Rafael Holdings, Inc. Income Taxes Disclosure

NOTE 21 – INCOME TAXES

 

The components of loss before income taxes, including equity in loss of Day Three, are as follows:

 

		For the Years Ended July 31,
		2025				2024
		(in thousands)
Domestic		$	(32,338	)		$	(67,653	)
Foreign			(858	)			(30	)
Loss before income taxes		$	(33,196	)		$	(67,683	)

 

Benefit from income taxes consisted of the following:

 

		For the Years Ended July 31,
		2025				2024
		(in thousands)
Current:
Foreign		$	—			$	19
Federal			—				—
State			(2,388	)			(2,602	)
Total current benefit			(2,388	)			(2,583	)
Deferred:
Foreign			—				(73	)
Federal			(160	)			(17	)
State			(5	)			(7	)
Total deferred benefit			(165	)			(97	)
Benefit from income taxes		$	(2,553	)		$	(2,680	)

The reconciliation between the Company’s effective tax rate on loss before income taxes and the statutory tax rate for the years ended July 31, 2025 and July 31, 2024 is as follows:

 

		For the Years Ended July 31,
		2025				2024
		(in thousands)
U.S. federal income tax at statutory rate		$	(6,972	)		$	(14,213	)
Permanent items - Cornerstone Acquisition			—				18,871
Nondeductible items			1,360				672
State income tax			(1,739	)			1,807
Rate change			140				—
Foreign operations			(34	)			(1	)
True up and other			(1,043	)			627
Cornerstone Acquisition impact to deferred tax assets			—				(51,546	)
Derecognition of Cornerstone investment due to Cornerstone Acquisition			—				23,312
Sales of state NOLs			(2,429	)			(2,613	)
Orphan Drug Credits			(1,045	)			—
Change in valuation allowance			9,209				20,404
Benefit from income taxes		$	(2,553	)		$	(2,680	)

 

In accordance with the State of New Jersey’s Technology Business Tax Certificate Transfer Program, which allowed certain high technology and biotechnology companies to sell unused net operating loss carryforwards (“NOLs”) to other New Jersey-based corporate taxpayers, the Company received approximately $2.4 million for the sale of the Company’s prior period NOLs totaling $28.6 million which was recorded in the benefit from income taxes in the consolidated statements of operations and comprehensive loss for the year ended July 31, 2025. The Company received approximately $2.6 million for the sale of the Company’s prior period NOLs totaling $31.6 million in the third quarter of fiscal 2024 which was recorded in the benefit from income taxes in the consolidated statements of operations and comprehensive loss for the year ended July 31, 2024.

 

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of net deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain.

 

Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows:

 

		At July 31,
		2025				2024
		(in thousands)
Deferred tax assets:
Net operating loss carryforwards		$	85,847			$	61,204
Federal tax credits, net of uncertain tax position			16,910				6,145
Capitalized Sec. 174 research and experimental expenditures			29,117				3,121
Stock-based compensation			2,354				2,486
Depreciation			340				286
Reserves and accruals			647				249
Charitable contributions			346				141
Related party interest			853				—
Disallowed interest expense			1,008				—
Gross deferred tax assets			137,422				73,632
Less valuation allowance			(128,403	)			(71,275	)
Total deferred tax assets, net of valuation allowance			9,019				2,357
Deferred tax liabilities:
Unrealized gain			(199	)			(2,327	)
Intangible assets			(8,958	)			(30	)
Total deferred tax liabilities:			(9,157	)			(2,357	)
Deferred tax liability, net		$	(138	)		$	—

 

The Company continually evaluates the likelihood of the realization of deferred tax assets and adjusts the carrying amount of the deferred tax assets by the valuation allowance to the extent the future realization of the deferred tax assets is more likely than not. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectation of future taxable income or loss, the timing of reversals of taxable temporary differences, the carryforward periods available to the Company for tax reporting purposes, and other relevant factors.

Deferred tax assets established for the excess outside tax basis of an investee are derecognized upon the event that the investee becomes a domestic subsidiary as a result of a business combination or consolidation, as it is likely that the deferred tax asset will no longer quality for recognition. During the year ended July 31, 2025, the Company derecognized unrealized loss deferred tax assets related to prior investments in Cyclo as a result of the Cyclo Acquisition. During the year ended July 31, 2024, the Company derecognized unrealized loss deferred tax assets related to prior investments in Cornerstone and Day Three as a result of the Cornerstone Acquisition and Day Three Acquisition, respectively.

