| DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description
of Business Rafael Holdings, Inc. (NYSE-RFL), (“Rafael
Holdings” or the “Company”), a Delaware corporation, holds interests in clinical and early stage pharmaceutical companies,
including an investment in Rafael Pharmaceuticals, Inc. or Rafael Pharmaceuticals, a late-stage cancer metabolism--based therapeutics
company, its preclinical cancer metabolism research institute, the Barer Institute (“Barer”), and commercial real estate assets.
The Company focuses its efforts on funding, discovering and developing novel cancer therapies through its continued investment in Rafael
Pharmaceuticals, the creation of the Barer Institute in 2019 and continued investments in advancing its preclinical portfolio as well
as investments in other early-stage oncology companies with a goal of building a focused cancer metabolism therapeutics company with the
potential to improve and extend the lives of patients. On June 17, 2021, the Company entered into a merger agreement to acquire full ownership
of Rafael Pharmaceuticals in exchange for issuing Company Class B common stock to the other stockholders of Rafael Pharmaceuticals. We
expect to bring the merger to a vote of our stockholders this calendar year.The assets are operated as two separate lines of business. The Company’s investment in Rafael Pharmaceuticals
includes preferred and common equity interests and a warrant to purchase additional equity. In 2019, the Company established Barer, as
an early-stage small molecule research institute focused on developing a pipeline of novel therapeutic compounds, including compounds
to regulate cancer metabolism with potentially broader application in other indications beyond cancer. Barer is led by a team of scientists
and academic advisors considered to be among the leading experts in cancer metabolism, chemistry, and drug development. In addition to
its own internal discovery efforts, Barer is pursuing collaborative research agreements and in-licensing opportunities with leading scientists
from top academic institutions. Farber Partners, LLC (“Farber”) was formed around one such 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 Company also holds
a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage oncological pharmaceutical company
based in Israel. In addition, the Company has recently initiated efforts to develop other early stage pharmaceutical ventures including
Levco Pharmaceuticals Ltd. (“Levco”), an Israeli company, established to partner with Dr. Alberto Gabizon and a leading institution
in Israel on the development of novel compounds for cancer. The
Company’s commercial real estate holdings consist of a building at 520 Broad Street in Newark, New Jersey that serves as headquarters
for the Company and certain other entities and tenants and an associated 800-car public garage, and a portion of a building in Israel.
The Company sold other real estate holdings in 2020. Basis
of Presentation The
“Company” in these consolidated financial statements refers to Rafael Holdings and its subsidiaries on a consolidated basis.
All significant intercompany accounts and transactions have been eliminated in consolidation. 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 year 2021 refers to the fiscal year ended July 31, 2021). 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”). All
majority-owned subsidiaries are consolidated with all intercompany transactions and balances eliminated in consolidation or combination.
