, Inc.	$	(8,210	)	$	(1,344	)	$	(9,658	)	$	(2,992	)

Loss per share
Basic and diluted	$	(0.50	)	$	(0.08	)	$	(0.60	)	$	(0.18	)

Weighted average number of shares used in calculation of loss per share
Basic and diluted		16,172,421			15,790,400			15,997,571			15,715,442

See accompanying notes to consolidated financial statements.

RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share data)

	Three Months Ended January 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 October 31, 2020		787,163	$	8		15,044,547		$	149	$	129,393		$	(17,701	)	$	3,724	$	13,743		$	129,316
Net loss		—		—		—			—		—			(8,165	)		—		(72	)		(8,237	)
Stock-based compensation		—		—		33,821			—		219			—			—		—			219
Stock-based compensation to Board of Directors		—		—		12,609			—		286			—			—		—			286
Shares issued - Securities Purchase Agreements		—		—		567,437			6		12,994			—			—		—			13,000
Shares withheld for payroll taxes		—		—		(6,294	)		—		(146	)		—			—		—			(146	)
Capital contribution for noncontrolling interest		—		—		—			—		—			—			—		912			912
Foreign currency translation adjustment		—		—		—			—		—			—			37		—			37
Balance at January 31, 2021		787,163	$	8		15,652,120		$	155	$	142,746		$	(25,866	)	$	3,761	$	14,583		$	135,387

	Six Months Ended January 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 July 31, 2020		787,163	$	8		15,028,536		$	149	$	129,136		$	(16,255	)	$	3,762		$	13,728		$	130,528
Net loss		—		—		—			—		—			(9,611	)		—			(57	)		(9,668	)
Stock-based compensation		—		—		41,082			—		433			—			—			—			433
Stock-based compensation to Board of Directors		—		—		12,609			—		286			—			—			—			286
Shares issued - Securities Purchase Agreements		—		—		567,437			6		12,994			—			—			—			13,000
Shares withheld for payroll taxes		—		—		(6,294	)		—		(146	)		—			—			—			(146	)
Stock options exercised		—		—		8,750			—		43			—			—			—			43
Capital contribution for noncontrolling interest		—		—		—			—		—			—			—			912			912
Foreign currency translation adjustment		—		—		—			—		—			—			(1	)		—			(1	)
Balance at January 31, 2021		787,163	$	8		15,652,120		$	155	$	142,746		$	(25,866	)	$	3,761		$	14,583		$	135,387

See accompanying notes to consolidated financial statements.

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 October 31, 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 July 31, 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

See accompanying notes to consolidated financial statements.

RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

	Six Months Ended January 31,
	2021			2020
Operating activities
Net loss	$	(9,668	)	$	(2,980	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		878			939
Deferred income taxes		6			12
Net unrealized gain on investments - Hedge Funds		(3,433	)		(520	)
Impairment of investments - Other Pharmaceuticals		724			—
Impairment – Altira		7,000			—
Equity in earnings of RP Finance		(192	)		—
Provision for doubtful accounts		104			48
Stock-based compensation		719			411
Amortization of debt discount		—			54
Gain on sale of building		(749	)		—

Change in assets and liabilities:
Trade accounts receivable		39			77
Prepaid expenses and other current assets		157			181
Other assets		46			(38	)
Accounts payable and accrued expenses		(933	)		(252	)
Due from Rafael Pharmaceuticals		(242	)		—
Other current liabilities		47			—
Due to related parties		29			126
Other liabilities		(59	)		42
Net cash used in operating activities		(5,527	)		(1,900	)

Investing activities
Purchase of investment in Altira		(1,000	)		—
Purchases of property and equipment		(205	)		(456	)
Payments to fund RP Finance		(3,750	)		—
Proceeds from sale of building		3,658			—
Proceeds related to distribution of Hedge Funds		2,000			—
Investment in Rafael Pharmaceuticals		(9,123	)		—
Net cash used in investing activities		(8,420	)		(456	)

Financing activities
Contribution from noncontrolling interest of consolidated entity		912			—
Proceeds from exercise of options		43			—
Proceeds from issuance of shares		13,000			—
Payments for taxes related to shares withheld for employee taxes		(146	)		(116	)
Net cash provided by (used in) financing activities		13,809			(116	)
Effect of exchange rate changes on cash and cash equivalents		18			(30	)
Net decrease in cash and cash equivalents		(120	)		(2,502	)
Cash and cash equivalents, beginning of period		6,206			12,024
Cash and cash equivalents, end of period	$	6,086		$	9,522

Supplemental schedule of noncash investing and financing activities
Conversion of LipoMedix bridge notes	$	—		$	200
Conversions of related party convertible notes payable and accrued interest	$	—		$	15,668

See accompanying notes to consolidated financial statements.

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 pre-clinical and clinical stage pharmaceutical companies and commercial real estate assets. The assets are operated as two separate lines of business.

The pharmaceutical holdings include preferred and common 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, in 2019, we 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. In addition, we have recently initiated efforts to develop other early stage pharmaceutical ventures including Levco Pharmacetuicals Ltd. (“Levco”), an Israeli company, established to partner with Dr. Alberto Gabizon and a top institution in Israel on the development of novel compounds for cancer, and Farber Partners, LLC (“Farber”), formed around an agreement with Princeton University’s Office of Technology Licensing for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, for an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program.

