INVESTMENTS - RELATED PARTIES

3 Months Ended

Mar. 31, 2019

Investments, Debt and Equity Securities [Abstract]

INVESTMENTS - RELATED PARTIES

7. INVESTMENTS – RELATED PARTIES

Investments in AVLP and Alzamend at March 31, 2019 and December 31, 2018, are comprised of the following:

	March 31,			December 31,
	2019			2018
Investment in convertible promissory note of AVLP	$	7,732,660		$	6,943,997
Accrued interest in convertible promissory note of AVLP		1,214,509			1,004,317
Total investment in convertible promissory note of AVLP – Gross		8,947,169			7,948,314
Less: original issue discount		(1,974,791	)		(2,336,693	)
Total investment in convertible promissory note of AVLP	$	6,972,378		$	5,611,621
Investment in derivative instruments of AVLP		1,751,868			2,230,641
Investment in common stock of AVLP		633,214			812,858
Investment in common stock of Alzamend		176,250			—
Investment in derivative instruments and common stock of AVLP and Alzamend	$	2,561,332		$	3,043,499
Total investment in AVLP and Alzamend – Net	$	9,533,710		$	8,655,120

The following table summarizes the changes in our investments in AVLP and Alzamend during the three months ended March 31, 2019:

	Investment in
	warrants and			Investment in		Total
	common stock			convertible		investment
	of AVLP and			promissory		in AVLP and
	Alzamend			note of AVLP		Alzamend – Net
Balance at January 1, 2019	$	3,043,499		$	5,611,621	$	8,655,120
Investment in convertible promissory notes of AVLP		—			530,756		530,756
Investment in common stock of AVLP and Alzamend		135,790			—		135,790
Fair value of derivative instruments issued by AVLP		257,907			—		257,907
Unrealized loss in derivative instruments of AVLP		(736,680	)		—		(736,680	)
Unrealized loss in common stock of AVLP and Alzamend		(139,184	)		—		(139,184	)
Accretion of discount		—			619,809		619,809
Accrued Interest		—			210,192		210,192
Balance at March 31, 2019	$	2,561,332		$	6,972,378	$	9,533,710

The Company’s investments in AVLP, a related party controlled by Philou Ventures, LLC, or Philou, a significant stockholder of the Company, consist of convertible promissory notes, derivative instruments and shares of common stock of AVLP. At March 31, 2019, the Company has provided loans to AVLP in the principal amount $7,732,660 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 15,465,320 shares of AVLP common stock. The warrants entitle the Company to purchase up to 15,465,320 shares of AVLP common stock at an exercise price of $0.50 per share for a period of five years. The warrants were determined by the issuer to be financial derivative instruments. At March 31, 2019 and December 31, 2018, the Company recorded an unrealized loss on its investment in warrants of AVLP of $3,150,061 and $2,413,381, respectively, representing the difference between the cost basis and the estimated fair value of the warrants in the Company’s accumulated other comprehensive income in the stockholder's equity section of the Company’s consolidated balance sheet. During the three months ended March 31, 2019 and 2018, the Company recognized, in other comprehensive loss, net unrealized loss on derivative securities of related party of $736,680 and $4,273,014, respectively. The Company’s investment in AVLP will be revalued on each balance sheet date. The fair value of the Company’s holdings in the AVLP warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate, which ranged between 2.22% and 2.77%, was derived from the U.S. Treasury yield curve, matching the term of our investment, in effect at the measurement date. The volatility factor which ranged between 68.7% and 82.8% was determined based on historical stock prices for similar technology companies with market capitalizations under $100 million. The warrant valuation is a Level 3 measurement.

In accordance with ASC No. 310, Receivables (“ASC 310”), the Company accounts for its convertible promissory notes in AVLP at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted for accrued interest and accretion of original issue discount and discount attributed to the fair value of the 15,465,320 warrants that the Company received in conjunction with its investment. Interest is accreted using the effective interest method. The Company records interest on an accrual basis and recognizes it as earned in accordance with the contractual terms of the convertible promissory notes, to the extent that such amounts are expected to be collected. An aggregate of $5,029,211 of original issue discount and discount attributed to the fair value of the warrants is being amortized as interest income through the maturity date. During the three months ended March 31, 2019 and 2018, the Company recorded $619,809 and $490,031, respectively, of interest income for the discount accretion. During the three months ended March 31, 2019 and 2018, the Company recorded contractual interest receivable attributed to the AVLP Notes and AVLP Loan Agreement of $210,191 and $143,682, respectively.

The Company evaluated the collectability of both interest and principal for the convertible promissory notes in AVLP to determine whether there was an impairment. Based on current information and events, the Company determined that it is probable that it will be able to collect amounts due according to the existing contractual terms. Impairment assessments require significant judgments and are based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.

During the three months ended March 31, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 71,000 shares of AVLP common stock for $41,790 and 430,942 shares of AVLP common stock for $417,169, respectively. At March 31, 2019, the closing market price of AVLP’s common stock was $0.65, a decline from $0.90 at December 31, 2018. The Company has determined that its investment in AVLP marketable equity securities are accounted for pursuant to the fair value method and based upon the closing market price of AVLP common stock at March 31, 2019, the Company’s investment in AVLP common stock had an unrealized loss of $102,104.