The entities included in these consolidated financial statements are as follows:
Company Country of Incorporation Percentage Owned
Rafael Holdings, Inc. 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 %
Rafael Medical Devices, 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. Use
of Estimates The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported
amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. Liquidity As
of July 31, 2021, the Company had cash and cash equivalents of $7.9 million in addition to the Company’s investment in a hedge
fund valued at $5.3 million. In
August 2021, the Company completed a securities purchase agreement and in which 2,945,986 shares of Class B Common Stock were sold for
an aggregate net proceeds of $97.8 million, after deducting transaction costs of $6.4 million. Management
expects that the balance of the Company’s cash and cash equivalents as of July 31, 2021, in addition to the balance in Investments
- Hedge Funds, and the proceeds of the August 2021 financing to be sufficient to meet Rafael Holdings’ obligations for at least
the next 12 months from the issuance of these consolidated financial statements. On
September 23, 2021, the Company entered into a line of credit agreement with Rafael Pharmaceuticals (the “Debtor”) in which
the Debtor may borrow up to an aggregate amount of $25,000,000. The first advance made to the Debtor was in the amount of $1,900,000
on September 24, 2021. On October 1, 2021, a second advance was made to the Debtor in the amount of $23,100,000. The Company’s cash balance
is sufficient to meet the Company’s currently anticipated working capital, research and development, and capital expenditure requirements
during the next 12 months from the issuance of these consolidated financial statements. Risks
and Uncertainties - COVID-19 In
December 2019, a new coronavirus, now known as COVID-19, which has proved to be highly contagious, 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. The
impacts on the Company’s and its affiliates’ operations and specifically the ongoing clinical trials of the Company’s pharmaceutical
holdings have been actively managed by respective pharmaceutical management teams who have worked closely with the appropriate regulatory
agencies to continue clinical trial activities with as minimal impact as possible including receiving waivers for certain clinical trial
activities from the respective regulatory agencies to continue the studies. Although
partially mitigated recently, there remains 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 the Company’s workforce, including a voluntary work-from-home
policy for the Company’s workforce who can perform their jobs from home, as well as restrictions on business travel. Due
to both known and unknown risks, including quarantines, closures and other restrictions resulting from the outbreak, operations and those
of the Company’s holdings may be adversely impacted. Additionally, as there is an evolving nature to the COVID-19 situation, the
Company cannot reasonably assess or predict at this time the full extent of the negative impact that the COVID-19 pandemic may have on
the Company’s business, financial condition, results of operations and cash flows. The impact will depend on future developments such
as the ultimate duration and the severity of the spread of the COVID-19 pandemic in the U.S. and globally, the effectiveness of federal,
state, local and foreign government actions on mitigation and spread of COVID-19, the pandemic’s impact on the U.S. and global economies,
changes in the Company’s customers’ behavior emanating from the pandemic and how quickly the Company can resume our normal operations,
among others. 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. Cash
and Cash Equivalents The
Company considers all liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Restricted
Cash Restricted
cash represents escrow funds held in bank accounts owned by the Company to be used to pay the severance due to the chief executive officer
for termination without cause, pursuant to his employment agreement. The Company does not have the right to use this cash balance for
any other purpose. Concentration
of Credit Risk and Significant Customers The Company routinely assesses the financial strength
of its customers. As a result, the Company believes that its accounts receivable credit risk exposure is limited. For the year ended July 31,
2021, related parties represented 65% of the Company’s revenue, and as of July 31, 2021, two customers represented 45% and
33% of the Company’s accounts receivable balance, respectively. For the year ended July 31, 2020, related parties represented
52% of the Company’s revenue, and as of July 31, 2020, three customers represented 11%, 10%, and 10% of the Company’s
accounts receivable balance, respectively. Allowance
for Doubtful Accounts The
allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance.
The allowance is determined based on known troubled accounts, historical experience and other currently available evidence. Doubtful
accounts are written off upon final determination that the trade accounts will not be collected. The computation of this allowance is
based on the tenants’ or parking customers’ payment histories, as well as certain industry or geographic specific credit
considerations. If the Company’s estimates of collectability differ from the cash received, then the timing and amount of the Company’s
reported revenue could be impacted. The credit risk is mitigated by the high quality of the Company’s existing tenant base, inclusive
of related parties, which represented 65% and 52% of the Company’s total revenue for the years ended July 31, 2021 and 2020,
respectively. The Company recorded bad debt expense of approximately $193,000 and $96,000 for the years ended July 31, 2021 and
2020, respectively. 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 the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810,
Consolidation 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 Equity
Method Investments Long-Lived
Assets Equipment,
buildings, leasehold improvements, and furniture and fixtures are recorded at cost and are depreciated on a straight-line basis over
their estimated useful lives, which range as follows:
Classification Years
Building and improvements 40
Tenant improvements 7-15
Other (primarily equipment and furniture and fixtures) 5 Long-lived
