Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS

v3.21.2
INVESTMENTS
3 Months Ended
Mar. 31, 2021
Investments [Abstract]  
INVESTMENTS

NOTE 5 — INVESTMENTS

Investment in convertible bonds - On September 28, 2020, the Company entered into a convertible bond purchase agreement pursuant to which it purchased at face value a convertible bond of Telcon RF Pharmaceutical, Inc., or Telcon in the principal amount of approximately $26.1 million which matures on October 16, 2030 and bears interest at the rate of 2.1% per year, payable quarterly. Beginning on October 16, 2021, the Company will be entitled on a quarterly basis to call for early redemption of all or any portion of the principal amount of the convertible bond. The convertible bond is convertible at the holder’s option at any time and from time to time into common shares of Telcon at an initial conversion price of approximately $8.00 per share. The conversion price is subject to antidilution adjustments in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon shares, a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event. The convertible bond and any proceeds therefrom, including proceeds from any exercise of the early redemption right or the call option described below, are pledged as collateral to secure the Company’s obligations under the revised API Supply Agreement with Telcon described in Note 6 and Note 11.

In connection with the purchase of the convertible bond, the Company entered into a call option agreement dated September 28, 2020 with Telcon pursuant to which Telcon or its designee is entitled to repurchase, at par, up to 50% in principal amount of the convertible bond commencing October 16, 2021 and prior to maturity. If the Company transfers the convertible bond, it will be obliged under the call option agreement to see to it that the transferee is bound by such call option.

The Company has elected the fair value option method to measure the investment in the Telcon convertible bond. The investment is classified as an available for sale security and remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value option recorded in other comprehensive income. The fair value and any change in fair value of the convertible bond is determined using a convertible bond lattice model. The model produces an estimated fair value based on changes in the market price of the underlying common stock.

The following table sets forth the fair value and changes in fair value of the investment in convertible bonds as of March 31, 2021, and December 31, 2020 (in thousands):

 

Investment in convertible bond

 

March 31, 2021

 

 

December 31, 2020

 

Balance, beginning of period

 

$

27,866

 

 

$

 

Fair value at issuance date

 

 

 

 

 

22,059

 

Change in fair value included in the statement of other comprehensive income (loss)

 

 

77

 

 

 

5,807

 

Balance, end of period

 

$

27,943

 

 

$

27,866

 

 

The fair value as of March 31, 2021, and December 31, 2020 was based upon following assumptions:

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Principal outstanding (South Korean won)

 

KRW 30 billion

 

 

KRW 30 billion

 

Stock price

 

KRW 5,020

 

 

KRW 6,060

 

Expected life (in years)

 

 

9.55

 

 

 

9.79

 

Selected yield

 

 

9.50

%

 

 

10.50

%

Expected volatility (Telcon common stock)

 

 

84.50

%

 

 

85.80

%

Risk-free interest rate (South Korea government bond)

 

 

2.02

%

 

 

1.72

%

Expected dividend yield

 

 

0.00

%

 

 

0.00

%

Conversion price

 

KRW 5,023

 

 

KRW 6,028

 

Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings, Inc., or EJ Holdings, to acquire, own and operate an amino acids manufacturing facility in Ube, Japan. In connection with the formation, the Company invested approximately $32,000 in exchange for 40% of EJ Holdings voting shares. JIP owns 60% of EJ Holdings voting shares. In October 2018, the Company entered into a loan agreement with EJ Holdings under which the Company made an unsecured loan to EJ Holdings in the amount of $13.6 million. The loan matures on September 30, 2028 and bears interest at the rate of 1% per annum, payable annually.  The loan proceeds were used by EJ Holdings to purchase the Ube facility in December 2019 and pay related taxes. In October 2020, the Company entered into a loan agreement with EJ Holdings pursuant to which it agrees to loan to EJ Holdings a total of approximately $6.5 million in monthly instalments through March 2021. The loans are unsecured general obligations of EJ Holdings, bear interest at a nominal annual rate payable on September 30 of each year beginning in 2021 and are due and payable in a lump sum at maturity on September 30, 2028. The proceeds of the loans are used by EJ Holdings to fund its activities and operations at its Ube facility. The parties contemplate that the Ube facility will eventually supply the Company with the facility’s output of amino acids, that the operation of the facility will be principally for our benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility will be made by EJ Holdings’ three-person board of directors, one of whom is a designee of the Company and two of who are representatives of JIP, in consultation with the Company. As of March 31, 2021, and December 31, 2020, the loans receivable from EJ Holdings were approximately $19.0 million and $18.6 million, respectively.

EJ Holdings is engaged in reestablishing operations at the Ube facility, including obtaining regulatory approvals for the manufacture of prescription grade L-glutamine (“PGLG”) in accordance with cGMP. EJ Holdings has had no significant revenues since its inception, has depended on loans from the Company to acquire the Ube facility and fund its operations and will continue to be dependent on loans from us or other financing unless and until the Ube facility is activated and EJ Holdings can secure customers for its products.

The Company has determined that EJ Holdings is a variable interest entity, or VIE, based upon the facts that the Company provided the loan financing to acquire the Ube facility and the EJ Holdings’ activities at the facility are principally for the Company’s benefit. JIP, however, owns 60% of EJ Holdings and is entitled to designate a majority of EJ Holdings’ board of directors and its Chief Executive Officer and outside auditors, and, as such, controls the management, business, and operations of EJ Holdings. Accordingly, the Company accounts for its variable interest in EJ Holdings under the equity method.

The Company’s share of the losses of EJ Holdings are classified as net losses on equity method investment. The investment is evaluated for impairment annually and if facts and circumstances indicate that the carrying value may not be recoverable, an impairment charge would be recorded.

The following table sets forth certain financial information of EJ Holdings for the three months ended March 31, 2021 and March 31, 2020 (in thousands):  

 

Three months ended March 31,

 

 

2021

 

 

2020

 

 

(Unaudited)

 

 

(Unaudited)

 

REVENUES, NET

 

59

 

 

 

84

 

GROSS PROFIT

 

59

 

 

 

84

 

NET LOSS

$

(1,886

)

 

$

(1,021

)