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fair value of financial instruments
 9 Months Ended
Sep. 30, 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 September 30, 2021 
   Total   Level 1   Level 2   Level 3 

Investments in convertible promissory notes
of Avalanche International, Corp. (“AVLP”)
– a related party

  $

16,574,000

   $-   $-   $

16,574,000

 

Investment in term promissory note of Ault &
Company, Inc. (“Ault & Company”) – a
related party

   2,620,000    -    -    2,620,000 

Investments in common stock of AVLP – a
related party

   60,000    -    -    60,000 

Investment in common stock and warrants of
Alzamend Neuro, Inc. (“Alzamend”) – a
related party

   24,851,000    20,781,000    -    4,070,000 
Investments in marketable equity securities   49,931,000    49,931,000    -    - 
Investments in debt and equity securities   9,924,000    -    -    9,924,000 
Total Investments  $103,960,000   $70,712,000   $-   $33,248,000 

 

   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		  $10,668,000   $—   $—   $10,668,000 
Investments in common stock and warrants of
AVLP – a related party		   5,486,000    500,000    —    4,986,000 
Investment in common stock and warrants of
Alzamend – a related party		   653,000    —    —    653,000 
Investments in marketable equity securities   2,563,000    2,563,000    —    — 
Investments in debt and equity securities   262,000    —    —    262,000 
Total Investments  $19,632,000   $3,063,000   $—   $16,569,000 

 

The Company assesses 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

 

The Company considers 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 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, the Company evaluates, 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, the Company employs a systematic methodology that considers available quantitative and qualitative evidence. In addition, the Company considers specific adverse conditions related to the financial health of, and business outlook for, the investee. If the Company has plans to sell the security or it is more likely than not that the Company 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, the Company may incur future impairments.

 

 

Equity Investments

 

The following discusses the Company’s marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities.

 

The Company’s 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 the Company uses quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.

 

The Company’s non-marketable equity securities are investments in privately held companies without readily determinable market values. The carrying value of the Company’s 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 the Company estimates 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 the Company holds. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3.

 

The Company performs a qualitative assessment on a periodic basis and recognizes 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 nine months ended September 30, 2021:

 

   Investments in 
   debt and equity 
   securities 
Balance at January 1, 2021  $262,000 
Investment in convertible promissory notes   3,850,000 
Investment in convertible preferred stock   2,850,000 
Initial valuation of acquired warrants   2,673,000 
Change in fair value of warrants   995,000 
Conversion of loans to debt and equity securities   150,000 
Unrealized gains on debt and equity securities   1,800,000 
Conversion to marketable securities   (2,656,000)
Balance at September 30, 2021  $9,924,000 

 

See Note 13 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 nine months ended September 30, 2021.