Fair Value Measurements

9 Months Ended

Sep. 30, 2016

Fair Value Measurements

Fair Value Measurements

Note 3 — Fair Value Measurements

Fair Value Measurements

The Company accounts for fair value in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”).  Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The inputs to the valuation techniques used to measure fair value are classified into the following categories:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 

As of September 30, 2016, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows (in thousands):

		Level 1		Level 2		Level 3		September 30, 2016
Financial Assets
Cash and cash equivalents	$	147,515	$	—	$	—	$	147,515
Restricted cash		1,162		—		—		1,162
Convertible promissory note investment in Plain Vanilla Corp.		—		—		2,710		2,710
Call option to acquire Plain Vanilla Corp. (1)		—		—		—		—
Total Financial Assets	$	148,677	$	—	$	2,710	$	151,387

(1) This asset is carried on the consolidated balance sheet on a historical cost basis and evaluated for impairment under ASC 325-20 (see “Note 6 - Investments")

As of December 31, 2015, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows (in thousands):

		Level 1		Level 2		Level 3		December 31, 2015
Financial Assets
Cash and cash equivalents	$	180,542	$	—	$	—	$	180,542
Restricted cash		1,498		—		—		1,498
Total Financial Assets	$	182,040	$	—	$	—	$	182,040

The Company’s cash and cash equivalents, which were held in operating bank accounts, are classified within Level 1 of the fair value hierarchy. In addition, the Company’s restricted cash is classified within Level 1 of the fair value hierarchy.  The carrying value of accounts receivable and payables approximates fair value due to the short time to expected payment or receipt of cash.

The Company engaged third party valuation experts to aid management in its analysis of the fair value of the promissory notes issued to the Company in each of January 2016 and May 2016 by, and the Company’s option to acquire all of the outstanding equity (“call option”) of, Plain Vanilla Corp. (“Plain Vanilla”). See “Note 6 – Investments” below for further information on the promissory notes and call option.

The fair value of the promissory notes was estimated using a probability weighted assessment of the expected cash flows discounted to their present value.  The discount rate of 25% used in the analysis reflects the early stage nature of the entity and the overall gaming industry indices.The assumptions used in the expected cash flows model are Level 3 inputs as defined above. The fair value of the call option was estimated using the probability weighted Black-Scholes valuation model. The Black-Scholes valuation model requires inputs such as the expected term of the call option, expected volatility and risk-free interest rate. Certain of these inputs are subjective and require significant analysis and judgment to develop. The weighted average assumptions used by the Company are Level 3 inputs as defined above and are noted in the following table:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2016		2016
Dividend yield	—	%	—	%
Risk-free interest rate	0.35	%	0.41	%
Expected volatility	66.65	%	63.88	%
Expected term (in years)	0.34		0.68

The following table presents the changes in fair value of the Plain Vanilla promissory notes and the call option:

		Nine months ended September 30, 2016
		Asset at the				Impairment				Asset at the
		beginning of				of cost method		Decrease in		end of
		the period		Additions		investment		fair value		the period
Convertible promissory note investment in Plain Vanilla Corp.	$	—	$	5,100	$	—	$	(2,390)	$	2,710
Call option to acquire Plain Vanilla Corp. (1)	$	—	$	2,400	$	(2,400)		—	$	—

This asset is carried on the consolidated balance sheet on a historical cost basis and evaluated for impairment under ASC 325-20 (see “Note 6 - Investments").