RFL Rafael Holdings Inc

In 2019, the Company established Barer, a preclinical cancer metabolism research operation, to focus on developing a pipeline of novel therapeutic compounds, including compounds designed to regulate cancer metabolism with potentially broader application in other indications beyond cancer. Barer was comprised of scientists and academic advisors that are experts in cancer metabolism, chemistry, and drug development. In addition to its own internal discovery efforts, Barer pursued collaborative research agreements and in-licensing opportunities with leading scientists from top academic institutions. Barer’s majority owned subsidiary, Farber Partners, LLC (“Farber”), was formed around one such agreement with Princeton University’s Office of Technology Licensing (“Princeton”) 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. In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at Barer Institute. Since then, the Company has sought partners for Farber programs and has entered into a license agreement for one of its technologies that is in pre-clinical research stage,

The Company owns a 37.5% equity interest in RP Finance LLC (“RP Finance”), which was, until March 13, 2024 (the date of the RP Finance Consolidation, as described in Note 3), accounted for under the equity method. RP Finance is an entity associated with members of the family of Howard Jonas (Executive Chairman, Chairman of the Board, and controlling stockholder of the Company) which holds 37.5% equity interest of RP Finance. RP Finance holds debt and equity investments in Cornerstone. In October 2021, Cornerstone received negative results of its Avenger 500 Phase 3 study for Devimistat in pancreatic cancer as well as a recommendation to stop its ARMADA 2000 Phase 3 study due to a determination that the trial would unlikely achieve its primary endpoint (the “Data Events”). Due to the Data Events, RP Finance fully impaired its then debt and equity investments in Cornerstone.

On March 13, 2024, Cornerstone consummated a restructuring of its outstanding debt and equity interests (the “Cornerstone Restructuring”). As a result of the Cornerstone Restructuring, Rafael became a 67% owner of the issued and outstanding common stock of Cornerstone (the “Cornerstone Acquisition”), and Cornerstone became a consolidated subsidiary of Rafael. The Cornerstone Acquisition is accounted for as an acquisition of a variable interest entity that is not a business in accordance with U.S. GAAP. The Company was determined to be the accounting acquirer for financial reporting purposes. See Note 3 to the Consolidated Financial Statements for additional information regarding the transaction. In conjunction with the Cornerstone Restructuring and Cornerstone Acquisition, the Company reassessed its relationship with RP Finance, and as a result determined that RP Finance is still a variable interest entity and that the Company became the primary beneficiary of RP Finance as the Company now holds the ability to control repayment of the RP Finance Line of Credit which directly impacts RP Finance’s economic performance. Therefore, following the Cornerstone Restructuring and Cornerstone Acquisition, the Company consolidated RP Finance (the “RP Finance Consolidation”). See Note 3 for additional information on the Consolidation. The Company is currently reviewing Cornerstone’s current efforts, prospects and available resources to determine the optimal operational direction.

In May 2021, the Company formed Rafael Medical Devices, an orthopedic-focused medical device company developing instruments to advance minimally invasive surgeries. In August 2023, the Company raised $925,000 from third parties in exchange for 31.6% ownership of Rafael Medical Devices.

In April 2023, the Company first invested in Day Three, a company which empowers third-party manufacturers to reimagine their existing cannabis offerings enabling them to bring to market better, cleaner, more precise and predictable versions by utilizing Day Three’s pharmaceutical-grade technology and innovation like Unlokt™. In January 2024, the Company entered into a series of transactions with Day Three and certain shareholders, acquiring a controlling interest of Day Three and subsequently consolidating Day Three's results (the “Day Three Acquisition”). The Company is evaluating the prospects for Day Three’s technology and offerings.

The “Company” in these consolidated financial statements refers to Rafael Holdings and its subsidiaries on a consolidated basis.

All majority-owned subsidiaries and RP Finance, LLC are consolidated with all intercompany transactions and balances eliminated in consolidation. In addition to Rafael Holdings, Inc., the entities included in these consolidated financial statements are as follows:

The Company assesses goodwill for impairment on an annual basis as of May 31 or more frequently when events and circumstances occur indicating that recorded goodwill may be impaired. The Company did not record a goodwill impairment charge during the three months ended October 31, 2024.

