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Oct. 18, 2021, 5:08 p.m. EDT

10-K: RAFAEL HOLDINGS, INC.

(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Annual Report contains forward-looking statements within the meaning of

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.

Overview

Rafael Holdings, Inc. (NYS:RFL) , ("Rafael Holdings", "we" 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 Company's investment in Rafael Pharmaceuticals includes preferred and common equity interests and a warrant to purchase additional equity (the "Warrant"). 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.

On June 17, 2021, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with RH Merger I, Inc., a Delaware corporation and a wholly-owned subsidiary of Holdings, RH Merger II, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Holdings and Rafael Pharmaceuticals, Inc., a Delaware corporation ("Rafael Pharmaceuticals" or "Pharma"), whereby Pharma will become our wholly-owned limited liability subsidiary.

We filed a preliminary proxy statement/prospectus with the SEC on September 14, 2021.

Business Update - 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. We actively monitor the outbreak and its potential impact on our operations and those of our holdings.

The impacts on our and our affiliates' operations and specifically the ongoing clinical trials of our pharmaceutical holdings have been actively managed by respective pharmaceutical management teams who have worked closely with the appropriate regulatory agencies to continue clinical trial activities with as minimal impact as possible including receiving waivers for certain clinical trial activities from the respective regulatory agencies to continue the studies.

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 is a potential impact to the value of our real estate portfolio as well as efforts to monetize those assets.

We have implemented a number of measures to protect the health and safety of our workforce, including a voluntary work-from-home policy for our workforce who can perform their jobs from home, as well as restrictions on business travel.

Due to both known and unknown risks, including quarantines, closures and other restrictions resulting from the outbreak, operations and those of our holdings may be adversely impacted. Additionally, 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.







        Pharmaceuticals Segment
        Our consolidated expenses for our Pharmaceuticals segment were as follows:
                                                Year Ended July 31,                Change
                                                 2021           2020           $            %
                                                                (in thousands)
        Selling, general and administrative   $    (8,153 )   $   (419 )   $  (7,734 )     (1,846 )%
        Research and development                   (4,907 )     (2,391 )      (2,516 )        105 %
        Depreciation and amortization                  (1 )         (1 )           -            - %
        Impairment - Altira                        (7,000 )          -        (7,000 )       (100 )%
        Loss From Operations                  $   (20,061 )   $ (2,811 )   $ (17,250 )        614 %
        


To date, the Pharmaceuticals segment has not generated any revenues. The entirety of the expenses in the Pharmaceuticals segment relates to the activities of LipoMedix, Barer, Levco, Farber, and Rafael Medical Devices. For the years ended July 31, 2021 and 2020, we held a 100% interest in Barer, a 68% and 67% interest, respectively, in LipoMedix, a 95% and 0% interest in Levco, respectively, and a 93% and 0% interest in Farber, respectively. Rafael Medical Devices is a newly created entity during the year ended July 31, 2021, in which we have a 100% interest.

Selling, general and administrative expenses. Selling, general and administrative expenses consist mainly of payroll, benefits, facilities, consulting and professional fees. The increase in selling, general and administrative expenses in the fiscal year ended July 31, 2021 compared to the fiscal year ended July 31, 2020 is primarily due to non-cash share-based compensation expense of approximately $5.5 million for awards issued to our newly hired CEO and Chief Commercial Officer ("CCO") and payroll of approximately $2.4 million pertaining to our newly hired CEO and CCO, partially offset by the expenses incurred to the founders of LipoMedix in 2020.

Research and development expenses. Research and development increased for the fiscal year ended July 31, 2021, due to increased activity at Barer, Levco, Farber, and Rafael Medical Devices.

Impairment expense - Altira. The Company recorded an impairment loss of $7 million related to the Company's additional investment in 33.333% of Altira for the year ended July 31, 2021.







        Real Estate Segment
        Our consolidated income and expenses for our Real Estate segment were as
        follows:
                                                Year Ended July 31,              Change
                                                 2021           2020          $           %
                                                              (in thousands)
        Rental - Third Party                  $       890     $  1,516     $   (626 )     (41 )%
        Rental - Related Party                      2,099        2,082           17         1 %
        Parking                                       502          832         (330 )     (40 )%
        Other - Related Party                         480          480           -         -  %
        Selling, general and administrative       (12,263 )     (8,699 )     (3,564 )     (41 )%
        Depreciation and amortization              (1,459 )     (1,865 )        406        22 %
        Loss From Operations                  $    (9,751 )   $ (5,654 )   $ (4,097 )      72 %
        


Revenues. Rental and Parking revenues decreased by approximately $0.9 million in the fiscal year ended July 31, 2021, compared to the prior fiscal year, primarily due to the sale of the building in Piscataway and the related reduced rental income, as well as a 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 consist mainly of payroll, benefits, facilities, consulting and professional fees. The increase in selling, general and administrative expenses in the fiscal year ended July 31, 2021 compared to the fiscal year ended July 31, 2020 is primarily due to increased legal and professional fees of approximately $1.6 million, increased real estate tax costs of approximately $0.7 million, an approximate $0.5 million increase in directors and officers liability insurance, and an increase in non-cash share-based compensation expense of approximately $0.4 million for awards issued to Management level employees.

