Fair Value Measurements

9 Months Ended

Sep. 30, 2021

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 September 30, 2021
	Balance Sheet Location	Total		Level 1		Level 2		Level 3
Financial Assets:
Money market funds	Cash and cash equivalents	$	820,594	$	820,594	$	—	$	—
Marketable equity securities	Prepaid expenses and other current assets	5,165		5,165
Total financial assets		$	825,759	$	825,759	$	—	$	—
Financial Liability:
Convertible security	Deferred acquisition costs, current	$	25,000	$	25,000	$	—	$	—


				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 "Seller"). 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 and a discount for lack of marketability derived based on the remaining term of the lock up period related to the Company's Class A common stock into which the convertible security is convertible. 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 and nine months ended September 30, 2021, the Company recorded a total loss of $1.0 million and $3.5 million, respectively, in other income (expense), 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 recorded in deferred acquisition costs, current, in the Company’s condensed consolidated balance sheets. In August 2021, the Seller elected to convert 50% of the convertible security with a stated value of $20.0 million into 405,205 shares of the Company's Class A common stock at a conversion price of $49.4 per share. The lock-up period to which the Class A common stock was subject expired during the three-month period ended September 30, 2021. As such, the fair value of the related convertible security was transferred from Level 3 to Level 1.

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. After the effectiveness of the IPO Registration Statement, the applicable margins for both the Term Loans and the Revolving Credit Loans were reduced by 0.25% on April 16, 2021 in accordance with the pre-existing terms of the Credit Agreement. As a result, the embedded derivative for the contingent interest adjustment feature related to the term loans was settled. The Company remeasured the embedded derivative to its fair value of $17.8 million on the settlement date, and then reclassified it to the carrying amount of the term loans. For the three and nine months ended September 30, 2021, the Company recorded a total gain of nil and $7.6 million, respectively, in other income (expense), net in the Company’s condensed consolidated statements of operations due to the change in fair value of the embedded derivative. There was no gain or loss related to the change in fair value of the embedded derivative during the same periods in 2020.

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 September 30, 2021, and therefore was classified as a Level 1 fair value measurement. For the three and nine months ended September 30, 2021, the Company recorded a total unrealized gain of $0.4 million and $5.2 million, respectively, in other income (expense), 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 September 30, 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	7,640		3,500
Settlements	(17,820)		(25,000)
Transfers	—		(25,000)
Balance as of September 30, 2021	$	—	$	—

- 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.

+ References + Details