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FAIR VALUE OF FINANCIAL INSTRUMENTS
 3 Months Ended
Mar. 31, 2021
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS

5. fair value of financial instruments

 

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy:

 

    Fair Value Measurement at March 31, 2021  
    Total     Level 1     Level 2     Level 3  
Investments in convertible and term
promissory notes of AVLP and Ault &
Company – related parties		   $ 13,467,783     $ —     $ —     $ 13,467,783  
Investments in common stock and derivative
instruments of AVLP – a related party		     10,335,348       819,324       —       9,516,024  
Investment in common stock and warrants of
Alzamend – a related party		     4,487,091       —       —       4,487,091  
Investments in marketable equity securities     18,153,863       18,153,863       —       —  
Securities purchased under agreement to resell     33,647,059       33,647,059                  
Investments in debt and equity securities     2,320,539       —       506,574       1,813,965  
Total Investments   $ 82,411,683     $ 52,620,246     $ 506,574     $ 29,284,863  

 

    Fair Value Measurement at December 31, 2020  
    Total     Level 1     Level 2     Level 3  
Investments in convertible promissory notes
and advances of AVLP and Alzamend – related
parties		   $ 10,668,470     $ —     $ —     $ 10,668,470  
Investments in common stock and derivative
instruments of AVLP – a related party		     5,486,140       499,588       —       4,986,552  
Investment in common stock and warrants of
Alzamend – a related party		     653,251       —       —       653,251  
Investments in marketable equity securities     2,562,983       2,562,983       —       —  
Investments in debt and equity securities     261,767       —       —       261,767  
Total Investments   $ 19,632,611     $ 3,062,571     $ —     $ 16,570,040  

 

We assess the inputs used to measure fair value using the three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market.

 

We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

 

We assess the inputs used to measure fair value using the three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market.

 

Investments

 

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

 

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. The Company made an irrevocable election to record available-for-sale debt investments at fair value utilizing the fair value option available under U.S. GAAP. The Company believed that carrying these investments at fair value better portrayed the economic substance of the investments. Under the fair value option, gains and losses on the debt investments are included in unrealized gains/(losses) on investments within net earnings each reporting period. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments .

 

Equity investments

 

The following discusses our marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities.

 

Our marketable equity securities are publicly traded stocks or funds measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because we use quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.

 

Our non-marketable equity securities are investments in privately held companies without readily determinable market values. The carrying value of our non-marketable equity securities is adjusted to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). Non-marketable equity securities that have been remeasured during the period based on observable transactions are classified within Level 2 or Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3.

 

 We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.

 

Derivatives

 

Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

 

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

 

The following table summarizes the changes in investments in debt and equity securities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the three months ended March 31, 2021:

 

    Investments in  
    debt and equity  
    securities  
Balance at January 1, 2021   $ 261,767  
Investment in convertible promissory notes     500,000  
Investment in warrants     1,000,000  
Change in fair value of warrants     57,560  
Accretion of discount     52,198  
Balance at March 31, 2021   $ 2,320,539  

  

See Note 12 for the changes in investments in AVLP, Alzamend and Ault & Company measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) during the three months ended March 31, 2021.