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 other entities and hosts other tenants and an associated 800-car public garage, and a portion of a building in Israel. In August 2020, the Company sold an office/data center building in Piscataway, New Jersey, which was classified as held for sale at July 31, 2020.

The “Company” in these consolidated financial statements refers to Rafael Holdings on a consolidated basis. 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 or combination. The entities included in these consolidated financial statements are as follows:

Company	Country of Incorporation	Percentage Owned
Rafael Holdings, Inc.	United States – Delaware		100	%
Broad Atlantic Associates, LLC	United States – Delaware		100	%
IDT 225 Old NB Road, LLC	United States – Delaware		100	%
IDT R.E. Holdings Ltd.	Israel		100	%
Rafael Holdings Realty, Inc.	United States – Delaware		100	%
Barer Institute, Inc.	United States – Delaware		100	%
The Barer Institute, LLC	United States – Delaware		100	%
Hillview Avenue Realty, JV	United States – Delaware		100	%
Hillview Avenue Realty, LLC	United States – Delaware		100	%
Levco Pharmaceuticals Ltd.	Israel		95	%
Farber Partners, LLC	United States – Delaware		93	%
Pharma Holdings, LLC	United States – Delaware		90	%
LipoMedix Pharmaceuticals Ltd.	Israel		68	%
Altira Capital & Consulting, LLC	United States – Delaware		67	%
CS Pharma Holdings, LLC	United States – Delaware		45	%*

*	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.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2 – 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 ending in the calendar year indicated (e.g., fiscal 2020 refers to the fiscal year ended July 31, 2020).

Operating results for the three and six months ended January 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2021. The balance sheet at July 31, 2020 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, 2020, or the 2020 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.

Risks and Uncertainties - COVID-19

In December 2019, a new coronavirus, now known as COVID-19, which has proved to be highly contagious, emerged in Wuhan, China and has since spread around the globe. The Company actively monitors the outbreak and its potential impact on its operations and those of the Company’s holdings. Although the Company’s operations are mainly in the United States, the Company has assets outside of the United States, and some of the Company’s pharmaceutical holdings conduct operations, manufacturing and clinical trial activities in Europe and Asia.

The impacts on the 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.

The Company has one tenant that had not paid rent in August 2020 due to the New Jersey state gym closures; however, the tenant subsequently resumed rent payments. There is a general degree of uncertainty in the national commercial real estate market based on the COVID-19 pandemic and 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 our workforce including a mandatory work-from-home policy for our workforce who can perform their jobs from home as well as restrictions on business travel and workplace and in-person meetings.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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, as there is an 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. 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.

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 3) 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 5), 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.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Revenue Recognition

The Company applies the five-step approach as described in ASC 606, Revenue from Contracts with Customers, which consists of the following: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation.

The Company disaggregates its 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.

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.

Recently Issued Accounting Standards 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, 2022, including interim periods within those fiscal years, and will be applied as a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements and intends to adopt the standard on August 1, 2023.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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, or 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 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.

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 41% 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 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 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.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

Howard Jonas has additional contractual rights to receive additional Rafael Pharmaceuticals 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.

The Company holds the Warrant to purchase a significant stake in Rafael Pharmaceuticals, as well as other equity and governance rights in Rafael Pharmaceuticals. The Company currently own 51% of the issued and outstanding equity in Rafael Pharmaceuticals. Approximately 8% of the issued and outstanding equity is owned by the Company’s subsidiary CS Pharma and 43% is held by the Company’s subsidiary Pharma Holdings. The Company’s subsidiary Pharma Holdings holds a non-dilutive option to increase the Company’s (via Pharma Holdings and CS Pharma) total ownership to 56%. Based on the current shares issued and outstanding of Rafael Pharmaceuticals as of January 31, 2021, the Company, and the Company’s affiliates, would need to pay approximately $17 million to exercise the Warrant in full to 56%. On an as-converted fully diluted basis (for all convertible securities of Rafael Pharmaceuticals outstanding), the Company, and the Company’s affiliates would need to pay approximately $125 million to exercise the Warrant in full (including to offset the impact of additional issuances of Rafael Pharmaceuticals equity under the Line of Credit). Howard Jonas holds 10% of the interest in Pharma Holdings and would need to contribute 10% of any cash necessary to exercise any portion of the Warrant. Following any exercise, a portion of the Company’s interest in Rafael Pharmaceuticals would continue to be held for the benefit of the other equity holders in Pharma Holdings and CS Pharma. Given the Company’s anticipated available cash, the Company would not be able to exercise the Warrant in its entirety and the Company may never be able to exercise the Warrant in full. Rafael Pharmaceuticals may also issue additional equity interests, such as stock options, which will require the Company to pay additional cash to maintain the Company’s ownership percentage or exercise the Warrant in full.

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.

