XML 29 R19.htm IDEA: XBRL DOCUMENT

INVESTMENTS – RELATED PARTIES

9 Months Ended

Sep. 30, 2021

13. INVESTMENTS – RELATED PARTIES

Investments in AVLP, Alzamend and Ault & Company at September 30, 2021 and December 31, 2020, are comprised of the following:

Investment in Promissory Notes, Related Parties

	Interest	Due	September 30,			December 31,
	Rate	Date	2021			2020
Investment in convertible promissory note of AVLP	12%	December 31, 2023	$	16,549,000		$	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 receivable, AVLP				2,025,000			2,025,000
Accrued interest receivable, Ault & Company and Alzamend				120,000			2,000
Total investment in promissory notes, related parties – gross				21,194,000			14,096,000
Less: original issue discount				-			(4,000	)
Less: provision for loan losses, AVLP				(2,000,000	)		(3,424,000	)
Total investment in promissory notes, related parties			$	19,194,000		$	10,668,000

Investment in Common Stock and Warrants, Related Parties

	Weighted Avg.
	Remaining	September 30,		December 31,
	Contractual Term	2021		2020
Investment in warrants of AVLP	2.9 years	$	-	$	4,986,000
Investment in common stock of AVLP			60,000		500,000
Investment in warrants of Alzamend	4.7 years		4,070,000		11,000
Investment in common stock of Alzamend			20,781,000		642,000
Total investment in common stock and warrants, related parties		$	24,911,000	$	6,139,000

The following table summarizes the changes in the Company’s investments in AVLP, Alzamend and Ault & Company during the nine months ended September 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		—			2,494,000			2,494,000
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		16,118,000			—			16,118,000
Investment in warrants of Alzamend		1,490,000			—			1,490,000
Short-term advance in Alzamend		—			(750,000	)		(750,000	)
Fair value of warrants issued by AVLP		2,786,000			—			2,786,000
Unrealized loss in warrants of AVLP		(7,772,000	)		—			(7,772,000	)
Unrealized gain in warrants of Alzamend		2,568,000			—			2,568,000
Unrealized gain in common stock of AVLP and Alzamend		3,582,000			—			3,582,000
Accretion of discount		—			4,213,000			4,213,000
Accrued interest		—			119,000			119,000
Balance at September 30, 2021	$	24,911,000		$	19,194,000		$	44,105,000

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 September 30, 2021, loans to AVLP totaled $16.5 million and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 33.1 million shares of AVLP common stock at an exercise price of $0.50 per share and an initial contractual term of five years.

During the nine months ended September 30, 2021, the Company recorded an unrealized loss of $7.7 million due to the decline in value of the warrant derivative securities that the Company received as a result of its investment in AVLP. The unrealized loss was recorded in accumulated other comprehensive loss 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 Assessment of Convertible Notes - AVLP

During the nine months ended September 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 September 30, 2021, the Company determined that the fair value of the convertible promissory notes in AVLP was $16.6 million. The Company’s determination of fair value requires 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.

As a result of new rules implemented by the SEC, which became effective September 28, 2021, shares of AVLP were no longer eligible for quotation on the “Pink – No Information” tier operated by the OTC Markets Group, Inc. Under the new rules, companies like AVLP are required to have current financial information publicly available for brokers to publish competing quotes and provide continuous market making. As AVLP does not have financial information publicly available, AVLP was removed from the Pink Market, which resulted in almost a complete loss of liquidity for shares of AVLP common stock.

Shares of AVLP are available only through the “Expert Market” tier operated by the OTC Markets Group, in which quotes are “unsolicited only.” That means broker-dealers can publish unsolicited quotes representing limit orders from customers who are not affiliates or insiders of the issuer. However, many broker-dealers will not effectuate trades in securities that are not eligible for competing quotes, such as those on the Expert Market tier. Quotations in Expert Market tier securities are only made available to broker-dealers, institutions and other sophisticated investors. Securities that are on Expert Market tier do not have trading bid and ask prices and share trading volumes publicly quoted. As a result, any transactions would be unknown to the public marketplace and would not provide stockholders with a reliable market value for their shares.

