INVESTMENTS - RELATED PARTIES

12 Months Ended

Dec. 31, 2018

Investments, Debt and Equity Securities [Abstract]

INVESTMENTS - RELATED PARTIES

10. INVESTMENTS – RELATED PARTIES

Investments in AVLP at December 31, 2018 and 2017, are comprised of the following:

	December 31,
	2018			2017
Investment in convertible promissory note of AVLP	$	6,943,997		$	4,124,220
Investment in warrants of AVLP		2,230,641			6,901,593
Investment in common stock of AVLP		812,858			826,408
Accrued interest in convertible promissory note of AVLP		1,004,317			324,400
Total investment in AVLP – Gross		10,991,813			12,176,621
Less: original issue discount		(2,336,693	)		(2,115,710	)
Total investment in AVLP – Net	$	8,655,120		$	10,060,911

The following table summarizes the changes in our investments in AVLP during the year ended December 31, 2018:

	Investment in			Investment in
	warrants and			convertible			Total
	common stock			promissory			investment
	of AVLP			note of AVLP			in AVLP – Net
Balance at January 1, 2017	$	84,578		$	952,073		$	1,036,651
Investment in convertible promissory notes of AVLP		—			620,091			620,091
Investment in common stock of AVLP		191,782			—			191,782
Fair value of warrants issued by AVLP		2,388,681			—			2,388,681
Unrealized gain in warrants of AVLP		4,512,912			—			4,512,912
Unrealized gain in common stock of AVLP		550,048			—			550,048
Accretion of discount		—			436,346			436,346
Accrued Interest		—			324,400			324,400
Balance at December 31, 2018	$	7,728,001		$	2,332,910		$	10,060,911
Investment in convertible promissory notes of AVLP		—			1,671,936			1,671,936
Payment of convertible promissory notes of AVLP		—			(1,107,500	)		(1,107,500	)
Investment in common stock of AVLP		417,169			—			417,169
Fair value of warrants issued by AVLP		2,255,341			—			2,255,341
Unrealized loss in warrants of AVLP		(6,926,293	)		—			(6,926,293	)
Unrealized loss in common stock of AVLP		(430,719	)		—			(430,719	)
Accretion of discount		—			2,034,358			2,034,358
Accrued Interest		—			679,917			679,917
Balance at December 31, 2018	$	3,043,499		$	5,611,621		$	8,655,120

The Company has made a strategic decision to invest in AVLP, a related party controlled by Philou Ventures, LLC, or Philou, a significant stockholder of the Company. The Company’s investments in AVLP consist of convertible promissory notes, warrants and shares of common stock of AVLP. On September 6, 2017, the Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”) with an effective date of August 21, 2017 pursuant to which the Company will provide AVLP a non-revolving credit facility of up to $10 million for a period ending on August 21, 2019, subject to the terms and conditions stated in the Loan Agreement, including the Company having available funds to grant such credit. At December 31, 2018, the Company has provided loans to AVLP in the principal amount $6,943,997 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 13,887,994 shares of AVLP common stock. Under the terms of the AVLP Loan Agreement, any notes issued by AVLP to the Company are secured by the assets of AVLP.

The warrants entitle the Company to purchase up to 13,887,994 shares of AVLP common stock at an exercise price of $0.50 per share for a period of five years. The exercise price of $0.50 is subject to adjustment for customary stock splits, stock dividends, combinations or similar events. The warrant may be exercised for cash or on a cashless basis. At December 31, 2018 and 2017, the Company recorded an unrealized gain (loss) on its investment in warrants of AVLP of ($6,926,293) and $4,512,912 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 and as a change in net unrealized gains on securities available-for-sale in the Company’s consolidated statements of comprehensive loss. During the years ended December 31, 2018 and 2017, the Company recognized, in other comprehensive income (loss), net unrealized gain (loss) on securities available-for-sale of ($8,027,746) and $5,171,743, respectively. The Company’s investment in warrants and common stock of AVLP represented ($7,357,012) and $5,062,960, respectively, of the net unrealized gain (loss) on securities available-for-sale. 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 1.92% and 2.98%, 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 80.4% 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 13,887,994 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. The original issue discount of $165,448 and the discount attributed to the fair value of the warrants of $4,644,022 are being amortized as interest income through the maturity date. During the years ended December 31, 2018 and 2017, the Company recorded $2,034,358 and $436,346, respectively, of interest income for the discount accretion. During the years ended December 31, 2018 and 2017, the Company recorded contractual interest receivable attributed to the AVLP Notes and AVLP Loan Agreement of $679,917 and $324,400, 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 years ended December 31, 2018 and 2017, the Company also acquired in the open market 430,942 shares of AVLP common stock for $417,169 and 221,333 shares of AVLP common stock for $191,782, respectively. At December 31, 2018, the closing market price of AVLP’s common stock was $0.90, a decline from $1.75 at December 31, 2017. The Company has determined that its investment in AVLP marketable equity securities are accounted for in accordance with ASC No. 820, Fair Value Measurements and Disclosures and based upon the closing market price of AVLP common stock at December 31, 2018, the Company’s investment in AVLP common stock had an unrealized gain of $119,329.

In aggregate, the Company has 903,175 shares of AVLP common stock which represents 16.3% of AVLP’s outstanding shares of common stock. The Company has determined that AVLP is a variable interest entity (“VIE”) as it does not have sufficient equity at risk. The Company does not consolidate AVLP because the Company is not the primary beneficiary and does not have a controlling financial interest. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, among other factors. Although the Company has made a significant investment in AVLP, the Company has determined that Philou, which controls AVLP through its equity investment and deemed to be more closely associated with AVLP, is the primary beneficiary. As a result, AVLP’s financial position and results of operations are not consolidated in our financial position and results of operations.