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INVESTMENTS - RELATED PARTIES

6 Months Ended

Jun. 30, 2020

Investments, Debt and Equity Securities [Abstract]

9. INVESTMENTS – RELATED PARTIES

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

	June 30,	December 31,
	2020	2019
Investment in convertible promissory note of AVLP	$ 9,802,686	$ 9,595,079
Accrued interest in convertible promissory note of AVLP	2,025,475	2,025,475
Total investment in convertible promissory note of AVLP – Gross	11,828,161	11,620,554
Less: provision for loan losses	(5,088,927)	(5,079,834)
Total investment in convertible promissory note of AVLP	$ 6,739,234	$ 6,540,720

Investment in derivative instruments of AVLP	858,564	1,330,684
Investment in common stock of AVLP	169,860	238,602
Investment in common stock of Alzamend	575,925	558,938
Investment in derivative instruments and common stock of AVLP and Alzamend	$ 1,604,349	$ 2,128,224

Total investment in AVLP and Alzamend – Net	$ 8,343,583	$ 8,668,944

Investment in warrants and common stock of AVLP and Alzamend	$ 1,604,349	$ 2,128,224
Investment in convertible promissory note of AVLP	6,739,234	6,540,720
Total investment in AVLP and Alzamend – Net	$ 8,343,583	$ 8,668,944

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

	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, 2020	$ 2,128,224	$ 6,540,720	$ 8,668,944
Investment in convertible promissory notes of AVLP	—	198,514	198,514
Investment in common stock of AVLP and Alzamend	12,884	—	12,884
Fair value of derivative instruments issued by AVLP	9,093	—	9,093
Unrealized loss in derivative instruments of AVLP	(481,213)	—	(481,213)
Unrealized loss in common stock of AVLP and Alzamend	(64,639)	—	(64,639)
Balance at June 30, 2020	$ 1,604,349	$ 6,739,234	$ 8,343,583

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 June 30, 2020, the Company has provided loans to AVLP in the principal amount $9,802,686 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 19,605,372 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 June 30, 2020 and December 31, 2019, the Company recorded a cumulative unrealized loss on its investment in warrants of AVLP of $4,845,469 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 six months ended June 30, 2019, the Company recognized, in other comprehensive loss, net unrealized gain (loss) on derivative securities of related party of $760,881 and ($1,242,094), respectively, which compares with a net unrealized gain (loss) on derivative securities of related party of $375,499 and ($361,181), respectively during the three and six months ended June 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 0.23% and 2.60%, 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 89.4% 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 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 six months ended June 30, 2019, the Company recorded $657,613 and $1,277,422, respectively, of interest income for the discount accretion and $253,923 and $464,114, respectively, of interest income from the contractual 12% rate provided for by the convertible promissory notes. During the six months ended June 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 June 30, 2020, the Company determined that the fair value of the convertible promissory notes in AVLP was approximately $6,739,234. 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 June 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 six months ended June 30, 2020 and year ended December 31, 2019, the Company also acquired in the open market 5,000 shares of AVLP common stock for $1,274 and 91,000 shares of AVLP common stock for $53,032, respectively. At June 30, 2020, the closing market price of AVLP’s common stock was $0.17, a decline 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 June 30, 2020, the Company’s investment in AVLP common stock had an unrealized loss of $577,975.

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.