At September 30, 2021, the Company estimated the fair value of AVLP’s common stock was $0.06 per share, a decrease from $0.50 at December 31, 2020. Based upon the estimated fair value of AVLP common stock at September 30, 2021, the Company’s investment in AVLP common stock had an unrealized loss of $688,000.

Variable Interest Entity Considerations - AVLP

The Company has determined that AVLP is a 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 million and extended to December 31, 2023. On June 4, 2021, the AVLP Loan Agreement was increased to up to $20 million.

Investments in Alzamend Common Stock and Warrants

The following table summarizes the changes in the Company’s investments in Alzamend common stock during the nine months ended September 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		4,000,000	$	1.13		4,510,000
Investment in Alzamend initial public offering		2,000,000	$	5.00		10,000,000
Open market purchases after initial public offering		230,000	$	7.17		1,648,000
Unrealized gain in common stock of Alzamend						3,849,000
Investment in Alzamend common stock		6,720,388	$	3.08		20,699,000
Investment in Alzamend options						82,000
Balance at September 30, 2021					$	20,781,000

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. The transaction was approved by the Company’s independent directors after receiving a third-party valuation report on 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 million shares of Alzamend’s Common stock in the initial public offering for an aggregate of $10 million. Alzamend’s common stock is listed on The Nasdaq Capital Market under the ticker symbol “ALZN”.

On July 28, 2021, Alzamend received from the U.S. Food and Drug Administration a “Study May Proceed” letter for a Phase 1 study under the Alzamend’s Investigational New Drug application for AL001, a lithium-based ionic cocrystal oral therapy for patients with dementia related to mild, moderate, and severe cognitive impairment associated with Alzheimer’s disease.

Based on the achievement of this milestone, under the March 9, 2021 securities purchase agreement, Alzamend sold an additional 1,333,333 shares of its common stock to DPL for $2 million, or $1.50 per share, and issued to DPL warrants to acquire 666,667 shares of Alzamend common stock with an exercise price of $3.00 per share.

At September 30, 2021, the fair value of Alzamend’s common stock was $3.08 based on the closing price of Alzamend’s common stock. Based upon the fair value of Alzamend common stock at September 30, 2021, during the nine months ended September 30, 2021, the Company recorded an unrealized gain of $3.8 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 nine months ended September 30, 2021, the Company recorded an unrealized gain on its investment in warrants of Alzamend of $2.6 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 2,016,667 Alzamend warrants was estimated using the Black-Scholes option-pricing method and the following assumptions:

Exercise price $3.00

Remaining contractual term (in years) 3.9 — 4.8

Volatility 86.3%

Weighted average risk free interest rate 0.76% — 0.98%

Expected dividend yield 0%

Significant Fluctuation in the Fair Value of Investment in Alzamend

Revenues from the Company’s trading activities during the nine months ended September 30, 2021 included significant net gains on equity securities, including unrealized gains and losses from market price changes. These gains and losses have caused, and will continue to cause, significant volatility in the Company’s periodic earnings.

At September 30, 2021, the fair value of Alzamend’s common stock was $3.08 based on the closing price of Alzamend’s common stock. Based upon the fair value of Alzamend common stock at September 30, 2021, during the three months ended September 30, 2021, the Company recorded an unrealized loss of $27.4 million related to its investment in Alzamend common stock and during the nine months ended September 30, 2021, the Company recorded an unrealized gain of $3.8 million related to its investment in Alzamend common stock.

During the three months ended September 30, 2021, the Company recorded an unrealized loss on its investment in warrants of Alzamend of $6.0 million and during the nine months ended September 30, 2021, the Company recorded an unrealized gain on its investment in warrants of Alzamend of $2.6 million. The Company’s investment in Alzamend will be revalued on each balance sheet date.

Investment in Ault & Company

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.