(v) Cornerstone and RP Finance amended the RPF Line of Credit (as defined in Note 5) to (i) extend the maturity date of the approximately $21.9 million in borrowings thereunder to May 31, 2028, (ii) limit the number of shares to be issued thereunder in respect of anti-dilution protection provided for therein in connection with the Cornerstone Restructuring and to provide RP Finance 3,658,368 shares of post-Reverse Stock Split Cornerstone Common Stock so that following the Cornerstone Restructuring, RP Finance holds six percent (6%) of the outstanding Common Stock of Cornerstone (the “RPF 6% Top Up Shares”), (iii) terminate any anti-dilution protection in respect of such ownership interest following consummation of the Cornerstone Restructuring, and (iv) terminate all future lending obligations of RP Finance under the RPF Line of Credit (as so amended, the “Amended RPF Line of Credit”);

(vi) Rafael invested an additional $1.5 million in cash in exchange for 1,546,391 shares of post-Reverse Stock Split Cornerstone Common Stock;

(vii) Cornerstone amended and restated its certificate of incorporation, to, among other things, effect a reverse split of all of Cornerstone’s capital stock on a one-for-ten basis (the “Reverse Stock Split”), set the number of authorized shares of Cornerstone Common Stock to be sufficient for issuance of the Common Stock in the Cornerstone Restructuring and eliminate the authorized preferred stock not required to be authorized as a result of the Mandatory Common Conversion;

(viii) Cornerstone amended prior agreements in place giving certain parties rights to designate members of the Board and those rights have been eliminated. All directors are elected by the Cornerstone stockholders and as the majority stockholder, Rafael can control that vote. The Company has entered into a voting agreement (the “Voting Agreement”) whereby Rafael has agreed to maintain three directors of Cornerstone that are independent of Rafael; and

(ix) Cornerstone increased the available reserve of Cornerstone Common Stock for grant to employees, consultants and other service providers to approximately 10% of Cornerstone’s fully diluted capital stock (the “Reserve Increase”).

Acquisition of Cornerstone

As a result of the Cornerstone Restructuring, Rafael became a 67% owner of the issued and outstanding Common Stock of Cornerstone, which became a consolidated subsidiary of Rafael. The Cornerstone Acquisition is accounted for as an acquisition of a VIE that is not a business in accordance with U.S. GAAP. The Company was determined to be the accounting acquirer for financial reporting purposes. The guidance requires an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen test is met, the acquired entity is not a business for financial reporting purposes. Accordingly, the Cornerstone Acquisition was accounted for as an asset acquisition as substantially all of the fair value of Cornerstone’s gross assets is concentrated within in-process research and development, an intangible asset.

Under ASC 810, the initial consolidation of a VIE shall not result in goodwill being recognized, and the acquirer shall recognize a gain or loss for the difference of (a) the sum of (i) the fair value of any consideration paid, (ii) the fair value of any noncontrolling interests, and (iii) the reported amount of any previously held interests, and (b) the net amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with ASC 805, Business Combinations (“ASC 805”). In accordance with the calculation within ASC 810, no gain or loss was recognized on the Cornerstone Acquisition.

The net amount of the VIE’s identifiable assets and liabilities recognized with respect to the Cornerstone Acquisition is based upon management’s preliminary estimates of and assumptions related to the fair values of assets acquired and liabilities assumed, using currently available information. For this purpose, fair value shall be determined in accordance with the fair value concepts defined in ASC 820, Fair Value Measurements and Disclosures.

The following table presents, in accordance with ASC 810, the sum of (i) the fair value of consideration paid, (ii) the fair value of noncontrolling interests, and (iii) the reported amount of previously held interests (amounts in thousands):

The following table presents, in accordance with ASC 810, the net preliminary amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with ASC 805 (amounts in thousands):

In accordance with the calculation within ASC 810, no gain or loss was recognized on the initial consolidation of Cornerstone. The Company incurred transaction costs of $716 thousand during the year ended July 31, 2024 for consulting, legal, accounting, and other professional fees that have been expensed as general and administrative expenses as part of the Cornerstone Restructuring, Cornerstone Acquisition, and RP Finance Consolidation.

The Company recognized a gain in the amount of $720 thousand during the quarter ended April 30, 2024 on the reversal of a reserve on a receivable due from Cornerstone, which was fully reserved for by the Company due to the Data Events. This receivable balance is then eliminated in consolidation against the corresponding payable balance acquired from Cornerstone recorded in Cornerstone's Due to related parties balance in the assets acquired and liabilities assumed in the Cornerstone Acquisition.

To value the IPR&D, the Company utilized the Multi-Period Excess Earnings Method (“MPEEM”), under the Income Approach. The method reflects the present value of the projected operating cash flows generated by Cornerstone’s assets after taking into account the cost to realize the revenue, and an appropriate discount rate to reflect the time value and risk associated with the invested capital. IPR&D acquired represents Cornerstone’s research and development activities related to oncology-focused pharmaceuticals which seeks to exploit the metabolic differences between normal cells and cancer cells.

IPR&D represents the R&D asset of Cornerstone which is in-process, but not yet completed, and which has no alternative use. As the Cornerstone Acquisition has been accounted for as an acquisition of a VIE that is not a business, it was determined that the fair value of the IPR&D asset acquired with no alternative future use should be charged to IPR&D expense at the acquisition date.

