Note 2—Investment in Rafael Pharmaceuticals, Inc.

The Company has made investments totaling $10 million in Rafael Pharmaceuticals, Inc., 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. The Company’s initial $2 million investment in Rafael in fiscal 2016 was in exchange for Rafael’s 3.5% convertible promissory notes due 2018. An additional $8 million was funded in August and September 2016. In September 2016, Rafael issued to the Company’s controlled 50%-owned subsidiary, CS Pharma Holdings, LLC (“CS Pharma”), a convertible promissory note with a principal amount of $10 million (the “Series D Note”) representing the $8 million investment funded on such date plus the conversion of the $2 million principal amount convertible promissory notes issued in connection with the prior funding.

On March 2, 2017, the Company sold 10% of the Company’s direct and indirect interests and rights in Rafael to Howard S. Jonas, the Company’s Chairman of the Board, and Chairman of the Board of Rafael, for a purchase price of $1 million. As a result of this transaction, the Company recorded an increase of $1.2 million in “Noncontrolling interests” and a decrease of $0.2 million in “Additional paid-in capital” in the accompanying consolidated balance sheet.

IDT-Rafael Holdings had the contractual right to receive additional shares of Rafael representing 10% of the outstanding capital stock of Rafael that will be issued upon the occurrence of any of the following: (i) Food and Drug Administration approval of a Rafael drug application, (ii) an initial public offering of Rafael at a valuation of over $500 million, or (iii) a sale of Rafael above certain valuations. Currently, none of the conditions have been satisfied and the right remains contingent. On September 14, 2017, IDT-Rafael Holdings distributed this right to its members on a pro rata basis such that the Company received the right to 9% of the outstanding capital stock of Rafael and Mr. Jonas received the right to 1% of the outstanding capital stock of Rafael. In addition, as compensation for assuming the role of Chairman of the Board of Rafael, and to create additional incentive to contribute to the success of Rafael, on September 19, 2017, the Company transferred its right to receive 9% of the outstanding capital stock of Rafael to Mr. Jonas. The right is further transferable at the discretion of Mr. Jonas.

Howard Jonas and Deborah Jonas jointly own $525,000 of Series C Convertible Notes of Rafael, and The Howard S. and Deborah Jonas Foundation own an additional $525,000 of Series C Convertible Notes of Rafael.

The Rafael Series D Note earns interest at 3.5% per annum, with principal and accrued interest due and payable on September 16, 2018. The Series D Note is convertible at the holder’s option into shares of Rafael’s Series D Preferred Stock. The Series D Note also includes a mandatory conversion into Rafael common stock upon a qualified initial public offering, and conversion at the holder’s option upon an unqualified financing event. In all cases, the Series D Note conversion price is based on the applicable financing purchase price.

The Company and CS Pharma were issued warrants to purchase shares of capital stock of Rafael representing in the aggregate up to 56% of the then issued and outstanding capital stock of Rafael, on an as-converted and fully diluted basis. The right to exercise warrants as to the first $10 million thereof is held by CS Pharma. The exercise price of the warrant is the lower of 70% of the price sold in an equity financing, or $1.25 per share, subject to certain adjustments. The minimum initial and subsequent exercises of the warrant shall be for such number of shares that will result in at least $5 million of gross proceeds to Rafael, or such lesser amount as represents 5% of the outstanding capital stock of Rafael, or such lesser amount as may then remain unexercised. The warrant will expire upon the earlier of December 31, 2020 or a qualified initial public offering or liquidation event.

The Company’s investment in Rafael, which was included in “Investments” in the accompanying consolidated balance sheets, consists of the following:

July 31 (in thousands)	2017		2016
Convertible promissory note (at fair value)	$	6,300	$	2,000
Warrants (at cost)		5,400		—
Right to receive additional shares (at cost)		400		—
Total investment in Rafael	$	12,100	$	2,000

Rafael is a variable interest entity, however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of Rafael that most significantly impact Rafael’s economic performance. At July 31, 2017, the Company’s maximum exposure to loss as a result of its involvement with Rafael was its $12.1 million investment, since there were no other arrangements, events or circumstances that could expose the Company to additional loss.

In addition to interests issued to the Company, CS Pharma has issued member interests to third parties in exchange for cash investment in CS Pharma of $10 million. At July 31, 2017 and 2016, CS Pharma had received $10.0 million and $8.8 million, respectively, of such investment. At July 31, 2016, the $8.8 million received was included in “Other current liabilities” in the accompanying consolidated balance sheet pending the issuance of the member interests. In fiscal 2017, the Company recorded additional paid-capital of $2.8 million and noncontrolling interests of $7.2 million upon the issuance of the member interests. The Company holds a 50% interest in CS Pharma and is the managing member. It is expected that CS Pharma will use its cash to invest in Rafael.