 

As of July 31, 2025, based on the Company’s history of losses and its assessment of future losses, management believes that it is more likely than not that future taxable income will not be sufficient to realize all of the Company’s deferred tax assets. Therefore, a valuation allowance has been applied to deferred tax assets.

 

Effective for tax years beginning after December 31, 2021, taxpayers are required to capitalize any expenses incurred that are considered incidental to research and experimentation (“R&E”) activities under IRC Section 174. While taxpayers historically had the option of deducting these expenses under IRC Section 174, the December 2017 Tax Cuts and Jobs Act mandates capitalization and amortization of R&E expenses for tax years beginning after December 31, 2021. Expenses incurred in connection with R&E activities in the U.S. must be amortized over a 5-year period and R&E expenses incurred outside the U.S. must be amortized over a 15-year period. R&E activities are broader in scope than qualified research activities that are considered under IRC Section 41 (relating to the research tax credit).

 

As of July 31, 2025, the Company has federal, state, and foreign net operating loss carryforwards of approximately $366.3 million, $107.3 million and $11.6 million , respectively. The Company acquired federal and state net operating loss carryforwards of approximately $87.1 million and $74.8 million, respectively in connection with the Merger with Cyclo in March 2025. Federal net operating loss carryforwards in the amount of $100.9 million begin expiring in 2026 and approximately $265.4 million have an indefinite life. Federal NOL carryforwards generated after tax year 2021 are subject to an 80% limitation on taxable income, do not expire and will carryforward indefinitely. State net operating loss carryforwards in the amount of $107.3 million begin expiring in fiscal 2026. Foreign net operating loss carryforwards in the amount of $11.6 million have an indefinite life.

 

The utilization of the Company’s, excluding Cyclo’s, net operating losses and research and development tax credits may be subject to a U.S. federal limitation due to the “change in ownership provisions” under Sections 382 and 383 of the Internal Revenue Code and other similar limitations in various state jurisdictions. Such limitations may result in a reduction of the amount of net operating loss carryforwards and research and development tax credits in future years and possibly the expiration of certain net operating loss carryforwards and research and development tax credits before their utilization. The Company has not conducted a Section 382 analysis to determine the potential limitations on the utilization of its net operating loss carryforwards and other tax attributes. Management does not believe that any such limitations, if applicable, would have a material impact on the Company’s consolidated financial statements.

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examinations by federal, foreign, and state and local jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from 2021 to present in the U.S. and from 2020 to present in the Company’s foreign operations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state and local tax authorities to the extent utilized in a future period.

 

In July 2025, the “One Big Beautiful Bill Act” (“OBBBA”) was enacted into law as Public Law 119-21. This legislation introduced sweeping changes to the U.S. tax code, including the permanent extension of 100% bonus depreciation for qualified property and the codification of full expensing for certain research and development (R&D) expenditures under Section 174. The Company has elected not to claim bonus depreciation on qualified property placed in service during the current fiscal year. With respect to Section 174, the Company has not adopted immediate expensing of qualified U.S. R&D expenses and is currently evaluating whether to expense the qualified U.S. R&D capitalized costs in the next year or over 2 years.

 

The Company is also subject to certain non-income taxes such as value added taxes, sales taxes, and property taxes. The Company has taken certain positions that management feels, although not free from doubt, should not result in a successful challenge by certain tax authorities.

 

As required by the uncertain tax position guidance in ASC No. 740, Income Taxes, (“ASC 740”) the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applied the uncertain tax position guidance in ASC 740 to all tax positions for which the statute of limitations remained open. Any estimates of tax contingencies contain assumptions and judgments about potential actions by taxing jurisdictions. Any interest and penalties related to uncertain tax positions would be included as part of the income tax provision.

 

The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of or changes in tax laws, regulations and interpretations thereof as well as other factors.

A reconciliation of the beginning and ending amount of unrecognized tax benefits associated with uncertain tax positions is as follows:

 

		At July 31,
		2025				2024
		(in thousands)
Balance, beginning of the year		$	6,218			$	—
Additions of tax positions related to the current year			1,045				—
Additions of tax positions related to the current year – Cyclo Acquisition			9,720				—
Additions of tax positions related to the prior year			—				6,218
Balance, end of year		$	16,983			$	6,218