The Company assumed Cornerstone's liability to RP Finance under the Amended RPF Line of Credit at its fair value in the Cornerstone Acquisition and acquired RP Finance's receivable from Cornerstone under the Amended RPF Line of Credit at its fair value in the RP Finance Consolidation. These intercompany amounts are eliminated in consolidation. The Company will accrete the fair value of Cornerstone's liability and RP Finance's receivable under the Amended RPF Line of Credit to the amount due on May 31, 2028 as interest expense and interest income, respectively, in the consolidated statements of operations and comprehensive loss over the estimated term of the Amended RPF Line of Credit.

The creditors of Cornerstone do not have legal recourse to the Company's general credit.

Consolidation of RP Finance

RP Finance, an entity in which the Company owns a 37.5% equity interest (previously accounted for as an equity method investment of Rafael), and in which an entity associated with members of the family of Howard Jonas holds an additional 37.5% equity interest, holds debt and equity investments in Cornerstone (which is included in the Company’s 67% equity ownership interest in Cornerstone). In conjunction with the Cornerstone Acquisition, the Company reassessed its relationship with RP Finance and, as a result of the Cornerstone Restructuring and resulting Cornerstone Acquisition, determined that RP Finance is still a VIE and that the Company is now considered the primary beneficiary of RP Finance as the Company now holds the ability to control repayment of the RPF Line of Credit, which directly impacts RP Finance’s economic performance. Therefore, the Company has consolidated RP Finance as a result of the Cornerstone Acquisition (the “RP Finance Consolidation”). The RP Finance Consolidation is accounted for as an acquisition of a VIE that is not a business in accordance with U.S. GAAP as RP Finance does not meet the definition of a business under U.S. GAAP.

Under ASC 810, the initial consolidation of a VIE shall not result in goodwill being recognized, and the acquirer shall recognize a gain or loss for the difference of (a) the sum of (i) the fair value of any consideration paid, (ii) the fair value of any noncontrolling interests, and (iii) the reported amount of any previously held interests, and (b) the net amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with ASC 805.

The following table presents, in accordance with ASC 810, the sum of (i) the fair value of consideration paid, (ii) the fair value of noncontrolling interests, and (iii) the reported amount of previously held interests (amounts in thousands):

The following table presents, in accordance with ASC 810, the net amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with ASC 805 (amounts in thousands):

In accordance with the calculation within ASC 810, a gain of $7.6 million was recognized as an adjustment to Rafael’s additional paid-in capital, due to the related parties involved, upon the RP Finance Consolidation. The acquired RP Finance investment in Cornerstone of $4.9 million, consisting of the fair value of RP Finance's 3,919,598 shares of post-Reverse Stock Split Cornerstone Common Stock, is eliminated in consolidation, as Cornerstone is a consolidated subsidiary of Rafael with a corresponding decrease of $1.8 million to Rafael's additional paid-in capital and corresponding decrease of $3.1 million to noncontrolling interests, equivalent to their respective proportionate ownership interest in RP Finance's shares of Cornerstone Common Stock.

The Company assumed Cornerstone's liability to RP Finance under the Amended RPF Line of Credit at its fair value in the Cornerstone Acquisition and acquired RP Finance's receivable from Cornerstone under the Amended RPF Line of Credit at its fair value in the RP Finance Consolidation. These intercompany amounts are eliminated in consolidation.

Pro Forma Financial Information

The following table sets forth the pro forma consolidated results of operations of Rafael, Cornerstone, and RP Finance after giving effect to the Cornerstone Restructuring, the Cornerstone Acquisition, and the RP Finance Consolidation for the three months ended October 31, 2023, as if the Cornerstone Restructuring, the Cornerstone Acquisition, and the RP Finance Consolidation had collectively occurred on August 1, 2023. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the Cornerstone Restructuring, the Cornerstone Acquisition, and RP Finance Consolidation had taken place on the date noted above, or of results that may occur in the future.

The pro forma loss from operations for the three months ended October 31, 2023 includes the IPR&D expense of $89.9 million, related to the IPR&D asset acquired in the Cornerstone Acquisition with no alternative future use, which is reported in Rafael's historical financial statements for the quarter ended April 30, 2024 and the year ended July 31, 2024.

The pro forma net loss from operations attributable to common stockholders for the three months ended October 31, 2023 includes a gain of $31.3 million on the recovery of receivables from Cornerstone and the recognition of a net loss attributable to noncontrolling interests of Cornerstone of $31.5 million, which are reported in Rafael's historical financial statements for the quarter ended April 30, 2024 and the year ended July 31, 2024.

Prior to the Cornerstone Restructuring described in Note 3, the Company indirectly owned 51% of the issued and outstanding equity in Cornerstone and had certain governance rights, with approximately 8% of the issued and outstanding equity owned by the Company’s subsidiary CS Pharma and 43% owned by the Company’s subsidiary Pharma Holdings.