NOTE 4 – INVESTMENT IN ALTIRA

The Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) on May 13, 2020 with a member (the “Seller”) of Altira Capital & Consulting, LLC (“Altira”). Pursuant to the Purchase Agreement, on May 13, 2020, the Seller sold the economic rights related to a 33.333% membership interest in Altira to the Company and in effect the Company purchased the potential right to receive a 1% royalty on Net Sales (as defined in the Royalty Agreement between Altira and Rafael Pharmaceutical) on sales of certain Rafael Pharmaceuticals’ products. The purchase consideration for the purchase of the membership interest consists of 1) $1,000,000 payable monthly in four equal installments of $250,000 each; 2) $3,000,000 due on January 3, 2021; 3) $3,000,000 due within fifteen (15) days of interim data analysis in Rafael Pharmaceuticals’ Phase 3 pivotal trial (AVENGER 500®) of CPI-613® (devimistat); and 4) $3,000,000 which is due within one-hundred and twenty (120) days from the date that Rafael Pharmaceuticals files a new drug application with the U.S. Food and Drug Administration for approval of devimistat (CPI-613) as a first in-line therapy for pancreatic cancer, as defined in the Purchase Agreement. The post-closing payments are to be made, at the Company’s discretion, in cash or shares of the Company’s Class B common stock based on the ten days average share price of the Company’s Class B common stock prior to the date of payment or any combination thereof.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company has accounted for the purchase of the 33.333% membership interest in Altira as an equity method investment in accordance with the guidance in ASC 323, Investments – Equity Method and Joint Ventures. The Company determined that a 33.333% membership interest in Altira indicates that the Company is able to exercise significant influence over Altira, and the Company’s membership interest is considered to be “more than minor” in accordance with the guidance. The cost of the investment was determined to be $4,000,000 pursuant to the terms of the Purchase Agreement. The contingent consideration, as described within the Purchase Agreement, in the amount of $6,000,000, will be recognized when the payments are considered probable.

For the year ended July 31, 2020, the Company determined that the investment in Altira was fully impaired and recorded an impairment charge of $4,000,000, which was the total amount of the Company’s investment recognized for the Purchase Agreement as of July 31, 2020.

On December 7, 2020, the Company purchased an additional 33.333% of membership interests in Altira, pursuant to the Membership Interest Purchase Agreement (the “Second Altira Agreement”) between the Company and another Altira member, (the “Second Seller”). With this transaction, the Company now owns an aggregate 66.666% of the membership interests in Altira. Pursuant to the Second Altira Agreement, on December 7, 2020, the Second Seller sold their economic rights related to a 33.333% membership interest in Altira to the Company and in effect the Company purchased the potential right to receive a 1% royalty on Net Sales (as defined in the Royalty Agreement between Altira and Rafael Pharmaceuticals) on sales of certain Rafael Pharmaceuticals’ products. The purchase consideration for the purchase of the Membership Interest consists of 1) $1,000,000 payable monthly in four equal installments of $250,000 each, commencing on January 4, 2021; 2) $3,000,000 due on January 4, 2021; 3) $3,000,000 due within fifteen (15) days of the earlier to occur of either the completion of Rafael Pharmaceuticals’ Phase III pivotal trial (AVENGER 500®) of CPI-613® (devimistat) or May 31, 2021 and not before January 4, 2021; and 4) $3,000,000 which is due within one-hundred and twenty (120) days from the date that Rafael Pharmaceuticals files a new drug application with the U.S. Food and Drug Administration for approval of devimistat (CPI-613) as a first in-line therapy for pancreatic cancer, as defined in the Purchase Agreement.

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 is not generating outputs, as required in ASC 805 to qualify as a business, and is 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 $7,000,000 pursuant to the terms of the Second Altira Agreement. The contingent consideration, as described within the Second Altira Agreement, in the amount of $3,000,000, will be recognized when the payments are considered probable.

During the six months ended January 31, 2021, the Company did not make any payments to the Seller for the Purchase Agreement and made a $1,000,000 payment to the Second Seller for the Second Altira Agreement. The remaining payments due to the Seller and Second Seller of $3,500,000 and $6,000,000, respectively, are recorded as current liabilities. Additional payments were made in February 2021 following the end of the quarter (see Note 17).

For the six months ended January 31, 2021, the Company determined that the additional purchase of the membership interests in Altira was fully impaired and recorded an impairment charge of $7,000,000, which was the total amount of the Company’s investment recognized for the Second Altira Agreement as of January 31, 2021.

The assets and operations of Altira are not significant.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5 – 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 $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 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.

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, we will use the equity method of accounting to record our investment in RP Finance. The Company has recognized approximately $96 thousand and $0 in income from its ownership interests of 37.5% in RP Finance for the three months ended January 31, 2021 and 2020, respectively, and $192 thousand and $0 in income from its ownership interests of 37.5% in RP Finance for the six months ended January 31, 2021 and 2020, respectively. The assets and operations of RP Finance are not significant and the Company has identified the equity investment in RP Finance as a related party transaction (see Note 11).

In August 2020, Rafael Pharmaceuticals called for a $5 million draw on the line of credit facility and the facility was funded by RP Finance LLC in the amount of $5 million, paid in parts in August and September 2020. In November 2020, Rafael Pharmaceuticals called for a second $5 million draw on the line of credit facility and the facility was funded by RP Finance in the amount of $5 million. For the six months ended January 31, 2021, the Company has funded a total of $3.75 million in accordance with its 37.5% ownership interest in RP Finance.

NOTE 6 – INVESTMENT IN LIPOMEDIX PHARMACEUTICALS LTD.

LipoMedix is a development-stage, privately held Israeli company focused on the development of an innovative, safe and effective cancer therapy based on liposome delivery.

As of January 31, 2021, the Company held 68% of the issued and outstanding ordinary shares of LipoMedix and has consolidated this investment from the second quarter of fiscal 2018.

