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FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS

4. FAIR VALUE MEASUREMENTS

  

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:

  

  ● Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.

  

  ● Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.

  

  ● Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.

  

At June 30, 2020, the Company’s financial instruments included the right to receive (i) 175,000 shares of common stock, par value $0.001 per share, of CleanSpark Common Stock, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The carrying amounts reported in the accompanying financial statements for cash and cash equivalents, receivables, inventories, accounts payable and accrued expenses and other current liabilities approximate their respective fair values because of the short-term nature of these accounts. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split which was completed by CleanSpark in December 2019.

  

The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets that are measured at fair value on a recurring basis:

  

  June 30, 2020
    Fair Value Measurements Using  
    Quoted prices in   Significant other     Significant  
    active markets for   observable     unobservable  
    identical assets   inputs     inputs  
    (Level 1)   (Level 2)     (Level 3)  
Assets                      
Common shares   $ 453   $ —     $ —  
Warrants     —     —       255  

 

Level 3 Valuation

  

The warrant asset (which relates to warrants to purchase shares of common stock) is marked-to-market each reporting period with the change in fair value recorded to other income (expense) in the accompanying statements of operations until the warrants are exercised. The fair value of the warrant asset is estimated using a Black-Scholes option-pricing model. The significant assumptions used in preparing the option pricing model for valuing the warrant asset as of June 30, 2020, include (i) volatility of 290%, (ii) risk free interest rate of 0.24%, (iii) strike price ($16.00 and $20.00), (iv) fair value of common stock ($2.59), and (v) expected life of 3.6 years.

  

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the CleanSpark warrants for the six months ended June 30, 2020:

  

    CleanSpark  
    Warrants  
Balance at December 31, 2019   $ 531  
Issuance of warrants     —  
Change in fair value     (276 )
Balance at June 30, 2020   $ 255  

 

No other changes in valuation techniques or inputs occurred during the six months ended June 30, 2020. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the six months ended June 30, 2020.