Prior to the Cornerstone Restructuring, the Company had determined that Cornerstone was a VIE; however, the Company had determined that it was not the primary beneficiary as it did not have the power to direct the activities of Cornerstone that most significantly impact Cornerstone’s economic performance. In addition, the interests held in Cornerstone were Series D Convertible Preferred Stock and did not represent in-substance common stock.

On March 13, 2024, Cornerstone consummated a restructuring of its outstanding debt and equity interests. See Note 3 for additional information regarding the Cornerstone Restructuring transaction.

The outstanding Series C Convertible Notes are convertible, at the option of the holders, in certain equity financings consummated by Cornerstone or into equity securities and warrants to purchase equity securities of Cornerstone.

In the event of a liquidation event of Cornerstone prior to the repayment or conversion of the Series C Convertible Notes, the holders are entitled to receive either (a) an amount equal to the outstanding principal and interest due, or (b) the pro rata per share amount of the proceeds of such liquidation the holders would be entitled to had they exercised their conversion right.

Of the Series C Convertible Notes outstanding as of October 31, 2024:

(a) Series C Convertible Notes with an aggregate principal amount of $614 thousand remain outstanding and were not amended in connection with the Cornerstone Restructuring. The interest accrued on these Series C Convertible Notes is $219 thousand and is recorded in accrued expenses on the consolidated balance sheet as of October 31, 2024. In the Cornerstone Acquisition, Rafael recorded these Series C Convertible Notes as current liabilities at the value of their aggregate principal amount of $614 thousand, and $205 thousand of accrued interest thereon recorded in accrued expenses on the consolidated balance sheet as of the date of the Cornerstone Acquisition, as these values approximate their fair values. As of October 31, 2024, these Series C Convertible Notes are currently in default as they are beyond the maturity date; and

(b) Series C Convertible Notes with an aggregate principal amount of $72 thousand were amended in the Cornerstone Restructuring to (i) extend the maturity date thereof to May 31, 2028 and (ii) provide that, on conversion thereof, the converting holder will receive shares of Cornerstone Common Stock. The holders of these amended Series C Convertible Notes that remain outstanding waived such holders’ rights in connection with the Cornerstone Restructuring. The interest accrued on these Series C Convertible Notes is $23 thousand as of October 31, 2024. In the Cornerstone Acquisition, Rafael recorded these Series C Convertible Notes as noncurrent liabilities at their fair value of $70 thousand, which considers the aggregate principal plus accrued interest. The Company will accrete the fair value of these Series C Convertible Notes to the value of the principal plus accrued interest thereon as of the date of the Cornerstone Acquisition as interest expense in the consolidated statements of operations and comprehensive loss over the estimated term of these amended Series C Convertible Notes.

During the three months ended October 31, 2024, the Company recorded $6 thousand of interest expense in relation to the Cornerstone Series C Convertible Notes to interest expense on the consolidated statements of operations and comprehensive loss.

Following the payment of the initial $2.0 million, and pursuant to the terms of the agreement, the Creditor agreed to forbear from exercising any of its rights, remedies or claims in respect to the outstanding balance. The forbearance shall not be deemed to have otherwise waived, released, or adversely affected any of the Creditor’s rights, remedies or claims in respect to the outstanding balance.

As part of the Cornerstone Acquisition, the creditor payable was recognized by the Company as an assumed liability and measured at its fair value of $2.7 million as of the date of the Cornerstone Acquisition. The Company will accrete the fair value of the creditor payable to the amount payable of $8.5 million owed to the Creditor as interest expense in the consolidated statements of operations and comprehensive loss over the estimated term of the forbearance agreement. The Company recorded $156 thousand of accretion in relation to the creditor payable recorded to interest expense in the consolidated statements of operations and comprehensive loss for the three months ended October 31, 2024.

The carrying value of the creditor payable was $3.1 million and $3.0 million as of October 31, 2024 and July 31, 2024, respectively, and is included in accrued expenses, noncurrent on the consolidated balance sheets.

The following table summarizes the purchase consideration transferred in the Day Three Acquisition as defined in ASC 805:

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the Day Three Acquisition as of the acquisition date:

The preliminary fair values of the assets acquired and liabilities assumed in the Day Three Acquisition are subject to change as we perform additional reviews of our assumptions utilized. During the year ended July 31, 2024, the Company recognized an adjustment which changed the fair value of certain acquired liabilities and goodwill as a result of obtaining additional information about the estimated liabilities. Further adjustments may be necessary as additional information related to the fair values of assets acquired, liabilities assumed, and tax implications thereon is assessed during the measurement period (up to one year from the acquisition date).

The noncontrolling interest was recognized at fair value, which was determined using the implied enterprise value based on the purchase price multiplied by the ratio of the number of shares owned by minority holders to total shares, as of the acquisition date.