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.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In March 2020, the Company provided bridge financing in the principal amount of $75,000 to LipoMedix with a maturity date of April 20, 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.

On May 20, 2020, the Company entered into a Share Purchase Agreement with LipoMedix to purchase 4,000,000 ordinary shares of LipoMedix for an aggregate purchase price of $1,000,000. The purchase consideration consisted of the outstanding Promissory Notes between the Company and LipoMedix dated November 13, 2019, January 21, 2020 and March 27, 2020 in the total principal amount of $300,000 plus accrued interest, for an aggregate amount of $306,737, and $693,263 of cash, thereby increasing the Company’s ownership in Lipomedix from 58% to 68%.

NOTE 7 – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

●

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

●

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

●

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

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

The following is a listing of the Company’s assets required to be measured at fair value on a recurring basis and where they are classified within the fair value hierarchy as of January 31, 2021 and July 31, 2020:

	January 31, 2021
	Level 1		Level 2		Level 3		Total
	(unaudited, in thousands)
Assets:
Hedge Funds	$	—	$	—	$	8,943	$	8,943
Total	$	—	$	—	$	8,943	$	8,943

	July 31, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Hedge Funds	$	—	$	—	$	7,510	$	7,510
Total	$	—	$	—	$	7,510	$	7,510

At January 31, 2021 and July 31, 2020, the Company did not have any liabilities measured at fair value on a recurring basis.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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):

	Six Months Ended
	January 31,
	2021			2020
		*(unaudited, in thousands)*
Balance, beginning of period	$	7,510		$	5,125
Liquidation of Hedge Fund Investments		(2,000	)		—
Total gain included in earnings		3,433			520
Balance, end of period	$	8,943		$	5,645

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 $2 million distribution of the Company’s investments in Hedge Funds.

The Company holds $0.5 million in investments in securities in another entity that are not liquid, which were included in Investments - Other Pharmaceuticals in the accompanying consolidated balance sheets. The investment is accounted for under ASC 321, Investments - Equity Securities, using the measurement alternative as defined within the guidance, and the Company recorded an impairment loss of $0.7 million and $0 for the six months ended January 31, 2021 and 2020, respectively.

Fair Value of Other Financial Instruments

The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

Cash and cash equivalents, trade accounts receivable, and accounts payable. At January 31, 2021 and July 31, 2020, 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.

NOTE 8 – TRADE ACCOUNTS RECEIVABLE

Trade Accounts Receivable consisted of the following:

	January 31, 2021			July 31, 2020
	*(unaudited, in thousands)*			*(in thousands)*
Trade Accounts Receivable	$	130		$	364
Accounts Receivable - Related Party		111			121
Less Allowance for Doubtful Accounts		(117	)		(218	)
Trade Accounts Receivable, net	$	124		$	267

The current portion of deferred rental income included in prepaid expenses and other current assets was approximately $89 thousand and $11 thousand as of January 31, 2021 and July 31, 2020, respectively.

The noncurrent portion of deferred rental income included in Other Assets was approximately $1.5 million as of January 31, 2021 and July 31, 2020.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 9 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

	January 31, 2021			July 31, 2020
	(unaudited, in thousands)			*(in thousands)*
Building and Improvements	$	47,774		$	47,591
Land		10,412			10,412
Furniture and Fixtures		1,145			1,145
Other		261			256
		59,592			59,404
Less Accumulated Depreciation		(15,832	)		(14,971	)
Total	$	43,760		$	44,433

Other property and equipment consist of other equipment and miscellaneous computer hardware.

Depreciation expense pertaining to property and equipment was approximately $0.4 million and $0.5 million for the three months ended January 31, 2021 and 2020, respectively, and $0.9 million and $0.9 million for the six months ended January 31, 2021 and 2020, respectively.

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.

In August 2020, the Company sold an office/data center building in Piscataway, New Jersey, which was classified as held for sale at July 31, 2020.

NOTE 10 – 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 stock options and other convertible instruments. These securities have been excluded from the calculation of diluted net loss per shares for the three months ended January 31, 2021 and 2020 because all such securities are anti-dilutive for all periods presented.

The following table summarizes the Company’s 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 January 31,				Six months ended January 31,
	2021		2020		2021		2020
Stock Options		570,801		586,874		570,801		586,874
Total		570,801		586,874		570,801		586,874

The diluted loss per share computation equals basic loss per share for the three and six months ended January 31, 2021 and 2020 because the Company had a net loss and the impact of the assumed exercise of stock options would have been anti-dilutive.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11 – 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 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 $90 thousand in related party services to IDT, of which approximately $29 thousand is included in due to related parties at January 31, 2021.

IDT leases approximately 80,000 square feet of office space plus parking at 520 Broad Street, Newark, NJ and approximately 3,600 square feet of office space in Jerusalem, Israel. IDT paid the Company approximately $460 thousand for office rent and parking during each of the three months ended January 31, 2021 and 2020. As of January 31, 2021 and 2020, IDT owed the Company approximately $30 thousand and $24 thousand, respectively, for office rent and parking.

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 for the three months ended January 31, 2021 and 2020, respectively, and $240,000 for the six months ended January 31, 2021 and 2020, respectively. As of January 31, 2021 and July 31, 2020, Rafael Pharmaceuticals owed the Company $360,000 and $118,000, respectively, included in due from Rafael Pharmaceuticals.

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, totaling approximately $116,000.