Depreciation and amortization expenses. Depreciation and amortization expenses decreased in the fiscal year ended July 31, 2021 compared to the prior fiscal year 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:
                                                     Year Ended July 31,                Change
                                                      2021          2020            $             %
                                                                      (in thousands)
        Loss from operations                       $  (29,812 )   $  (8,465 )   $ (21,347 )         252 %
        Interest expense, net                            (102 )         (32 )         (70 )         219 %
        Net loss resulting from foreign exchange
        transactions                                        -            (5 )           5          (100 )%
        Gain on sale of building                          749             -           749           100 %
        Impairment of investments - Other
        Pharmaceuticals                                  (724 )        (799 )          75            (9 )%
        Unrealized gain on investments - Hedge
        Funds                                           4,758         2,385         2,373            99 %
        Loss before income taxes                      (25,131 )      (6,916 )     (18,215 )        (263 )%
        Provision for income taxes                        (18 )         (29 )          11           (38 )%
        Impairment of equity method investment
        in Altira                                           -        (4,000 )       4,000          (100 )%
        Equity in earnings of RP Finance                  383           192           191            99 %
        Consolidated net loss                         (24,766 )     (10,753 )     (14,013 )         130 %
        Net loss attributable to noncontrolling
        interests                                        (222 )        (338 )         116           (34 )%
        Net loss attributable to Rafael
        Holdings, Inc.                             $  (24,544 )   $ (10,415 )   $ (14,129 )         136 %
        


Interest expense, net. Interest (expense), net for the year ended July 31, 2021 totaled approximately $2 thousand of interest income and $104 thousand of interest expense. Interest (expense) income, net for the year ended July 31, 2020 totaled approximately $52 thousand of interest income and $84 thousand of interest expense. Interest expense of $104 is primarily related to $64 thousand of accrued interest and $28 thousand of amortization of debt issuance costs related to the Note Payable entered into in July 2021.The increase of interest (expense) income, net is due to interest incurred on the $15,000,000 Note Payable entered into in July 2021.

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

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

Impairment of investments - Other Pharmaceuticals. We recorded an impairment loss of $724 thousand related to our investment using the measurement alternative for the year ended July 31, 2021.

Impairment of equity method investment of Altira. The Company recorded an impairment loss of $0 and $4 million related to the Company's initial investment in 33.333% of Altira for the years ended July 31, 2021 and 2020, respectively.

Unrealized gain on investments - Hedge Funds. We recorded unrealized gains of approximately $4.8 million and $2.4 million for the years ended July 31, 2021 and 2020, respectively, due to gains on our Hedge Funds portfolio.

Provision for income taxes. During the years ended July 31, 2021 and 2020, there was a provision for income taxes for $18 thousand and $29 thousand, respectively.

Equity in earnings of RP Finance. We recognized approximately $383 thousand and $192 thousand in income from our ownership interests of 37.5% in RP Finance for the years ended July 31, 2021 and 2020, respectively, related to our equity method investment in RP Finance.

Net loss attributable to noncontrolling interests. The change in the net loss attributable to noncontrolling interests was due to the losses related to noncontrolling interests held in LipoMedix, Farber, and Levco for the year ended July 31, 2021.

Liquidity and Capital Resources

General

As of July 31, 2021, we had cash and cash equivalents of $7.9 million in addition to our investment in a hedge fund valued at $5.3 million.

In August 2021, we completed a securities purchase agreement and in which we sold 2,945,986 shares of Class B Common Stock for aggregate net proceeds of $97.8 million, after deducting transaction costs of $6.4 million.

We expect that the balance of our cash and cash equivalents as of July 31, 2021, in addition to our 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 July 9, 2021, the Company, as guarantor, Rafael Holdings Realty, Inc., a wholly-owned subsidiary of the Registrant ("Realty"), as pledgor, and Broad-Atlantic Associates, LLC, a wholly-owned subsidiary of Realty (the "Borrower," and together with the Company and Realty, the "Borrower Parties"), as borrower, entered into a loan agreement (the "Loan Agreement") with 520 Broad Street LLC, a third-party lender (the "Lender"). The Loan Agreement provides for a loan in the amount of $15 million (the "Note Payable") from Lender to Borrower secured by (i) a first mortgage on 520 Broad Street, Newark, New Jersey 07102; and (ii) a first priority security interest in the equity of the Borrower as set forth in the Pledge and Security Agreement between Realty and Lender.