Included in the acquired liabilities assumed in the Day Three Acquisition is a non-interest bearing installment note payable of $2.5 million. The installment note was recognized by Day Three in relation to a 2021 asset purchase agreement for certain patents. The assumed installment note payable had a balance of $800 thousand due January 2024 (which was paid in January 2024) and the remaining $1.7 million due in November 2024. At October 31, 2024 and July 31, 2024, the installment note payable has a remaining balance due of $1.7 million which is included in Installment note payable on the consolidated balance sheets.

Intangible assets acquired primarily include patents, technology licenses and non-compete agreements. The weighted average amortization period for the acquired intangible assets is approximately 14.7 years.

The consolidated financial statements include the results of the Day Three Acquisition subsequent to the closing date. Pro forma information is not presented as the acquisition was not considered significant.

On January 23, 2024, Day Three entered into an asset purchase agreement for the sale of certain patents for $280 thousand.

On March 20, 2024, Day Three amended and restated its certificate of incorporation to, among other things, effect a reverse split of all of Day Three’s common stock on a one-for-one-thousand basis (the “DTL Reverse Stock Split”).

On May 1, 2024, Rafael entered into a stock purchase agreement with Day Three to purchase 7,194 shares of common stock at a purchase price of $173.75 per share for an aggregate purchase price of $1.25 million, $1 million of which was funded through the relief of an existing intercompany receivable. As a result of the transaction, Rafael has an 84% ownership interest in Day Three.

Summarized Fair Value Method Investment Details

The 31.4% ownership percentage as of October 31, 2024 is comprised of the shares of common stock owned by the Company and does not include the Cyclo Warrants. The total aggregate fair value of the Cyclo investment of $7.6 million as of October 31, 2024 is comprised of common shares with an aggregate fair value of $6.7 million and Cyclo Warrants with an aggregate fair value of $0.9 million. The total aggregate fair value of the Cyclo investment of $12.0 million as of July 31, 2024 is comprised of common shares with an aggregate fair value of $10.7 million and the Cyclo Warrants with an aggregate fair value of $1.3 million, see Note 15.

Agreement and Plan of Merger with Cyclo

On August 21, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among: the Company; Tandem Therapeutics, Inc., a Nevada corporation and a wholly-owned subsidiary of the Company (“First Merger Sub”); Tandem Therapeutics, LLC, a Nevada limited liability company and a wholly-owned subsidiary of the Company (“Second Merger Sub” and together with First Merger Sub, the “Merger Subs”); and Cyclo. The Merger Agreement and the transactions contemplated thereby were unanimously approved by the Company and Cyclo’s boards of directors (the “Boards”). The Merger Agreement also requires approval of Cyclo’s stockholders (the "Cyclo Shareholder Vote") and the issuance of the Company’s Class B Common Stock, $0.01 par value per share (“Rafael Class B Common Stock”) in the Merger (as defined below) requires approval by the Company’s stockholders (the "Rafael Shareholder Vote"). Upon such approvals and satisfaction or waiver of all other conditions set forth in the Merger Agreement and the effectiveness of a registration statement on Form S-4 to register the shares of Class B Common Stock of Rafael to be issued in the Merger, as defined below, the Merger will be consummated (the date upon which is referred to as the “Closing Date”).

The Merger

The Merger Agreement provides for, among other things, that at the First Effective Time (the “First Effective Time”), First Merger Sub will merge with and into Cyclo (the “First Merger”), First Merger Sub will cease to exist, and Cyclo will become a wholly-owned subsidiary of the Company. Immediately following the First Merger, Cyclo will merge with and into Second Merger Sub, with Second Merger Sub being the Surviving Entity of the subsequent Merger (the "Second Merger” and together with the First Merger, the “Merger”).

If the Merger is consummated, Rafael would become the primary beneficiary of Cyclo, a VIE that constitutes a business. In accordance with ASC 810, the initial consolidation of a VIE that is a business shall be accounted for as a business combination in accordance with the provisions in Topic 805.

Consideration to Cyclo Equity Holders in the Merger

At the First Effective Time: (i) any shares of Cyclo Capital Stock then held by Cyclo or in Cyclo’s treasury immediately prior to the First Effective Time shall be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor; (ii) any shares of Cyclo Capital Stock then held by Rafael immediately prior to the First Effective Time shall be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor; (iii) except as provided in (i) and (ii) above, each share of Cyclo common stock issued and outstanding immediately prior to the First Effective Time shall cease to be an existing and issued share of Cyclo common stock, and shall be converted, by virtue of the First Merger and without any action on the part of the holders thereof, into the right to receive a number of validly issued, fully paid and nonassessable shares of Rafael Common Stock equal to the Exchange Ratio (as defined below). The shares of Rafael Common Stock to be issued upon conversion of the Cyclo common stock are referred to as the “Merger Consideration”.

