Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

4. Fair Value Measurements

The composition of our financial assets and liabilities as of September 30, 2020 and December 31, 2019 among the three levels of the fair value hierarchy are as follows (in thousands):

	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	107	$	—	$	—	$	107
Foreign certificates of deposit and time deposits		—		48,727		—		48,727
Short-term investments:
Corporate debt securities		—		51,032		—		51,032
Foreign certificates of deposit and time deposits		—		4,847		—		4,847
Mutual funds		—		46,092		—		46,092
Long-term investments:
Corporate debt securities		—		2,540		—		2,540
Total financial assets	$	107	$	153,238	$	—	$	153,345
Liabilities:
Contingent consideration	$	—	$	—	$	465,900	$	465,900
Total financial liabilities	$	—	$	—	$	465,900	$	465,900

	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

The following table presents the activity for the nine months ended September 30, 2020 related to our Level 3 liabilities (in thousands):

Level 3 Liabilities:	Contingent Consideration
Balance as of December 31, 2019	$	320,100
Additions		—
Fair value adjustments		335,703
Payments		(189,903	)
Balance as of September 30, 2020	$	465,900

As of September 30, 2020, 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 original 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 of the contingent consideration obligations using a Monte Carlo simulation.

With respect to the remaining Gram Games contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Gram Games in October 2020 to set the third and final contingent consideration payment at $75.0 million (the “Gram Games Amendment”), that will be paid in third quarter of 2021. The Company revised its measurement of the remaining contingent consideration obligation as of September 30, 2020 by calculating the present value of the final payment using a discount rate commensurate with the remaining term of 2.1%.

The estimated fair value of the Gram Games contingent consideration obligation decreased from $78.1 million as of December 31, 2019 to $73.7 million as of September 30, 2020, primarily due to the $68.3 million payment in the third quarter of 2020 to the former owners of Gram Games for its performance during the second contingent consideration period, partially offset by an increase in the estimated payout as a result of the Gram Games Amendment. For the three and nine months ended September 30, 2020, we recognized $39.2 million and $63.9 million, respectively, of expense within research and development expenses in our consolidated statement of operations.

With the respect to the Small Giant contingent consideration obligation, we estimate the fair value at each subsequent measurement period using a Monte Carlo simulation. The table below outlines the significant unobservable inputs used in estimating the fair value of both remaining Small Giant contingent consideration periods as of September 30, 2020, weighted by the relative fair value of each annual period’s obligation to the total obligation.

	September 30, 2020
	Range	Weighted Average
Bookings growth rates	7.0% - 27.0%	18.3%
Bookings volatility	29.0% - 29.0%	29.0%
Asset volatility	44.0% - 44.0%	44.0%
Net cash flow margins	45.4% - 47.8%	46.8%
Discount rates	10.5% - 10.5%	10.5%

Changes in these unobservable inputs would have resulted in a higher or lower contingent consideration obligation.

The estimated fair value of the Small Giant contingent consideration obligation increased from $242.0 million as of December 31, 2019 to $392.2 million as of September 30, 2020. The increase was driven by stronger than expected performance and the increased probability of achievement during the remaining performance periods, partially offset by a $121.6 million payment to the former owners of Small Giant for its performance during the first contingent consideration period. Accordingly, for the three and nine months ended September 30, 2020, we recognized $27.6 million and $271.8 million, respectively, of expense within research and development expenses in our consolidated statement of operations.