On September 8, 2020, Levco Pharmaceuticals Ltd (“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 $3,000 per month and issue to him common shares representing up to 5% of common stock outstanding. Additionally, Levco will provide a lab grant in the amount of $120,000 to support the project.

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 $120,000 plus value-added tax. The research period is over thirteen months, with two additional twelve-month options to extend.

On December 10, 2020, a controlled subsidiary of the Company, Farber Partners LLC (“Farber”), reached an agreement with Princeton University 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 a minimum annual royalty payment of $50 thousand, 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.

On January 5, 2021, in connection with the vesting of certain restricted shares of Class B common stock held by an officer of the Company, the Company withheld 5,405 shares to pay for the payroll taxes on the officer’s behalf, totaling approximately $123,000.

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.

The Company leases space to related parties which represented approximately 62% and 43% of the Company’s total revenue for the three months ended January 31, 2021 and 2020, respectively, and 59% and 43% for the six months ended January 31, 2021 and 2020, respectively. See Note 16 for future minimum rent payments from related parties and other tenants.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company has recognized approximately $96 thousand and $0 in income from its ownership interests of 37.5% in RP Finance for the three months ended January 31, 2021 and 2020, respectively, and $192 thousand and $0 in income from its ownership interests of 37.5% in RP Finance for the six months ended January 31, 2021 and 2020, respectively (see Note 5).

In December 2020, two entities, on whose Boards of Directors Howard Jonas, the Registrant’s Chief Executive Officer and Chairman of the Board serves, each purchased 218,245 shares of Class B common stock for consideration of $5 million each. In connection with the purchases, each purchaser was granted warrants (the “Issued Warrants”) to purchase twenty percent (20%) of the shares of Class B common stock purchased by such purchaser. The Issued Warrants have an exercise price of $22.91 per share and expire on June 6, 2022. The shares and Issued Warrants were issued in reliance on the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended.

NOTE 12 – INCOME TAXES

At January 31, 2021, the Company has federal net operating loss (“NOL”) carryforwards from domestic operations of approximately $41.7 million, to offset future taxable income. The Company has state NOLs of $24.6 million. The Company has NOLs from foreign operations of $2.4 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 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 13 – BUSINESS SEGMENT INFORMATION

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

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

In August 2020, the Company sold a 3-story, 65,253 square foot office building located at 225 Old New Brunswick Road in Piscataway, New Jersey to 225 ONBR, LLC, an entity unaffiliated with the Company. The purchase price was $3,875,000 and, after transfer taxes and broker’s commission, the Company received $3,675,638 in cash. As of January 31, 2021, the building was classified as held for sale on the consolidated balance sheet.

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 January 31, 2021
Revenues	$	—		$	959		$	959
Loss from operations		(8,643	)		(2,174	)		(10,817	)

Three Months Ended January 31, 2020
Revenues	$	—		$	1,236		$	1,236
Loss from operations		(514	)		(1,392	)		(1,906	)

(unaudited, in thousands)	Pharmaceuticals			Real Estate			Total
Six Months Ended January 31, 2021
Revenues	$	—		$	2,012		$	2,012
Loss from operations		(9,176	)		(4,132	)		(13,308	)

Six Months Ended January 31, 2020
Revenues	$	—		$	2,446		$	2,446
Loss from operations		(780	)		(2,668	)		(3,448	)

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 January 31, (unaudited)		2021				2020
Revenue from tenants located in Israel			7	%			6	%

Six Months Ended January 31, (unaudited)		2021				2020
Revenue from tenants located in Israel			7	%			6	%

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, 2021
Long-lived assets, net	$	42,183	$	1,577	$	43,760
Total assets		142,614		3,635		146,249

July 31, 2020
Long-lived assets, net	$	42,840	$	1,593	$	44,433
Total assets		132,286		4,061		136,347

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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. 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, which the Company accrued for and has an outstanding balance of approximately $48,000 as of January 31, 2021. As the Company accounts for contingencies when a loss is considered probable and can be reasonably estimated, the accrued balance is 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, Newark, New Jersey. 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, 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.

NOTE 15 – 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, 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.

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 (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at July 31, 2020		580,874		$	4.90		2.65	$	2,846
Granted		—			—
Exercised		(8,750	)		4.90
Cancelled / Forfeited		(1,323	)		—
Outstanding at January 31, 2021		570,801		$	4.90		2.15	$	2,797
Exercisable at January 31, 2021		570,801		$	4.90		2.15	$	2,797

During the six months ended January 31, 2021, 8,750 options were exercised. At January 31, 2021, there was no unrecognized compensation cost related to non-vested stock options.

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 Fair Value
Outstanding at July 31, 2020		123,104		$	10.80
Granted		44,070			21.92
Vested		(29,434	)		(18.11	)
Cancelled / Forfeited		(2,099	)		(13.54	)
Non-vested shares at January 31, 2021		135,641		$	17.01

At January 31, 2021, there was $1.8 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over the next 1.9 years.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Share Purchase Agreement

On December 7, 2020, Rafael Holdings entered into a Securities Purchase Agreement (the “SPA”) for the sale of 567,437 shares of the Company’s Class B common stock at a price per share of $22.91 (which was the closing price for the Class B common stock on the New York Stock Exchange on December 4, 2020 the trading day immediately preceding the date of the SPA) for an aggregate purchase price of $13 million. In connection with the purchases, each purchaser was granted warrants to purchase twenty percent (20%) of the shares of Class B common stock purchased by such purchaser. The warrants have an exercise price of $22.91 per share and expire on June 6, 2022. The Company issued warrants to purchase an aggregate of 113,487 shares of Class B common stock.