The “Exchange Ratio” means the quotient (rounded down to four decimal places) obtained by dividing (x) $0.95 by (y) the sum of the (A) Total Net Cash Amount, plus (B) Total Loan Amount, divided by the total number of shares of Rafael Capital Stock outstanding at the First Effective Time, including any shares of Rafael Capital Stock issuable upon exercise or conversion of outstanding securities of Rafael with exercise or conversion prices that are no greater than 150% of the then market price for the Rafael Class B common stock.

The “Total Net Cash Amount” is defined in the Merger Agreement as (a) the sum of the total of (i) cash, cash equivalents and marketable securities of Rafael as of the Closing Date; and (ii) Included Assets (as defined below), minus (b) the amount of Rafael’s current liabilities (on an unconsolidated basis), including, without limitation, accounts payable and accrued expenses, as of the end of the last month immediately prior to the Closing Date, updated for material changes to such amounts following such date until the Closing Date, and determined in a manner consistent with the manner such liabilities were historically reflected in Rafael’s financial statements.

The “Included Assets” is defined in the Merger Agreement as the appraised value of the real estate located at 5 Shlomo Levy Street, Har Hotzvim Jerusalem and the value of the Globis Capital Partners, L.P. holdings as of the latest calendar quarter ending prior to the First Effective Time. Total Loan Amount shall mean the outstanding principal amount of all amounts loaned by Rafael to Cyclo between June 11, 2024 and the Closing, including, without limitation, the Cyclo Convertible Notes, Cyclo Convertible Note III (as defined below) and Cyclo Convertible Note IV (as defined below), plus the accrued and unpaid interest thereon as of the date of the Closing.

The “Parent Capital Stock” (also referred to as “Rafael Capital Stock”) is defined in the Merger Agreement as the Rafael Class B common stock, $0.01 par value per share, the Rafael Class A common stock, par value $0.01 per share, of Rafael and the Rafael preferred stock, $0.01 par value per share.

All compensatory options to purchase Cyclo common stock shall automatically convert into options to acquire, on substantially similar terms and conditions, an adjusted number of shares of Rafael Class B Common Stock, based upon the Exchange Ratio (rounded down to the nearest whole share), at an adjusted exercise price per share, based upon the Exchange Ratio (rounded up to the nearest whole cent).

Unless otherwise provided for in outstanding warrant agreements, all outstanding warrants to purchase Cyclo common stock (other than those held by Rafael which will be cancelled) will automatically be converted into warrants to purchase an adjusted number of shares of Rafael Class B Common Stock, based upon the Exchange Ratio, at an adjusted exercise price per share, based upon the Exchange Ratio. Certain Cyclo warrants have the right to elect to receive cash payment in lieu of receiving warrants to purchase Rafael Class B Common Stock.

For U.S. federal income tax purposes, the Merger is intended to qualify as a "reorganization” within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended.

No fractional shares of Rafael Class B Common Stock will be issued in connection with the Merger, and holders of Cyclo common stock who would otherwise be entitled to receive a fraction of a share of Rafael Class B Common Stock, shall, in lieu of any such fractional shares to which they would otherwise be entitled, receive the number of shares of Rafael Class B Common Stock to which such holder of Cyclo common stock would be entitled to receive aggregated and rounded up to the nearest whole share.

Cyclo Securities held by Rafael

Cyclo’s common stock and warrants held by Rafael will be cancelled and retired and shall cease to exist upon consummation of the Merger.

The Cyclo Convertible Notes (as defined below) will be forgiven at the closing of the Merger.

Representations and Warranties; Covenants

The Merger Agreement contains representations, warranties and covenants of each of the parties thereto that are customary for transactions of this type.

Under the Merger Agreement, (a) Cyclo has agreed, among other things, (i) to conduct its business in the ordinary course, and not to take certain actions without the consent of the Company, (ii) not to solicit or engage in discussions regarding any alternative acquisition proposal or other transaction similar to the Business Combination, (iii) seek approval of its stockholders to the Business Combination, and (iv) use reasonable best efforts to cause all conditions to the Business Combination to be satisfied and to consummate the Business Combination, and (b) the Company has agreed (i) not to take certain actions without the consent of Cyclo, (ii) use reasonable efforts to cause the shares of Rafael Class B Common Stock to be issued in the Business Combination to be listed on the New York Stock Exchange, (iii) create, register with the Securities and Exchange Commission (“SEC”) and list on the New York Stock Exchange a class of warrants to be issued to certain holders of publicly-traded warrants to purchase Cyclo common stock, (iv) increase the number of shares available for grant under its equity plan to cover options to be issued to holders of Cyclo Options, (v) seek approval of its stockholders to the issuance of the shares of the Rafael Class B Common Stock in the Business Combination, and (vi) use reasonable best efforts to cause all conditions to the Business Combination to be satisfied and to consummate the Business Combination.