assets are reviewed for impairment when circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows estimated
by the Company to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount
by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are recorded as held
for sale at the lower of carrying value or estimated net realizable value. Tests for impairment or recoverability are performed at least
annually and require significant management judgment and the use of estimates which the Company believes are reasonable and appropriate
at the time of the impairment test. Future unanticipated events affecting cash flows and changes in market conditions could affect such
estimates and result in the need for an impairment charge. The Company also re-evaluates the periods of amortization to determine whether
circumstances warrant revised estimates of current useful lives. No impairment losses were identified or recorded in the fiscal years
ended July 30, 2021 and 2020 on the Company’s other intangible assets. Properties The
Company owns commercial real estate located at 520 Broad Street in Newark, New Jersey, and a related 800-car public parking garage across
the street. Additionally, the Company owns a portion of the 6th floor of a building located at 5 Shlomo Halevi Street, in Jerusalem,
Israel. Assets
Held for Sale The
Company classifies assets held for sale if all held for sale criteria is met pursuant to ASC 360-10. Assets classified as held for sale
are not depreciated and are measured at the lower of their carrying amount or fair value less cost to sell. Further, assets held for
sale are presented as current assets on the consolidated balance sheet. Debt
Issuance Costs Debt
issuance costs are recorded net against the related debt and amortized to interest expense over the life of the related debt. During
the years ended July 31, 2021 and 2020, amortized debt issuance costs of $27,776 and $0, respectively, were recorded as a component of
interest expense. Revenue
Recognition The
Company applies the five-step approach as described in ASC 606, Revenue from Contracts with Customers 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 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. Repairs
and Maintenance The
Company charges the cost of repairs and maintenance, including the cost of replacing minor items not constituting substantial betterment,
to selling, general and administrative expenses as these costs are incurred. Stock-Based
Compensation The
Company accounts for stock-based compensation using the provisions of ASC 718, Stock Based Compensation Income
Taxes The
Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between
the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is
provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization
of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become
deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning
strategies in its assessment of a valuation allowance. Deferred tax assets and liabilities are measured using the enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change. The
Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The Company
determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not
recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority that has full knowledge
of all relevant information. Tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount
of tax benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater
than 50% likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized
in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable,
a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability. The
Company classifies interest and penalties on income taxes as a component of income tax expense, if any. Contingencies The
Company accrues for loss contingencies when both (a) information available prior to issuance of the financial statements indicates
that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably
be estimated. When the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range, the Company
records its best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues
the minimum amount in the range. The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible
that a loss may have been incurred. Leases The
Company adopted FASB ASC Topic 842, Leases As
a lessor, the Company presents all rental revenue and reimbursements from tenants as a single line item rental income within the consolidated
statements of operations and comprehensive loss. Fair
Value Measurements Fair
value of financial and non-financial assets and liabilities is defined as an exit price, which is 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. The three-tier
hierarchy for inputs used to measure fair value, which prioritizes the inputs to valuation techniques used to measure fair value, is
as follows: Level
1 Level
2 Level
3 A
financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires
judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. Functional
Currency The
U.S. Dollar is the functional currency of our entities operating in the United States. The functional currency for our subsidiaries operating
outside of the United States is the New Israeli Shekel, the currency of the primary economic environment in which such subsidiaries primarily
expend cash. The Company translates those subsidiaries’ financial statements into U.S. Dollars. The Company translates assets and
liabilities at the exchange rate in effect as of the consolidated financial statement date, and translates accounts from the statements
of operations and comprehensive loss using the weighted average exchange rate for the period. The Company reports gains and losses from
currency exchange rate changes related to intercompany receivables and payables, currently in non-operating expenses. Loss
Per Share Basic
loss per share is computed by dividing net loss attributable to all classes of common stockholders of the Company by the weighted average
number of shares of all classes of common stock outstanding during the applicable period. Diluted loss per share is determined in the
same manner as basic loss per share, except that the number of shares is increased to include restricted stock still subject to risk
of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such
increase would be anti-dilutive. Recently
Issued Accounting Standards Not Yet Adopted In
June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments In
August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity |
