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INVESTMENTS – RELATED PARTIES | 6 Months Ended
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Jun. 30, 2021
Investments Related Parties |
INVESTMENTS – RELATED PARTIES | 12. INVESTMENTS – RELATED PARTIES Investments in AVLP, Alzamend and Ault & Company at June 30, 2021 and December 31, 2020, are comprised of the following: Investment in Promissory Notes, Related Parties
|  | Interest |  | Due |  | June 30, |  |  | December 31, |
|  | Rate |  | Date |  | 2021 |  |  | 2020 |
Investment in convertible promissory note of AVLP |  | 12% |  | December 31, 2023 |  | $ | 15,049,000 |  |  | $ | 11,269,000 |
Short-term advance in Alzamend |  |  |  |  |  |  | - |  |  |  | 750,000 |
Investment in convertible promissory note of Alzamend |  |  |  |  |  |  | - |  |  |  | 50,000 |
Investment in promissory note of Ault & Company |  | 8% |  | February 25, 2022 |  |  | 2,500,000 |  |  |  | - |
Accrued interest in promissory notes, related parties |  |  |  |  |  |  | 2,028,000 |  |  |  | 2,027,000 |
Total investment in promissory notes, related parties – gross |  |  |  |  |  |  | 19,577,000 |  |  |  | 14,096,000 |
Less: original issue discount |  |  |  |  |  |  | (2,240,000 | ) |  |  | (4,000 | )
Less: provision for loan losses |  |  |  |  |  |  | (3,424,000 | ) |  |  | (3,424,000 | )
Total investment in promissory notes, related parties |  |  |  |  |  | $ | 13,913,000 |  |  | $ | 10,668,000 |
Investment in Common Stock and Warrants, Related Parties
|  | Weighted Avg. |  |  |  |  |  |
|  | Remaining |  | June 30, |  |  | December 31, |
|  | Contractual Term |  | 2021 |  |  | 2020 |
Investment in warrants of AVLP |  | 2.9 years |  | $ | 4,303,000 |  |  | $ | 4,986,000 |
Investment in common stock of AVLP |  |  |  |  | 450,000 |  |  |  | 500,000 |
Investment in warrants of Alzamend |  | 4.7 years |  |  | 9,577,000 |  |  |  | 11,000 |
Investment in common stock of Alzamend |  |  |  |  | 46,025,000 |  |  |  | 642,000 |
Total investment in common stock and warrants, related parties |  |  |  | $ | 60,355,000 |  |  | $ | 6,139,000 |
The following table summarizes the changes in the Company’s investments in AVLP, Alzamend and Ault & Company during the six months ended June 30, 2021:
|  |  |  |  | Investment in |  |  |  |
|  | Investment in |  |  | promissory notes |  |  | Total |
|  | warrants and |  |  | and advances |  |  | Investment in |
|  | common stock |  |  | of AVLP, |  |  | AVLP, Alzamend |
|  | of AVLP and |  |  | Alzamend and |  |  | and Ault & |
|  | Alzamend |  |  | Ault & Company |  |  | Company, net |
Balance at January 1, 2021 |  | $ | 6,139,000 |  |  | $ | 10,668,000 |  |  | $ | 16,807,000 |
Investment in convertible promissory notes of AVLP |  |  | — |  |  |  | 1,540,000 |  |  |  | 1,540,000 |
Investment in convertible promissory note of Alzamend |  |  | — |  |  |  | (50,000 | ) |  |  | (50,000 | )
Investment in promissory note of Ault & Company |  |  | — |  |  |  | 2,500,000 |  |  |  | 2,500,000 |
Investment in common stock of AVLP and Alzamend |  |  | 14,093,000 |  |  |  | — |  |  |  | 14,093,000 |
Investment in warrants of Alzamend |  |  | 954,000 |  |  |  | — |  |  |  | 954,000 |
Short-term advance in Alzamend |  |  | — |  |  |  | (750,000 | ) |  |  | (750,000 | )
Fair value of warrants issued by AVLP |  |  | 2,240,000 |  |  |  | — |  |  |  | 2,240,000 |
Unrealized loss in warrants of AVLP |  |  | (2,924,000 | ) |  |  | — |  |  |  | (2,924,000 | )
Unrealized gain in warrants of Alzamend |  |  | 8,612,000 |  |  |  | — |  |  |  | 8,612,000 |
Unrealized gain in common stock of AVLP and Alzamend |  |  | 31,241,000 |  |  |  | — |  |  |  | 31,241,000 |
Accretion of discount |  |  | — |  |  |  | 4,000 |  |  |  | 4,000 |
Accrued interest |  |  | — |  |  |  | 1,000 |  |  |  | 1,000 |
Balance at June 30, 2021 |  | $ | 60,355,000 |  |  | $ | 13,913,000 |  |  | $ | 74,268,000 |
Investments in AVLP The Company’s investments in AVLP, a related party controlled by Philou Ventures, LLC (“Philou”), an affiliate of the Company, consist of convertible promissory notes, warrants and shares of AVLP common stock. As of June 30, 2021, loans to AVLP totaled $15.0 million and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 30.1 million shares of AVLP common stock at an exercise price of $0.50 per share for a period of five years. At June 30, 2021, the Company recorded a cumulative unrealized loss on its investment in warrants of AVLP of $4.0 million 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 AVLP will be revalued on each balance sheet date. Fair Value Assessments of Warrants - AVLP The fair value of the Company’s holdings in the AVLP warrants was estimated using the Black-Scholes option-pricing method and the following assumptions:
Exercise price |  | $0.50
Remaining contractual term (in years) |  | 1.18 — 5.0
Volatility |  | 68.7% — $112.1%
Weighted average risk free interest rate |  | 0.13% — 2.98%
Expected dividend yield |  | 0%
The volatility factor 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. Fair Value Assessment of Convertible Notes - AVLP During the six months ended June 30, 2021 and 2020, no interest income was recognized from the Company’s investment in convertible promissory notes 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. At June 30, 2021, the Company determined that the fair value of the convertible promissory notes in AVLP was $13.6 million. 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, 2021. 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. Fair Value Assessment of Common Stock – AVLP In aggregate, the Company has 999,175 shares of AVLP common stock which represents 18.0% of AVLP’s outstanding shares of common stock. At June 30, 2021, the closing market price of AVLP’s common stock was $0.45, a decrease from $0.50 at December 31, 2020. Based upon the closing market price of AVLP common stock at June 30, 2021, the Company’s investment in AVLP common stock had an unrealized loss of $0.3 million. Variable Interest Entity Considerations - AVLP 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 the Company’s financial position and results of operations. Extension of AVLP Loan Agreement On April 13, 2021, the AVLP Loan Agreement was increased to up to $15,000,000 and extended to December 31, 2023. On June 4, 2021, the AVLP Loan Agreement was increased to up to $20,000,000. Investments in Alzamend Common Stock and Warrants The following table summarizes the changes in the Company’s investments in Alzamend common stock during the six months ended June 30, 2021:
|  | Shares of |  |  | Per Share |  |  | Investment in |
|  | Common Stock |  |  | Price |  |  | Common Stock |
Balance at January 1, 2021 |  |  | 427,888 |  |  | $ | 1.50 |  |  | $ | 642,000 |
Purchase of shares from an Alzamend shareholder |  |  | 62,500 |  |  | $ | 0.80 |  |  |  | 50,000 |
March 9, 2021 securities purchase agreement |  |  | 2,666,667 |  |  | $ | 1.14 |  |  |  | 3,046,000 |
Investment in Alzamend initial public offering |  |  | 2,000,000 |  |  | $ | 5.00 |  |  |  | 10,000,000 |
Open market purchases after initial public offering |  |  | 109,000 |  |  | $ | 9.14 |  |  |  | 996,000 |
Unrealized gain in common stock of Alzamend |  |  |  |  |  |  |  |  |  |  | 31,291,000 |
Balance at June 30, 2021 |  |  | 5,266,055 |  |  | $ | 8.74 |  |  | $ | 46,025,000 |
At December 31, 2020, the Company had provided Alzamend a short-term advance of $750,000 and invested $50,000 in an 8% convertible promissory note. In conjunction with the issuance of the 8% convertible promissory note, Alzamend 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. On March 9, 2021, DP Lending entered into a securities purchase agreement with Alzamend to invest $10.0 million in Alzamend common stock and warrants, subject to the achievement of certain milestones. DP Lending funded $4.0 million upon execution of the securities purchase agreement, which included the conversion of the short-term advance and convertible promissory note in the aggregate amount of $800,000. The remaining $6.0 million will be funded upon Alzamend achieving certain milestones related to the U.S. Food and Drug Administration approval of Alzamend’s Investigational New Drug application and Phase 1a human clinical trials for Alzamend’s lithium based ionic cocrystal therapy, known as AL001. Under the securities purchase agreement, in aggregate, Alzamend has agreed to sell up to 6,666,667 shares of its common stock to DP Lending for $10.0 million, or $1.50 per share, and issue to DP Lending warrants to acquire 3,333,334 shares of Alzamend common stock with an exercise price of $3.00 per share. Due to the significant risks and uncertainties associated with FDA approvals, through June 30, 2021, the Company believes that the achievement of the requisite performance conditions for additional investment is not probable and, as a result, no fair value of future investment rights has been recognized. The transaction was approved by the Company’s independent directors after receiving a third-party valuation report of Alzamend. On June 15, 2021 Alzamend closed an initial public offering at a price to the public of $5.00 per share. DP Lending purchased 2,000,000 shares of Alzamend’s Common stock in the initial public offering for an aggregate of $10,000,000. Alzamend’s common stock is listed on The Nasdaq Capital Market under the ticker symbol “ALZN”. At June 30, 2021, the fair value of Alzamend’s common stock was $8.74 based on the closing price of Alzamend’s common stock. Based upon the fair value of Alzamend common stock at June 30, 2021, during the six months ended June 30, 2021, the Company recorded an unrealized gain of $31.7 million related to its investment in Alzamend common stock. In conjunction with the March 2021 securities purchase agreement, Alzamend issued to the Company warrants to purchase 1,333,334 shares of Alzamend common stock at an exercise price of $3.00 per share for a period of five years. The Company computed the fair value of Alzamend warrants using the Black-Scholes option pricing model. During the three and six months ended June 30, 2021, the Company recorded an unrealized gain on its investment in warrants of Alzamend of $8.6 million. The Company’s investment in Alzamend will be revalued on each balance sheet date. Fair Value Assessment of Alzamend Warrants The fair value of the Company’s holdings in the 1,350,000 Alzamend warrants was estimated using the Black-Scholes option-pricing method and the following assumptions:
Exercise price |  |  | $3.00 |
Remaining contractual term (in years) |  |  | 4.17 — 4.690 |
Volatility |  |  | 85.01% |
Weighted average risk free interest rate |  |  | 0.665% — 0.768% |
Expected dividend yield |  |  | 0% |
Investment in Ault & Company, Inc. On February 25, 2021, Ault & Company, a related party, sold and issued an 8% Secured Promissory Note in the principal amount of $2.5 million to the Company. The principal amount of the Secured Promissory Note, plus any accrued and unpaid interest at a rate of 8% per annum, is due and payable on February 25, 2022. The carrying value of the 8% Secured Promissory Note is considered to be a reasonable estimate of its fair value.

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