Approximately $8.2 million of the proceeds received pursuant to the SPA were used by the Company to exercise an additional portion of the Warrant in order to maintain the Company’s relative position in Rafael Pharmaceuticals in light of issuances of Rafael Pharmaceuticals equity securities to third-party shareholders of Rafael Pharmaceuticals, due to warrant exercises by these shareholders. The Company is using the remaining proceeds to fund the operations of its drug development programs including its Barer Institute subsidiary, and for general corporate purposes. Under the SPA, two entities, on whose Boards of Directors Howard Jonas, the Registrant’s Chief Executive Officer and Chairman of the Board serves, each purchased 218,245 shares of Class B common stock for consideration of $5 million each. The shares and warrants were issued in reliance on the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended.

The assumptions in the table below were used to estimate the fair value of the warrants granted using the Black-Scholes option pricing method at December 7, 2020. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of the warrant issued represents the period of time that the warrants issued are expected to be outstanding. Expected volatility is based on implied volatilities from the Company’s stock, historical volatility of the Company’s stock, and other factors.

Risk-free interest rate	0.1	%
Expected term (in years)	1.5
Expected volatility	80.0	%
Expected dividend yield	—	%

The details of the outstanding warrants are as follows:

	Number of Shares		Weighted Average Exercise Price		Remaining Contractual Term (years)
Outstanding at July 31, 2020		—	$	—		—
Granted		113,487		22.91		1.35
Outstanding at January 31, 2021		113,487	$	22.91		1.35

NOTE 16 – 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 2029. Lease income included on the consolidated statements of operations and comprehensive loss was $0.7 million and $0.9 million for the three months ended January 31, 2021 and 2020, respectively, and $1.5 million and $1.8 million for the six months ended January 31, 2021 and 2020, respectively.

RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The future contractual minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of January 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)
2021 (remaining)	$	1,024	$	393	$	1,417
2022		2,078		780		2,858
2023		2,117		592		2,709
2024		2,155		538		2,693
2025		1,659		550		2,209
Thereafter		—		1,948		1,948
Total Minimum Future Rental Income	$	9,033	$	4,801	$	13,834

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, Newark, New Jersey, 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, Newark, New Jersey 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.

NOTE 17 – SUBSEQUENT EVENTS

On February 17, 2021, the Company issued 129,620 shares of Class B Common Stock to the Altira Seller for the payment totaling $500 thousand related to the first payment due and $3 million related to the second payment due January 3, 2021.

On February 17, 2021, the Company issued 101,844 shares of Class B Common Stock to the Altira Second Seller for the payment totaling $500 thousand related to the first payment due and $2.25 million related to the second payment due January 4, 2021. Additionally, $250 thousand was paid in cash to complete the first payment due.

On March 2, 2021, the Company agreed to loan $400,000 to LipoMedix. The loan has a maturity date of September 1, 2021 and accrues interest at an interest rate of 8% per annum on the outstanding principal amount. Principal and accrued interest are due at maturity. As of the date of this filing, the loan has not yet been funded by the Company.

On March 5, 2021, the Company entered into an Employment Agreement with Ameet Mallik that provides for Mr. Mallik to be appointed as Chief Executive Officer of the Company on May 1, 2021.

On March 7, 2021, the Company entered into an Employment Agreement with William Conkling that provides for Mr. Conkling to be appointed as Chief Commercial Officer of the Company on March 16, 2021.

On March 15, 2021, a portion of the Issued Warrants related to the SPA were exercised for a total exercise price of approximately $1 million in exchange for 43,649 shares of the Company's Class B Common Stock.

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

Overview

The Company owns interests in pre-clinical and clinical stage pharmaceutical companies and commercial real estate assets. The assets are operated as two separate lines of business.

The pharmaceutical holdings include preferred and common 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, in 2019, we 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. In addition, we have recently initiated efforts to develop other early stage pharmaceutical ventures including Levco, an Israeli company, established to partner with Dr. Alberto Gabizon and a top institution in Israel on the development of novel compounds for cancer, and Farber Partners, formed around an agreement with Princeton University’s Office of Technology Licensing for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, for an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program.

Business Update - COVID-19

In December 2019, a new coronavirus, now known as COVID-19, which has proved to be highly contagious, emerged in Wuhan, China and since has spread around the globe. We actively monitor the outbreak and its potential impact on our 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.

We have one tenant that has not paid rent in August 2020 due to the New Jersey state gym closures; however, the tenant subsequently resumed rent payments. There is a general degree of uncertainty in the national commercial real estate market based on the COVID-19 pandemic and 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 mandatory work-from-home policy for our workforce who can perform their jobs from home as well as restrictions on business travel and workplace and in-person meetings.

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, as there is an 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. 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.

