Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

4. Fair Value Measurements

As of December 31, 2019, our contingent consideration obligations represent the estimated fair value of the additional consideration payable in connection with our acquisitions of Gram Games in the second quarter of 2018 and Small Giant in the first quarter of 2019. Under the terms of each acquisition, contingent consideration may be payable based on the achievement of certain future performance targets during each annual period following the respective acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. For both acquisitions, we estimated the acquisition date fair value and each subsequent measurement of the contingent consideration obligation using a Monte Carlo simulation. The significant unobservable inputs used in estimating these fair value measurements were each entity’s projected performance, a risk-adjusted discount rate and performance volatility similar to industry peers. Changes in the projected performance of the acquired businesses could result in a higher or lower contingent consideration obligation in the future.

Specific to the Gram Games acquisition, the estimated fair value of the contingent consideration obligation increased from $49.0 million as of December 31, 2018 to $78.1 million as of December 31, 2019. The increase was primarily due to stronger than expected performance and the increased probability of achievement, partially offset by the $28.5 million payment to the former owners of Gram Games’ for its performance during the first annual contingent consideration period. For the years ended December 31, 2019 and 2018, we recognized $57.6 million and $5.5 million, respectively, of expense within research and development expenses in our consolidated statement of operations.

Specific to the Small Giant acquisition, the estimated fair value of the contingent consideration obligation increased from $98.0 million at the acquisition date to $242.0 million as of December 31, 2019. The increase was primarily due to stronger than expected performance and the increased probability of achievement. For the year ended December 31, 2019, we recognized $144.0 million of expense within research and development expenses in our consolidated statement of operations.

The composition of our financial assets and liabilities as of December 31, 2019 and 2018 among the three levels of the fair value hierarchy are as follows (in thousands):

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	625	$	—	$	—	$	625
Corporate debt securities		—		151,770		—		151,770
Foreign certificates of deposit and time deposits		—		3,260		—		3,260
Short-term investments:
Corporate debt securities		—		814,946		—		814,946
U.S. government and government agency debt securities		—		25,000		—		25,000
Foreign certificates of deposit and time deposits		—		53,786		—		53,786
Mutual funds		—		44,441		—		44,441
Long-term investments:
Corporate debt securities		—		108,288		—		108,288
U.S. government and government agency debt securities		—		67,012		—		67,012
Total financial assets	$	625	$	1,268,503	$	—	$	1,269,128
Liabilities:
Contingent consideration	$	—	$	—	$	320,100	$	320,100
Total financial liabilities	$	—	$	—	$	320,100	$	320,100

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	565	$	—	$	—	$	565
Corporate debt securities		—		4,987		—		4,987
Short-term investments:
Corporate debt securities		—		36,232		—		36,232
Total financial assets	$	565	$	41,219	$	—	$	41,784
Liabilities:
Contingent consideration	$	—	$	—	$	49,000	$	49,000
Total financial liabilities	$	—	$	—	$	49,000	$	49,000

The following table presents the activity for the year ended December 31, 2019 related to our Level 3 liabilities (in thousands):

Level 3 Liabilities:	Total
Contingent consideration obligation –  December 31, 2018	$	49,000
Additions		98,000
Fair value adjustments		201,564
Payments		(28,464	)
Contingent consideration obligation –  December 31, 2019	$	320,100