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INVESTMENTS - RELATED PARTIES
 9 Months Ended
Sep. 30, 2020
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS - RELATED PARTIES

9. INVESTMENTS – RELATED PARTIES

 

Investments in AVLP and Alzamend Neuro, Inc. (“Alzamend”) at September 30, 2020 and December 31, 2019, are comprised of the following:

 

    September 30,     December 31,  
    2020     2019  
Investment in convertible promissory note of AVLP   $ 10,153,661     $ 9,595,079  
Investment in convertible promissory note of Alzamend     50,000       —  
Accrued interest in convertible promissory note of AVLP     2,025,475       2,025,475  
Total investment in convertible promissory note of AVLP – Gross     12,229,136       11,620,554  
Less: original issue discount     (9,904 )     —  
Less: provision for loan losses     (5,159,910 )     (5,079,834 )
Total investment in convertible promissory note of AVLP and Alzamend     7,059,322       6,540,720  
                 
Investment in derivative instruments of AVLP     2,490,794       1,330,684  
Investment in common stock of AVLP     259,786       238,602  
Investment in common stock and warrants of Alzamend     587,686       558,938  
Investment in derivative instruments and common stock of AVLP and
Alzamend		     3,338,266       2,128,224  
                 
Total investment in AVLP and Alzamend – Net   $ 10,397,588     $ 8,668,944  
                 
Investment in warrants and common stock of AVLP and Alzamend   $ 3,338,266     $ 2,128,224  
Investment in convertible promissory note of AVLP and Alzamend     7,059,322       6,540,720  
Total investment in AVLP and Alzamend – Net   $ 10,397,588     $ 8,668,944  

 

The following table summarizes the changes in our investments in AVLP and Alzamend during the nine months ended September 30, 2020:

 

    Investment in     Investment in        
    warrants and     convertible     Total  
    common stock     promissory     investment  
    of AVLP and     note of AVLP     in AVLP and  
    Alzamend     and Alzamend     Alzamend – Net  
Balance at January 1, 2020   $ 2,128,224     $ 6,540,720     $ 8,668,944  
Investment in convertible promissory notes of AVLP     —       478,506       478,506  
Investment in convertible promissory note of Alzamend     —       38,128       38,128  
Investment in common stock of AVLP and Alzamend     12,884       —       12,884  
Investment in warrants of Alzamend     11,872       —       11,872  
Fair value of derivative instruments issued by AVLP     80,076       —       80,076  
Unrealized loss in derivative instruments of AVLP     1,080,034       —       1,080,034  
Unrealized loss in common stock of AVLP and Alzamend     25,176       —       25,176  
Accretion of discount             1,968       1,968  
Balance at September 30, 2020   $ 3,338,266     $ 7,059,322     $ 10,397,588  

 

Investments in AVLP

 

The Company’s investments in AVLP, a related party controlled by Philou Ventures, LLC, or Philou, an affiliate of the Company, consist of convertible promissory notes, derivative instruments and shares of AVLP common stock. At September 30, 2020, the Company has provided loans to AVLP in the principal amount $10,153,661 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 20,306,921 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 derivative financial instruments. At September 30, 2020 and December 31, 2019, the Company recorded a cumulative unrealized loss on its investment in warrants of AVLP of $3,284,222 and $4,364,256, 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 and nine months ended September 30, 2020, the Company recognized, in other comprehensive loss, net unrealized gain on derivative securities of related party of $1,561,247 and $1,080,034, respectively, which compares with a net unrealized loss on derivative securities of related party of $1,152,480 and $1,513,661, respectively during the three and nine months ended September 30, 2019. 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 0.13% 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 104.6% 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 had accounted 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 warrants that the Company received in conjunction with its investment. Interest was accreted using the effective interest method. The Company recorded interest on an accrual basis and recognized 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. During the three and nine months ended September 30, 2019, the Company recorded $614,856 and $1,892,278, respectively, of interest income for the discount accretion and  $268,428 and $732,542, respectively, of interest income from the contractual 12% rate provided for by the convertible promissory notes. During the nine months ended September 30, 2020, no interest income was recognized from the Company’s investment in AVLP.

 

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, primarily the value of the underlying conversion feature and current economic events, the Company concluded that an impairment existed at December 31, 2019. At September 30, 2020, the Company determined that the fair value of the convertible promissory notes in AVLP was approximately $7,059,322. The Company’s determination of fair value was based upon the estimated present value of a future liquidity event combined with the closing price of AVLP’s common stock at September 30, 2020. 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 nine months ended September 30, 2020 and year ended December 31, 2019, the Company acquired 5,000 shares of AVLP common stock for $1,274 and 91,000 shares of AVLP common stock for $53,032, respectively, in each case in the open market. At September 30, 2020, the closing market price of AVLP’s common stock was $0.26, an increase from $0.24 at December 31, 2019. The Company has determined that its investment in AVLP marketable equity securities should be 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 September 30, 2020, the Company’s investment in AVLP common stock had an unrealized loss of $488,049.

 

In aggregate, the Company has 999,175 shares of AVLP common stock which represents 18.0% 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 the voting power conferred by its equity investment and which is 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.

 

Investments in Alzamend

 

The Company’s investments in Alzamend, a related party, consist of a convertible promissory note, derivative instruments and shares of Alzamend common stock. At September 30, 2020, the Company has provided a loan to Alzamend in the principal amount $50,000 and, in addition to the 8% convertible promissory notes, Alzamend has issued to the Company warrants to purchase 16,667 shares of Alzamend common stock at an exercise price of $3.00 per share for a period of five years. The warrants were determined by the issuer to be derivative financial instruments. At September 30, 2020, the Company recorded a cumulative unrealized loss on its investment in warrants of Alzamend of $111, 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. The Company’s investment in Alzamend will be revalued on each balance sheet date. The fair value of the Company’s holdings in the Alzamend warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 0.28% was derived from the U.S. Treasury yield curve, matching the term of our investment, in effect at the measurement date. The volatility factor of 103.7% was determined based on historical stock prices for similar 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 had accounted for its convertible promissory notes in Alzamend at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted for accrued interest and accretion of the discount attributed to the fair value of the warrants that the Company received in conjunction with its investment. Interest was accreted using the effective interest method. The Company recorded interest on an accrual basis and recognized 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. During the three and nine months ended September 30, 2019, the Company recorded $1,968 of interest income for the discount accretion and $329 of interest income from the contractual 8% rate provided for by the convertible promissory notes.

 

The Company evaluated the collectability of both interest and principal for the convertible promissory notes in Alzamend to determine whether there was an impairment. Based on current information and events, primarily the value of the underlying conversion feature and current economic events, the Company concluded that no impairment existed at September 30, 2020.

 

During the nine months ended September 30, 2020 and year ended December 31, 2019, the Company also acquired 11,325 shares of Alzamend common stock for $9,060 and 372,625 shares of Alzamend common stock for $208,100, respectively. At September 30, 2020, the estimated fair value of Alzamend’s common stock was $1.50. The Company has determined that its investment in Alzamend marketable equity securities should be accounted for in accordance with ASC No. 820, Fair Value Measurements and Disclosures and based upon the estimated fair value of Alzamend common stock at September 30, 2020, the Company’s investment in Alzamend common stock had an unrealized gain of $358,765.