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 and Six Months Ended January 31, 2021 Compared to Three and Six Months Ended January 31, 2020

Pharmaceuticals Segment

Our consolidated expenses for our Pharmaceuticals segment were as follows:

	Three Months Ended January 31,						Change
	2021			2020			$			%
	(unaudited, in thousands)
Selling, general and administrative	$	(75	)	$	(65	)	$	(10	)		(15	)%
Research and development		(1,568	)		(448	)		(1,120	)		(250	)%
Depreciation		—			(1	)		1			100	%
Impairment – Altira		(7,000	)		—			(7,000	)		(100	)%
Loss from operations	$	(8,643	)	$	(514	)	$	(8,129	)		(1,582)	%

	Six Months Ended January 31,						Change
	2021			2020			$			%
	(unaudited, in thousands)
Selling, general and administrative	$	(93	)	$	(86	)	$	(7	)		(8	)%
Research and development		(2,083	)		(693	)		(1,390	)		(201	)%
Depreciation		—			(1	)		1			100	%
Impairment – Altira		(7,000	)		—			(7,000	)		(100	)%
Loss from operations	$	(9,176	)	$	(780	)	$	(8,396	)		(1,076	)%

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, and Farber. Research and development increased for the three and six months ended January 31, 2021 compared to the three months and six months ended January 31, 2020 due to increased Barer activity as the entity commenced operations in fiscal 2020, and operations commencing in the three months ended January 31, 2021 for both Levco and Farber. The Company recorded an expense of $7.0 million related to the Company’s purchase of a 33.333% membership interests in Altira for the three and six months ended January 31, 2021. As of January 31, 2021 and 2020, we held a 68% and 51% interest, respectively, in LipoMedix, a 95% and 0% interest in Levco, respectively, and a 93% and 0% interest in Farber, respectively. We consolidated our majority interests in Lipomedix, Levo, and Farber.

Real Estate Segment

Our consolidated income and expenses for our Real Estate segment were as follows:

	Three Months Ended January 31,						Change
	2021			2020			$			%
	(unaudited, in thousands)
Rental – Third Party	$	190		$	370		$	(180	)		(49	)%
Rental – Related Party		527			527			—			—	%
Parking		122			219			(97	)		(44	)%
Other		120			120			—			—	%
Selling, general and administrative		(2,692	)		(2,156	)		(536	)		(25	)%
Depreciation		(441	)		(472	)		31			7	%
Loss from operations	$	(2,174	)	$	(1,392	)	$	(782	)		(56)	%

	Six Months Ended January 31,						Change
	2021			2020			$			%
	(unaudited, in thousands)
Rental – Third Party	$	426		$	716		$	(290	)		(41	)%
Rental – Related Party		1,047			1,047			—			—	%
Parking		299			443			(144	)		(33	)%
Other		240			240			—			—	%
Selling, general and administrative		(5,266	)		(4,176	)		(1,090	)		(26	)%
Depreciation		(878	)		(938	)		60			6	%
Loss from operations	$	(4,132	)	$	(2,668	)	$	(1,464	)		(55	)%

Revenues. Rental and Parking revenues decreased by approximately $277 thousand and $434 thousand for the three and six months ended January 31, 2021 compared to the three and six months ended January 31, 2020 primarily due to the sale of the building in Piscataway and the related reduced rental income, in addition to the decrease in parking as many customers who were utilizing the parking garage are now working from home due to COVID-19.

Selling, general and administrative expenses. Selling, general and administrative expenses consists mainly of payroll, benefits, facilities, consulting and professional fees. The increase in selling, general and administrative expenses for the three and six months ended January 31, 2021 compared to the three and six months ended January 31, 2020 is primarily due to increased insurance and real estate tax costs.

Depreciation expenses. Depreciation expenses decreased for the three and six months ended January 31, 2021 as compared to the three and six months ended January 31, 2020 due to the sale of the building in Piscataway, New Jersey.

Consolidated Operations

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

	Three Months Ended January 31,						Change
	2021			2020			$			%
	(unaudited, in thousands)
Loss from operations	$	(10,817	)	$	(1,906	)	$	(8,911	)		(468	)%
Interest (expense) income, net		(1	)		33			(34	)		(103	)%
Unrealized gain (loss) on investments - Hedge Funds		2,489			557			1,932			347	%
Loss before income taxes		(8,329	)		(1,316	)		(7,013	)		(533	)%
Provision for income taxes		(4	)		(12	)		8			67	%
Equity in earnings of RP Finance		96			—			96			100	%
Consolidated net loss		(8,237	)		(1,328	)		(6,909	)		(520	)%
Net loss attributable to noncontrolling interests		(72	)		(75	)		3			4	%
Net loss attributable to Rafael Holdings, Inc.	$	(8,165	)	$	(1,253	)	$	(6,912	)		(552	)%

	Six Months Ended January 31,						Change
	2021			2020			$			%
	(unaudited, in thousands)
Loss from operations	$	(13,308	)	$	(3,448	)	$	(9,860	)		(286	)%
Interest (expense) income, net		(1	)		(31	)		30			97	%
Net loss resulting from foreign exchange transactions		—			(5	)		5			100	%
Gain on sale of building		749			—			749			100	%
Impairment of investments - Other Pharmaceuticals		(724	)		—			(724	)		(100	)%
Unrealized gain on investments - Hedge Funds		3,433			520			2,913			560	%
Loss before income taxes		(9,851	)		(2,964	)		(6,887	)		(232	)%
Provision for income taxes		(9	)		(16	)		7			44	%
Equity in earnings of RP Finance		192			—			192			100	%
Consolidated net loss		(9,668	)		(2,980	)		(6,688	)		(224	)%
Net loss attributable to noncontrolling interests		(57	)		(129	)		72			56	%
Net loss attributable to Rafael Holdings, Inc.	$	(9,611	)	$	(2,851	)	$	(6,760	)		(237	)%