The Company has also agreed, so long as Cyclo is not in active discussions regarding an acquisition proposal, to fund Cyclo through the earlier of the consummation of the Business Combination or termination of the Merger Agreement in such amounts as may be necessary for Cyclo to operate its business and pay its debts and obligations as they become due, provided that Cyclo is being operated in a manner consistent with the terms of the Merger Agreement and the financial forecast previously shared with the Company (the “Pre-Closing Funding”). Following the closing, the Company will fund Cyclo’s TransportNPC™ clinical trial to its 48-week interim analysis up to a maximum amount, when added to the Pre-Closing Funding, of $25 million.

The Merger Agreement places certain restrictions on the operation of Rafael’s business prior to the closing of the Business Combination, and such restrictions, the waiver of which is subject to the consent of Cyclo, may prevent Rafael from making certain acquisitions, taking certain other specified actions or otherwise pursuing business opportunities during the pendency of the Business Combination that Rafael would have made, taken or pursued if these restrictions were not in place.

In addition, in connection with the closing of the Business Combination, the Company has agreed to appoint Markus W. Sieger, a current independent member of Cyclo’s board of directors, to the Company’s Board.

Lock-Up Agreements

The Merger Agreement provides that Cyclo’s directors and their affiliates that will receive shares of Rafael Class B Common Stock pursuant to the Merger Agreement or upon exercise of Rafael options received upon conversion of Cyclo options in the Business Combination have each agreed to enter into a lock-up agreement which contains certain restrictions on transfer of such shares of Rafael Class B Common Stock for a period of the earlier of (a) six (6) months following closing of the Business Combination or (b) the date on which Rafael completes a liquidation, merger, share exchange, reorganization or other similar transaction that results in all of Rafael’s stockholders having the right to exchange their Rafael Class B Common Stock for cash, securities or other property.

Voting Agreement

In connection with the entry into the Merger Agreement, Rafael and certain other holders of Cyclo common stock entered into voting agreements pursuant to which those holders have agreed to vote in favor of the Merger Agreement and the consummation of the Business Combination at any meeting of Cyclo’s stockholders and take other actions in furtherance of the consummation of the Business Combination until the earlier of (i) the First Effective Time and (ii) the termination of the Merger Agreement (the “Voting Agreement”).

Support Agreement

In connection with the entry into the Merger Agreement, Howard Jonas entered into a support agreement (the “Support Agreement”) with Rafael and Cyclo, under which Mr. Jonas has agreed to vote all shares of Rafael capital stock over which he exercises voting control to approve the issuance of the Rafael Class B Common Stock to the stockholders of Cyclo as contemplated by the Merger Agreement.

Termination

The Merger Agreement may be terminated under certain customary and limited circumstances prior to closing of the Business Combination, including, but not limited to, (i) by the mutual written consent of the Company and Cyclo; (ii) by the Company, subject to certain exceptions, if any of the representations or warranties of Cyclo are not true and correct or if Cyclo fails to perform any of its covenants or agreements under the Merger Agreement; (iii) by Cyclo, subject to certain exceptions, if any of the representations or warranties made by the Company are not true and correct or if the Company fails to perform any of its covenants or agreements under the Merger Agreement; (iv) by either the Company or Cyclo, if the Business Combination has not been consummated on or prior to November 30, 2024; provided, however, that, in the event that the SEC has not declared effective under the Securities Act of 1933, as amended (the “Securities Act”) the Form S-4 by the date which is 45 calendar days prior to the End Date of November 30, 2024 pursuant to the Merger Agreement, then the End Date shall automatically be extended to December 31, 2024 (the “End Date”), unless the breach of any covenants or obligations under the Merger Agreement by the party seeking to terminate was the principal cause of the failure to consummate the transactions contemplated by the Merger Agreement; (v) by either the Company or Cyclo, if any governmental entity has issued an order or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by the Merger Agreement and such order or other action has become final and non-appealable; (vi) by either the Company or Cyclo, if the required approvals by the stockholders of the Company and Cyclo have not been obtained; and (vii) by the Company, if Cyclo’s Board (or a committee thereof) makes a Cyclo Adverse Change Recommendation, as defined in the Merger Agreement. A “Cyclo Adverse Change Recommendation” means during the pre-closing Period, neither Cyclo’s board nor any committee thereof shall (1)(A) withdraw, withhold, amend or qualify or modify, in each case, in a manner adverse to Rafael, or publicly propose to withdraw, withhold, amend or qualify or modify, in each case, in a manner adverse to Rafael, Cyclo’s board recommendation, (B) fail to include Cyclo’s board recommendation in the joint proxy statement/prospectus, (C) fail to publicly reaffirm Cyclo’s board recommendation within ten (10) business days after Rafael so requests in writing (it being understood that Rafael shall only be entitled to make up to two (2) such reaffirmation requests), (D) approve, recommend or declare advisable, or publicly propose to approve, recommend or declare advisable, any acquisition proposal other than from Rafael and Rafael’s affiliates or (E) if any tender offer or exchange offer is commenced for equity securities of Cyclo, fail to recommend against such tender offer or exchange offer by the earlier of (1) the tenth (10th) business day after the commencement of such tender offer or exchange offer and (2) the third (3rd) business day prior to Cyclo’s stockholders meeting other than a “stop, look and listen” communication pursuant to Rule 14d-9(f) under the Exchange Act.

