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Part I
As used in this Annual Report, unless the context otherwise requires, the terms the “Company,” “Rafael Holdings,” “we,” “us,” and “our” refer to Rafael Holdings, Inc., a Delaware corporation, and its subsidiaries, collectively. Each reference to a fiscal year in this Annual Report refers to the fiscal year ending in the calendar year indicated (for example, fiscal 2018 refers to the fiscal year ended July 31, 2018).
Item 1. Business.
Overview
Rafael Holdings, Inc. (“Rafael”) owns commercial real estate assets and interests in clinical and early stage pharmaceutical companies. The assets are operated as two separate lines of business. The commercial real estate holdings consist of the building at 520 Broad Street in Newark, New Jersey that houses IDT’s headquarters, and its associated public garage, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel that hosts offices for IDT and certain affiliates. The pharmaceutical holdings include debt, preferred equity interests and warrants in Rafael Pharmaceuticals, Inc., 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., an early stage oncology focused pharmaceutical company based in Israel.
Financial information by segment is presented in Note 12 in the Notes to our Consolidated and Combined Financial Statements in Item 8 of this Annual Report.
Our headquarters are located at 520 Broad Street, Newark, New Jersey 07102. The main telephone number at our headquarters is (212) 658-1450 and our corporate web site’s home page is www.rafaelholdings.com.
We make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity through the investor relations page of our web site (http://Rafaeholdings.com/irpass.com) as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Our web site also contains information not incorporated into this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission.
The Spin-Off
On March 26, 2018, IDT Corporation, which we refer to as IDT, our former parent corporation, completed a tax-free spinoff (the “Spin-Off”) of our capital stock, through a pro rata distribution of our common stock to its stockholders of record as of the close of business on March 13, 2018 (the “Record Date”). As a result of the Spin-Off, each of IDT’s stockholders received: (i) one share of the Company’s Class A common stock for every two shares of IDT’s Class A common stock held on the Record Date, and (ii) one share of the Company’s Class B common stock for every two shares of IDT’s Class B common stock held of record on the Record Date. On March 26, 2018, 787,163 shares of the Company’s Class A common stock, and 11,754,835 shares of the Company’s Class B common stock were issued and outstanding, which includes 114,945 restricted stock units issued to employees and consultants in connection with the spin.
We entered into various agreements with IDT prior to the Spin-Off, including a Separation and Distribution Agreement to effect the separation and provide a framework for the our relationship with IDT after the Spin-Off, and a Transition Services Agreement, which provides for certain services to be performed by IDT to facilitate our transition into a separate publicly-traded company. These agreements provide for, among other things, (1) the allocation between the Company and IDT of employee benefits, taxes and other liabilities and obligations attributable to periods prior to the Spin-Off, (2) transitional services to be provided by IDT relating to human resources and employee benefits administration, and (3) finance, accounting, tax, investor relations and legal services to be provided by IDT to us following the Spin-Off. In addition, we entered into a Tax Separation Agreement with IDT, which sets forth the responsibilities of us and IDT with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Spin-Off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods.
Recent Developments
On September 5, 2018, our subsidiary CS Pharma Holdings, LLC (“CS Pharma”), partially exercised the Warrant (the “Warrant”) to purchase Series D Convertible Preferred Stock of Rafael Pharmaceuticals, Inc. (“Rafael Pharmaceuticals”) held by certain of our subsidiaries. CS Pharma purchased 8.0 million shares of Rafael Pharmaceuticals’ Series D Convertible Preferred Stock for $10 million representing approximately 13.5% of the outstanding equity of Rafael Pharmaceuticals.
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Business Description
We own commercial real estate assets and interests in clinical and early stage pharmaceutical companies. The assets are operated as two separate lines of business and we are looking to increase the value of our real estate holdings.
Real Estate
The commercial real estate holdings consist of the building at 520 Broad Street in Newark, New Jersey that houses IDT’s headquarters, and its associated public garage, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel that hosts offices for IDT and certain affiliates.
520 Broad Street in Newark New Jersey is a 20-story commercial office building containing approximately 496,000 square feet. The building was completed in 1957 and is of steel-frame construction with cast-in-place concrete floors. The facade is constructed of stone and metal framed glass curtain wall sections. The public garage has three levels, plus additional surface parking that, in total, can accommodate in excess of 800 parking spaces. We have retained a leading real estate brokerage firm to market the building for potential sale while we continue to attempt to maximize the value of our holdings by leasing activity and improvements.
The building serves as the headquarters of IDT Corporation and IDT’s affiliate, Genie Energy, who occupy the second through fourth floors, which have been recently renovated. Currently, approximately 24.30% of the building is leased, including leases to IDT and Genie.
The IDT lease expires in April 2025 and is for 80,000 square feet and includes two parking spots per thousand square feet of space leased. The annual base rent is $1,528,000. IDT has the right to terminate the lease upon four months’ notice and, upon early termination, IDT will pay a penalty equal to 25% of the portion of the rent due over the course of the remaining term. IDT has the right to lease an additional 50,000 square feet in the building on the same terms as the base lease, in 25,000 square feet increments. Upon expiration of the lease, IDT has the right to renew the lease for another five years on substantially the same terms, with a 2% increase in the rental payments.
