Fair Value Measurements

3 Months Ended

Mar. 31, 2021

4. Fair Value Measurements

The following table sets forth the Company’s financial instruments that were measured at fair value by level within the fair value hierarchy on a recurring basis as of the dates indicated (in thousands):


				As of March 31, 2021
	Balance Sheet Location	Total		Level 1		Level 2		Level 3
Financial Assets:
Money market funds	Cash and cash equivalents	$	477	$	477	$	—	$	—
Marketable equity securities	Prepaid expenses and other current assets		5,354		5,354		—		—
Embedded derivative	Long-term debt		16,740		—		—		16,740

Total financial assets		$	22,571	$	5,831	$	—	$	16,740

Financial Liability:
Convertible security	Deferred acquisition costs, current	$	47,200	$	—	$	—	$	47,200


					As of December 31, 2020
	Balance Sheet Location		Total		Level 1		Level 2		Level 3
Financial Assets:
Money market funds		Cash and cash equivalents	$	6,413	$	6,413	$	—	$	—
Embedded derivative		Long-term debt		5,680		—		—		5,680

Total financial assets			$	12,093	$	6,413	$	—	$	5,680

Financial Liability:

Convertible security		Deferred acquisition costs, current	$	46,500	$	—	$	—	$	46,500

Convertible Security

In November 2020, the Company issued a convertible security as part of the consideration exchanged for certain mobile game Apps acquired from an independent foreign-based mobile game developer. The Company elected to account for the convertible security using the fair value option. Under the fair value option, the financial liability is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The fair value of the convertible security was determined using the probability-weighted expected return method (“PWERM”). This valuation methodology is based on unobservable estimates and judgements, and therefore is classified as a Level 3 fair value measurement. The significant unobservable input used in the fair value measurement of the convertible security is the expected timing of occurrence of an IPO. Fair value measurements are highly sensitive to changes in this input and significant changes in this input would result in a significantly higher or lower fair value. For the three months ended March 31, 2021, the Company recorded a total loss of $0.7 million in other income, net in the Company’s condensed consolidated statements of operations due to the change in fair value of the convertible security. The convertible security is included in deferred acquisition costs, current, in the Company’s condensed consolidated balance sheets.

Embedded Derivative

Loans issued under Company’s credit agreement with the lenders party thereto and Bank of America, N.A., as administrative agent for the lenders (the “Credit Agreement”) contain certain interest adjustment features which were determined to be an embedded derivative requiring bifurcation and separate accounting as the features are not clearly and closely related to the host debt instrument. The embedded derivative was initially valued and remeasured using the “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument with and without the embedded derivative using a discounted cash flow approach. The difference of the estimated fair value between the instrument with the embedded derivative and the instrument without the embedded derivative is the fair value of the embedded derivative. This valuation methodology is based on unobservable estimates and judgements, and therefore is classified as a Level 3 fair value measurement. The significant unobservable input used in the fair value measurement of the embedded derivative is the expected timing of occurrence of an IPO. Fair value measurements are highly sensitive to changes in these inputs and significant changes in these inputs would result in a significantly higher or lower fair value. The initial fair value of the embedded derivative was determined to be nominal for term loans issued prior to 2021 and

5.6

million for the term loans issued in February 2021, which was accounted for as a reduction to the carrying amount of the term loans. For the three months ended March 31, 2021 and 2020, the Company recorded a total gain of

6.6

million and nil, respectively, in other income, net in the Company’s condensed consolidated statements of operations due to the change in fair value of the embedded derivative.

Marketable Equity Securities

The Company’s marketable equity securities consist entirely of its investment in the ordinary shares of Huuuge, Inc., a foreign based independent mobile game developer, which completed its initial public offering and became listed on the Warsaw Stock Exchange in the first quarter of 2021. The Company had carried the investment at cost in other assets on the Company’s consolidated balance sheets in prior fiscal years. The cost basis of the investment was immaterial. The fair value of the marketable equity securities was based on the quoted market price of Huuuge, Inc.’s ordinary shares as of March 31, 2021, and therefore was classified as a Level 1 fair value measurement. For the three months ended March 31, 2021, the Company recorded a total unrealized gain of $5.4 million in other income, net in the Company’s condensed consolidated statements of operations as a result of remeasuring the investment to fair value.

The following table presents a reconciliation of the Company’s financial asset and liability measured at fair value as of March 31, 2021 using significant unobservable inputs (Level 3), and the change in fair value (in thousands):


	Embedded Derivative			Convertible Security
Balance as of December 31, 2020	$	5,680		$	46,500
Addition related to the issuance of term loans in February 2021		5,630			—
Extinguishment of term loans in February 2021		(1,130	)		—
Change in fair value recognized in earnings		6,560			700

Balance as of March 31, 2021	$	16,740		$	47,200

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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