NOTE J – INVESTMENT

During the period December 2018 through August 2022, the Company made an aggregate investment of $7,000,000 in ILiAD Biotechnologies, LLC (“ILiAD”), a privately held clinical stage biotechnology company dedicated to the prevention and treatment of human disease caused by Bordetella pertussis. ILiAD is developing key technologies that focus on validating its proprietary intranasal vaccine, BPZE1, for the prevention of pertussis (whooping cough). At September 30, 2022, the Company owned approximately 6.9% of the outstanding units of ILiAD on a non-fully diluted basis and 6.4% of the outstanding units on a fully diluted basis (after giving effect to the exercise or conversion of all outstanding options, warrants and convertible notes). In connection with its initial investment, the Company’s Chairman and Chief Executive Officer obtained a seat on ILiAD’s Board of Managers and receives the same compensation for service on the Board of Managers as other non-management Board members.

On August 24, 2022, ILiAD completed a private financing of $42,836,000 of Class D units, of which a multi-national pharmaceutical company invested $30,000,000 (the “Financing”). As part of the Financing, the Company invested an additional $1,000,000. This private financing represented an observable price transaction in accordance with ASC 323, and resulted in dilution in the Company’s ownership in the investee (ILiAD). In accordance with ASC 323-10-40-1 the Company accounted for the dilution as if it had sold a portion of its investment. As a result, the Company increased the carrying value of its ILiAD investment by $3,727,000 and recognized an unrealized gain based on the excess of the fair value of the securities issued by ILiAD over the carrying value of the Company’s diluted shares. The unrealized gain of $3,727,000 as a result of the securities issuance by ILiAD in the Financing is reflected in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2022.

The Company has accounted for the transaction in accordance with ASC 323-10-40-1, which states that an equity method investor (the Company) shall account for a share issuance by an investee (ILiAD) as if the investor had sold a proportionate share of its investment in the transaction and records a gain or loss associated with the dilution of its investment. The difference between the securities of ILiAD owned by the Company and the securities sold in the Financing were not material. Accordingly, the Company valued its securities at the observable transaction price. Any gain or loss to the investor resulting from an investee’s share issuance shall be recognized in earnings.

In addition, as part of the Financing, the Company converted its convertible note in the principal amount of $1,000,000 plus accrued interest of $86,000, in accordance with its terms, into equity of ILiAD and has accounted for this investment under the equity method of accounting. The Company recognized an unrealized gain on conversion of $271,000 based on the observable price transaction which was recognized in its unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2022.

For the three months ended September 30, 2022 and 2021, the Company recorded an allocated net loss from its equity method investment in ILiAD of $285,000 and $186,000, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded an allocated net loss from its equity method investment in ILiAD totaling $1,073,000 and $632,000, respectively.

The difference between the Company’s share of equity in ILiAD’s net assets and the equity investment carrying value reported on the Company’s unaudited condensed consolidated balance sheet at September 30, 2022 is due to an excess amount paid over the book value of the investment totaling approximately $7,000,000 which is accounted for as equity method goodwill.