The Genie lease expires in April 2025 and is for 8,631 square feet and includes two parking spots per thousand square feet of space leased. The annual base rent is $198,513. Genie has the right to terminate the lease upon four months’ notice and, upon early termination, Genie will pay a penalty equal to 25% of the portion of the rent due over the course of the remaining term. Upon expiration of the lease, Genie has the right to renew the lease for another five years on substantially the same terms, with a 2% increase in the rental payments.
In addition to the IDT and Genie leases, there are three additional leases for space in the building. The first lease is for a portion of the sixth floor for an eleven-year term, of which the first six years are non-cancellable. The second lease is for a portion of the ground floor and basement for a term of ten years, seven months and the third lease is for another portion of the ground floor for a term of ten years, four months. The leases have all commenced. At July 31, 2018 and July 31, 2017, the carrying value of the land, building and improvements at 520 Broad Street was $45.2 million and $45.6 million, respectively.
Depreciation and amortization expense of property, plant and equipment was $1.7 million, $1.7 million and $1.6 million in fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
The building in Piscataway is located at 225 Old New Brunswick Road: it is a three story commercial office building containing approximately 65,000 square feet. The building was completed in 1978. Since its completion, the building has been leased as data space and therefore has power, diverse paths of fiber, back-up generators and dedicated HVAC units. Currently, approximately 28% of the building is leased to two data users. Both leases are to tenants who each occupy a portion of the first floor. One lease expires at the end of 2020 and the other lease expires at the end of October 2022. We have retained Colliers International to market the building for potential sale. The marketing efforts initiated in the first quarter of fiscal 2019.
The real estate holding in Israel is a condominium portion of an office building built in 2004 located in the Har Hotzvim section of Jerusalem, Israel. The condominium is approximately 12,400 square feet and the space is occupied by IDT and related parties. Har Hotzvim is a high-tech industrial park located in northwest Jerusalem. It is the city's main zone for science-based and technology companies, among them Intel, Teva and Mobileye. A related party terminated its lease as of June 30, 2017. As of July 31, 2018, IDT is leasing approximately 30% of the condominium.
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. LipoMedix, based in Israel, is a clinical stage oncology company.
We own our interests/rights in Rafael Pharmaceutical through a 90%-owned non-operating subsidiary, IDT-Rafael Holdings, LLC. IDT-Rafael Holdings holds a warrant to purchase a significant stake in Rafael Pharmaceuticals, as well as other equity and governance rights in Rafael Pharmaceuticals, and owns 50% of CS Pharma, a non-operating entity which holds convertible debt and other rights to purchase equity interests in Rafael Pharmaceuticals.
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Those interests/rights include:
1. $10,000,000 of Series D Convertible Notes of Rafael Pharmaceuticals held by CS Pharma.
2. A warrant to purchase up to 56% of the capital stock of Rafael Pharmaceuticals – the right to exercise the first $10,000,000 worth of the warrant is held by CS Pharma; and the remainder is held directly by IDT-Rafael Holdings.
3. On September 5, 2018, CS Pharma exercised the first $10 million of warrants to purchase 8.0 million shares of Series D Convertible Preferred Stock of Rafael Pharmaceuticals, representing approximately 13.5% of the outstanding equity of Rafael Pharmaceuticals.
We also have certain governance rights, including appointment of directors.
On September 19, 2017, IDT approved a compensatory arrangement with Howard S. Jonas related to the right held by IDT-Rafael Holdings to receive additional Rafael Pharmaceutical shares (“Bonus Shares”) upon the achievement of certain milestones. Under that arrangement, IDT and the Company transferred to Howard Jonas the contractual right to receive “Bonus Shares” for an additional 10% of the outstanding capital stock of Rafael Pharmaceuticals that was previously held by IDT-Rafael Holdings, which is contingent upon achieving certain milestones. This right was previously held by IDT-Rafael Holdings, subject to its right to transfer to recipients that IDT-Rafael Holdings, in its sole discretion, felt merit because of special efforts by such persons in assisting Rafael Pharmaceuticals and its products. IDT-Rafael Holdings distributed the rights to its members and we transferred the portion we received to Howard Jonas. 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.
On March 2, 2017, Howard Jonas, our Chairman of the Board, and Chairman of the Board of Rafael Pharmaceuticals purchased 10% of IDT-Rafael Holdings, LLC, in which the Company’s direct and indirect interest and rights in Rafael Pharmaceuticals were held, for a purchase price of $1 million, which represented 10% of the Company’s cost basis in IDT-Rafael Holdings. We hold our interest in CS Pharma through our 90%-owned non-operating subsidiary, IDT-Rafael Holdings, LLC, which holds a 50% interest in CS Pharma. Accordingly, we will hold an effective 45% indirect interest in the assets held by CS Pharma, including its cash. Separately, Howard Jonas and Deborah Jonas jointly own $525,000 of Series C Convertible Notes of Rafael Pharmaceuticals, and The Howard S. and Deborah Jonas Foundation owns $525,000 of Series C Notes of Rafael Pharmaceuticals.