If the Business Combination is validly terminated in accordance with the Merger Agreement, then either of Rafael or Cyclo shall reimburse the terminating party for their reasonable documented out-of-pocket expenses, including all fees and expenses of counsel, financial advisors and accountants, actually incurred in connection with the Merger Agreement, in an amount not to exceed $250,000 in cash, or if Rafael terminates the Business Combination in the event of a Cyclo Adverse Change Recommendation, Cyclo will promptly pay to Rafael an amount equal to $400,000 in cash (the “Company Termination Fee”).

Funding Commitment

Rafael has agreed, so long as Cyclo is not in active discussions regarding an acquisition proposal, to fund Cyclo through the earlier of the consummation of the Merger or termination of the Merger Agreement in such amounts as may be necessary for Cyclo to operate its business and pay its debts and obligations as they become due, provided that Cyclo is being operated in a manner consistent with the terms of the Merger Agreement and the financial forecast previously shared with Rafael (the “Pre-Closing Funding”). Following the closing, Rafael will fund Cyclo’s TransportNPC™ clinical trial to its 48-week interim analysis up to a maximum amount, when added to the Pre-Closing Funding, of $25 million. The aggregate Pre-Closing Funding that has taken place through the date of this filing is referred to herein as the “Cyclo Convertible Notes,” see Note 12.

The Merger is expected to close in the first calendar quarter of 2025, following the receipt of the required approvals by Rafael and Cyclo stockholders and the fulfillment of other customary closing conditions.

On October 8, 2024, Rafael entered into an Amendment to Convertible Promissory Notes whereby each Cyclo Convertible Note was amended to replace conversion terms related to a Sale Transaction (“Sale Transaction” as defined in the Cyclo Convertible Notes’ Agreements as a) the sale of all or substantially all of Cyclo’s assets, b) the consolidation or Merger of Cyclo or any of its subsidiaries with or into any other corporation or other entity or person or other similar transaction, or c) any other transaction or series of related transactions to which Cyclo is a party in which in excess of fifty percent (50%) of Cyclo’s voting securities are transferred), and include terms so that pursuant to the Agreement and Plan of Merger, dated as of August 21, 2024, the outstanding principal balance of the Cyclo Convertible Notes, together with any accrued and unpaid interest thereon, shall be discharged in full and Cyclo will not be required to make any further payments to Rafael. The Amendment to Convertible Promissory Notes also amended the maturity date of the Cyclo Convertible Note I and the Cyclo Convertible Note II to be December 21, 2024, such that all of the Cyclo Convertible Notes have a maturity date of December 21, 2024.

The Cyclo Convertible Notes are required to be accounted for at fair value pursuant to ASC 825, Financial Instruments (“ASC 825”), at their respective dates of issuance and in subsequent reporting periods, as the Company elected to account for its prior investment in Cyclo common stock under the fair value option. The Company has elected to present interest income from the Cyclo Convertible Notes, together with the changes in fair value of the notes, along with the changes in fair value related to the investments in Cyclo, in unrealized gain on investments - Cyclo on the consolidated statements of operations and comprehensive loss. During the three months ended October 31, 2024, the Company recognized an unrealized loss of $1.6 million related to its investment in Cyclo Convertible Notes receivable. See Note 14 for further details.

On November 7, 2024, the Company entered into the Fifth Amended and Restated Note Purchase Agreement with Cyclo, whereby the Company was issued $2.0 million in convertible notes receivable for $2 million in cash. On December 9, 2024, the Company entered into the Sixth Amended and Restated Note Purchase Agreement with Cyclo, whereby the Company was issued $1.0 million in convertible notes receivable for $1 million in cash. See Note 25 for further details.

During the three months ended October 31, 2024 and 2023, the Company reclassified approximately $194 thousand and $177 thousand, respectively, of unrealized gains out of accumulated other comprehensive income related to the sale of available-for-sale securities into realized gain on available-for-sale securities.

Corporate bonds and U.S. agency bonds held as of October 31, 2024 were all due within one year.

Marketable securities in an unrealized loss position for the three months ended October 31, 2024 were not deemed impaired at acquisition. Effective August 1, 2023, the Company evaluates subsequent unrealized losses to determine whether the decline in fair value has resulted from credit losses or other factors. No such credit losses have been identified during the three months ended October 31, 2024 and 2023.