Fair Value Measurements

3 Months Ended

Mar. 31, 2021

Fair Value Disclosures [Abstract]

Fair Value Measurements

4. Fair Value Measurements

The composition of our financial assets and liabilities as of March 31, 2021 and December 31, 2020 among the three levels of the fair value hierarchy are as follows (in millions):

	March 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	243.7	$	—	$	—	$	243.7
Corporate debt securities		—		25.0		—		25.0
Foreign certificates of deposit and time deposits		—		126.8		—		126.8
Short-term investments:
Corporate debt securities		—		610.4		—		610.4
Foreign certificates of deposit and time deposits		—		4.3		—		4.3
Mutual funds		—		47.6		—		47.6
Total financial assets	$	243.7	$	814.1	$	—	$	1,057.8
Liabilities:
Contingent consideration	$	—	$	—	$	256.5	$	256.5
Total financial liabilities	$	—	$	—	$	256.5	$	256.5

	December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	611.1	$	—	$	—	$	611.1
Corporate debt securities		—		313.0		—		313.0
Foreign certificates of deposit and time deposits		—		85.6		—		85.6
Short-term investments:
Corporate debt securities		—		152.8		—		152.8
Foreign certificates of deposit and time deposits		—		6.5		—		6.5
Mutual funds		—		49.1		—		49.1
Long-term investments:
Corporate debt securities		—		2.0		—		2.0
Total financial assets	$	611.1	$	609.0	$	—	$	1,220.1
Liabilities:
Contingent consideration	$	—	$	—	$	463.1	$	463.1
Total financial liabilities	$	—	$	—	$	463.1	$	463.1

The following table presents the activity for the three months ended March 31, 2021 related to our Level 3 liabilities (in millions):

Level 3 Liabilities:	Contingent Consideration
Balance as of December 31, 2020	$	463.1
Additions		—
Fair value adjustments		33.0
Payments		(239.6	)
Balance as of March 31, 2021	$	256.5

As of March 31, 2021, our contingent consideration obligations relate to the additional consideration payable in connection with our acquisitions of Gram Games in the second quarter of 2018, Small Giant in the first quarter of 2019 and Rollic in the fourth quarter of 2020. Under the original terms of the Gram Games and Small Giant acquisitions, contingent consideration may be payable based on the achievement of certain future profitability metrics 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. Under the terms of the Rollic acquisition, contingent consideration may be payable based on the achievement of certain future bookings and profitability metrics 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 all three acquisitions, we estimated the acquisition date fair value of the contingent consideration obligation using a Monte Carlo simulation. The significant unobservable inputs used in estimating these acquisition date fair value measurements were each entity’s projected performance, a risk-adjusted discount rate and performance volatility similar to industry peers.

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 the fourth quarter of 2020 to set the final contingent consideration payment at $75.0 million (the “Gram Games Amendment”), to be paid in third quarter of 2021. At the date of the Gram Games Amendment, the Company measured the remaining final obligation by calculating the present value of the final payment using a discount rate of 2.1%, commensurate with the remaining term. Subsequently, the Company accretes the obligation up to its final amount using the effective interest method.

The estimated value of the Gram Games contingent consideration obligation accreted up from $74.1 million as of December 31, 2020 to $74.5 million as of March 31, 2021. For the three months ended March 31, 2021 and 2020, we recognized $0.4 million and $11.1 million, respectively, of expense within research and development expenses in our consolidated statement of operations related to the Gram Games contingent consideration.

With the respect to the remaining Small Giant and Rollic contingent consideration obligations, we estimate the fair value at each subsequent reporting period using a Monte Carlo simulation. The table below outlines the significant unobservable inputs used in estimating the fair value of the remaining Small Giant and Rollic contingent consideration liabilities as of March 31, 2021, weighted by the relative fair value of each annual period’s obligation to the total obligation.

	March 31, 2021
	Range	Weighted Average
Bookings growth rates	(1.2%) - 88.8%	11.1%
Bookings volatility	24.0% - 47.0%	29.2%
Asset volatility	35.0% - 55.0%	39.5%
Net cash flow margins	20.3% - 49.2%	43.7%
Discount rates	9.5% - 29.0%	13.9%

Changes in the projected performance of the acquired businesses could result in a higher or lower contingent consideration obligation in the future.

The estimated fair value of the Small Giant contingent consideration obligation decreased from $409.3 million as of December 31, 2020 to $198.7 million as of March 31, 2021. The decrease was driven by a $239.6 million payment to the former owners of Small Giant for its performance during the second contingent consideration period, partially offset by stronger than expected performance and the increased probability of achievement during the remaining performance period. For the three months ended March 31, 2021 and 2020, we recognized $29.0 million and $108.9 million, respectively, of expense within research and development expenses in our consolidated statement of operations.

In April 2021, the Company executed an amendment to the Share Purchase Agreement with the former owners of Small Giant to exclude the direct profitability from Puzzle Combat, which launched globally in April 2021, from the remaining performance period.

The estimated fair value of the Rollic contingent consideration obligation increased from $53.8 million as of December 31, 2020 to $57.8 million as of March 31, 2021. The increase was driven by the increased probability of achievement and stronger than expected performance during the remaining performance periods. For the three months ended March 31, 2021, we recognized $4.0 million of expense within research and development expenses in our consolidated statement of operations.

In April 2021, the Company executed an amendment to the Share Purchase Agreement with the former owners of Rollic to provide additional discretion in the method of allocating future acquisition expenses by Rollic to the performance metrics for the remaining performance periods, as agreed to in writing by each party.