The Note Payable bears interest at a rate per annum equal to seven and one-quarter percent (7.25%) and thereafter at an interest rate per annum equal to the 30-day LIBOR Rate, as published in The Wall Street Journal, plus 6.90% per annum, but in no event less than seven and one-quarter percent (7.25%) per annum. The Note Payable is due on August 1, 2022, subject to the Company's option to extend the maturity date until August 1, 2023 for a fee equal to three-quarters of one percent (0.75%) of the Note Payable.

Effective September 24, 2021, we entered into a line of credit agreement with Rafael Pharmaceuticals (the "Debtor"), which provides for loan commitments in the amount of $25,000,000. The funds loaned under the Line of Credit Agreement are to be used by the Debtor in accordance with the budget that has been approved by the Company. Of the aggregate amount, $1.9 million was advanced on September 24, 2021 and the remaining amount was funded on October 1, 2021. Our cash balance is 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.







                                                                              July 31,
                                                                         2021          2020
        Cash flows (used in) provided by                                   (in thousands)
        Operating activities                                           $ (15,601 )   $  (4,666 )
        Investing activities                                              (8,171 )      (1,034 )
        Financing activities                                              30,298           (96 )
        Effect of exchange rates on cash, cash equivalents and
        restricted cash                                                      122           (22 )
        Increase (decrease) in cash, cash equivalents and restricted
        cash                                                           $   6,648     $  (5,818 )
        


Operating Activities

The increase in cash used in operating activities for the year ended July 31, 2021 as compared to the year ended July 31, 2020 was primarily related to the net loss, and impact from noncash items, primarily the unrealized gain on investment - Hedge Funds of $4.8 million, the gain on the sale of the office building in Piscataway, New Jersey of $749 thousand offset by the impairment expense related to the investment in Altira of $7 million, stock based compensation of $6.6 million, depreciation of $1.5 million, the impairment of investment - Other Pharmaceuticals of $724 thousand, and other changes in assets and liabilities.

Investing Activities

Cash used in investing activities for the year ended July 31, 2021 was primarily related to the purchase of 7.3 million shares of Rafael Pharmaceuticals' Series D Preferred Stock for $9.1 million, the payments to fund our portion of advances under the line of credit between RP Finance and Rafael Pharmaceuticals for $7.5 million, the payments of an aggregate of $2 million towards the acquisition of a second 33.333% membership interest in Altira, and purchases of property and equipment of $206 thousand, offset by the proceeds of $7 million from the liquidation of the hedge funds and $3.7 million from the sale of the building in Piscataway, New Jersey in August 2020.

Cash used in investing activities for the year ended July 31, 2020 related to the initial payments of $0.5 million towards the acquisition of 33.333% membership interest in Altira for a product-in development, and $0.5 million related to building improvements made to our real estate holdings.

Financing Activities

Cash provided by financing activities for the year ended July 31, 2021 was primarily related to proceeds from the issuance of a note payable in the amount of $15.0 million, proceeds of $13 million for the sale of 567,437 shares of our Class B common stock and warrants to purchase an additional 113,487 shares of Class B common stock. Additionally, there were approximately $2 million in proceeds provided by the exercise of warrants to purchase 87,298 shares of Class B common stock by two holders of the warrants.

Cash used in financing activities for the year ended July 31, 2020 was related to payments for taxes related to shares withheld for employee taxes, offset by proceeds from the exercise of options.

We do not anticipate paying dividends on our common stock until we achieve sustainable profitability and retain certain minimum cash reserves. The payment of dividends in any specific period will be at the sole discretion of our Board of Directors.

Trends and Uncertainties - COVID-19

In December 2019, a novel strain of 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 year ended July 31, 2021, COVID-19 has not had a material impact on our operations.

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.

The impacts on our and our affiliates' operations and specifically the ongoing clinical trials of our pharmaceutical holdings have been actively managed by respective pharmaceutical management teams who have worked closely with the appropriate regulatory agencies to continue clinical trial activities with as minimal impact as possible including receiving waivers for certain clinical trial activities from the respective regulatory agencies to continue the studies.

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 is a potential impact to the value of our real estate portfolio as well as efforts to monetize those assets.

We have implemented a number of measures to protect the health and safety of our workforce, including a voluntary work-from-home policy for our workforce who can perform their jobs from home, as well as restrictions on business travel.

Due to both known and unknown risks, including quarantines, closures and other restrictions resulting from the outbreak, operations and those of our holdings may be adversely impacted. Additionally, 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.

Critical Accounting Policies and Estimates

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management's most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to revenue recognition, allowance for doubtful accounts, income taxes and valuation of investments and long-lived assets. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. See Note 1 to the Consolidated Financial Statements in this Annual Report for a complete discussion of our significant accounting policies. For more information on recent accounting standards, see Note 1 to the Consolidated Financial Statements in this Annual Report.

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.

Oct 18, 2021

COMTEX_395450565/2041/2021-10-18T17:07:39

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