Interest (expense) income, net. Interest (expense) income, net was $(1) thousand for the three months ended January 31, 2021 and $33 thousand for the three months ended January 31, 2020. The reduction of interest income is due to interest earned in the three months ended January 31, 2020 on a Certificate of Deposit (“CD”) account that was subsequently closed and funds transferred to fund the Warrant exercise. Interest (expense) income, net was $(1) thousand for the six months ended January 31, 2021 and $(31) thousand for the six months ended January 31, 2020. The reduction of interest expense during the six months ended January 31, 2021 is due to the conversion of the $15.0 million convertible note and related interest, to equity, during the prior fiscal year.

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

Gain on sale of building. In August 2020, the Company sold a building located in Piscataway, New Jersey, and recognized a gain on the sale of approximately $749 thousand.

Impairment of investments - Other Pharmaceuticals. The Company recorded an impairment loss of $724 thousand related to the Company’s investment using the measurement alternative for the six months ended January 31, 2021.

Unrealized gain (loss) on investments - Hedge Funds. The Company recorded unrealized gains of approximately $2.5 million and $557 thousand for the three months ended January 31, 2021 and 2020, respectively, and approximately $3.4 million and $520 thousand for the six months ended January 31, 2021 and 2020, respectively.

Equity in earnings of RP Finance. The Company recognized approximately $96 thousand $192 thousand in income from its ownership interests of 37.5% in RP Finance for the three and six months ended January 31, 2021.

Net loss (income) attributable to noncontrolling interests. The change in the net loss (income) attributable to noncontrolling interests was due to LipoMedix and the new entities Farber and Levco for the three and six months ended January 31, 2021.

Liquidity and Capital Resources

General

As of January 31, 2021, we had cash and cash equivalents of $6.1 million. We expect our cash from operations in the next 12 months, the balance of cash and cash equivalents that we held as of January 31, 2021, and our balance in Investments – Hedge Funds of $8.9 million as of January 31, 2021 to be sufficient to meet our currently anticipated working capital, research and development, and capital expenditure requirements during the next 12 months from the issuance of these consolidated financial statements.

	January 31,
	2021			2020
	*(unaudited, in thousands)*
Cash flows (used in) provided by
Operating activities	$	(5,527	)	$	(1,900	)
Investing activities		(8,420	)		(456	)
Financing activities		13,809			(116	)
Effect of exchange rates on cash and cash equivalents		18			(30	)
Decrease in cash and cash equivalents	$	(120	)	$	(2,502	)

Operating Activities

The increase in cash used in operating activities for the six months ended January 31, 2021 as compared to the six months ended January 31, 2020 was primarily related to the net loss, and impact from non-cash items, primarily the impairment expense related to the investment in Altira, offset by the unrealized gain on investments - Hedge Funds.

Investing Activities

Cash used in investing activities for the six months ended January 31, 2021 was primarily related to the Company partially exercising the Warrant and purchasing 7.3 million shares of Rafael Pharmaceuticals’ Series D Preferred Stock for $9.1 million, the payments to fund the Company’s portion of advances under the line of credit between RP Finance and Rafael Pharmaceuticals, the initial payments of $1.0 million towards the acquisition of a second 33.333% membership interest in Altira for a product-in-development, offset by the proceeds of $3.7 million from the sale of the building in Piscataway, New Jersey in August 2020 and proceeds of $2.0 million from hedge funds.

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 provided by financing activities for the six months ended January 31, 2021 was primarily related to proceeds of $13.0 million for the sale of 567,437 shares of the Company’s Class B common stock and warrants to purchase an additional 113,487 shares of Class B common stock.

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.

Trends and Uncertainties – COVID-19

In December 2019, a novel strain of coronavirus (“COVID-19”) emerged and has subsequently expanded to a pandemic resulting in significant risks and disruptions to the health and welfare of the global population and economy. For the period ended October 31, 2020, COVID-19 has not had a material impact on our operations, and we anticipate that our existing balances of cash and cash equivalents and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next twelve months.

We actively monitor the outbreak and its potential impact on our 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.

We had one tenant that has not paid rent in August 2020 due to the New Jersey state gym closures; however, the tenant subsequently resumed rent payments. There is a general degree of uncertainty in the national commercial real estate market based on the COVID-19 pandemic and as a result there remains a potential impact to the value of our real estate portfolio as well as efforts to monetize those assets.

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 2020 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 2020 (“2020 Form 10-K”). There have been no material changes in our critical accounting policies and procedures during the six months ended January 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.

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 2020 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 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, 2021.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended January 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Legal proceedings in which we are involved are more fully described in Note 14 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 2020 Form 10-K includes a discussion of risk factors related to investment in our common stock which is incorporated herein. There were no material changes from the risk factors associated with our business previously disclosed in Part I, Item 1A “Risk Factors” of our 2020 Form 10-K.

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.

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*		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.

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: March 17, 2021	Rafael Holdings, Inc.

	By:	/s/ Howard S. Jonas
		Howard S. Jonas Chief Executive Officer

	By:	/s/ David Polinsky
		David Polinsky Chief Financial Officer

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Rafael (RFL) 10-Q2021 Q2 Quarterly report

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