Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Our Business

We are a leading developer, publisher and marketer of interactive entertainment for consumers around the globe. Our products are currently designed for console gaming systems such as Sony's PS4 and PS3 and Microsoft's Xbox One and Xbox 360; and PC, including smartphones and tablets. We deliver our products through physical retail, digital download, online platforms and cloud streaming services.

We endeavor to be the most creative, innovative and efficient company in our industry. Our core strategy is to capitalize on the popularity of video games by developing and publishing high-quality interactive entertainment experiences across a range of genres. We focus on building compelling entertainment franchises by publishing a select number of titles for which we can create sequels and incremental revenue opportunities through add-on content, microtransactions and online play. Most of our intellectual property is internally owned and developed, which we believe best positions us financially and competitively. We have established a portfolio of proprietary software content for the major hardware platforms in a wide range of genres, including action, adventure, family/casual, racing, role-playing, shooter, sports and strategy, which we distribute worldwide. We believe that our commitment to creativity and innovation is a distinguishing strength, enabling us to differentiate our products in the marketplace by combining advanced technology with compelling storylines and characters that provide unique gameplay experiences for consumers. We have created, acquired or licensed a group of highly recognizable brands to match the broad consumer demographics we serve, ranging from adults to children and game enthusiasts to casual gamers. Another cornerstone of our strategy is to support the success of our products in the marketplace through innovative marketing programs and global distribution on platforms and through channels that are relevant to our target audience.

Our revenue is primarily derived from the sale of internally developed software titles and software titles developed by third-parties. Operating margins are dependent in part upon our ability to release new, commercially successful software products and to manage effectively their development costs. We have internal development studios located in Canada, China, Czech Republic, the United Kingdom and the United States.

Software titles published by our Rockstar Games label are primarily internally developed. We expect Rockstar Games, our wholly-owned publisher of the Grand Theft Auto, Max Payne, Midnight Club, Red Dead and other popular franchises, to continue to be a leader in the action / adventure product category and to create groundbreaking entertainment by leveraging our existing titles as well as by developing new brands. We believe that Rockstar has established a uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 260 million units. The latest installment, Grand Theft Auto V, was released on Sony's PS3 and Microsoft's Xbox 360 in September 2013, on Sony's PS4 and Microsoft's Xbox One in November 2014, and on PC in April 2015. Grand Theft Auto V includes access to Grand Theft Auto Online, which initially launched in October 2013. Rockstar Games is also well known for developing brands in other genres, including the L.A. Noire, Bully and Manhunt franchises. Rockstar Games continues to expand on our established franchises by developing sequels, offering downloadable episodes, content and virtual currency, and releasing titles for smartphones and tablets.

Our 2K label has published a variety of popular entertainment properties across all key platforms and across a range of genres including shooter, action, role-playing, strategy, sports and family/casual entertainment. We expect 2K to continue to develop new, successful franchises in the future. 2K's internally owned and developed franchises include the critically acclaimed, multi-million unit selling BioShock, Mafia, Sid Meier's Civilization and XCOM series. In May 2016, 2K launched Battleborn, a new brand created by Gearbox Software, the makers of Borderlands. 2K also publishes successful externally developed franchises, such as Borderlands and Evolve. 2K's realistic sports simulation titles include our flagship NBA 2K series, which continues to be the top-ranked NBA basketball video game, and the WWE 2K professional wrestling series.

We are continuing to execute on our growth initiatives in Asia, where our strategy is to broaden the distribution of our existing products and expand our online gaming presence, especially in China and South Korea. 2K has secured a multi-year license from the NBA to develop an online version of the NBA simulation game in China, Taiwan, South Korea and Southeast Asia. In October 2012, NBA 2K Online, our free-to-play NBA simulation game, which was co-developed by 2K and Tencent, launched commercially on the Tencent Games portal in China.

On January 31, 2017, Take-Two acquired privately-held Social Point (refer to Note 23 of our Consolidated Financial Statements). Founded in 2008 and headquartered in Barcelona, Spain, Social Point is a highly-successful free-to-play mobile game developer and publisher that focuses on delivering high-quality, deeply-engaging entertainment experiences. Social Point currently has multiple profitable titles in the market, including its two most successful games, Dragon City and Monster Legends. In addition, Social Point has a robust development pipeline with a number of exciting games planned for launch over the next two years. Social Point’s games currently are available in North America, Latin America and EMEA, and approximately 50% of its revenue is derived from the United States. In 2016, over 90% of its revenue was generated from mobile platforms.

Trends and Factors Affecting our Business

Product Release Schedule. Our financial results are affected by the timing of our product releases and the commercial success of those titles. Our Grand Theft Auto products in particular have historically accounted for a significant portion of our revenue. Sales of Grand Theft Auto products generated 38.2% of our net revenue for the fiscal year ended March 31, 2017. The timing of our Grand Theft Auto product releases may affect our financial performance on a quarterly and annual basis.

Economic Environment and Retailer Performance. We continue to monitor economic conditions that may unfavorably affect our businesses, such as deteriorating consumer demand, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. Our business is dependent upon a limited number of customers that account for a significant portion of our revenue. Our five largest customers accounted for 65.5%, 58.9% and 64.6% of net revenue during the fiscal years ended March 31, 2017, 2016 and 2015, respectively. As of March 31, 2017 and 2016, five customers comprised 69.9% and 73.9% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 57.6% and 64.1% of such balance at March 31, 2017 and 2016, respectively. We had two customers who accounted for 40.2% and 17.4% of our gross accounts receivable as of March 31, 2017 and three customers who accounted for 35.2%, 16.8% and 12.1% of our gross accounts receivable as of March 31, 2016. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2017 and 2016. The economic environment has affected our customers in the past, and may do so in the future. Bankruptcies or consolidations of our large retail customers could seriously hurt our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers. Certain of our large customers sell used copies of our games, which may negatively affect our business by reducing demand for new copies of our games. While the downloadable content that we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to adversely affect our business.

Hardware Platforms. We derive most of our revenue from the sale of products made for video game consoles manufactured by third-parties, such as Sony's PS4 and PS3 and Microsoft's Xbox One and Xbox 360, which comprised 81.0% of our net revenue by product platform for the fiscal year ended March 31, 2017. The success of our business is dependent upon the consumer acceptance of these consoles and continued growth in their installed base. When new hardware platforms are introduced, demand for software used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. We continually monitor console hardware sales. We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development. Accordingly, our strategy is to focus our development efforts on a select number of the highest quality titles for these platforms, while also expanding our offerings for emerging platforms such as tablets, smartphones and online games.

Online Content and Digital Distribution. The interactive entertainment software industry is delivering a growing amount of content through digital online delivery methods. We provide a variety of online delivered products and offerings. Most of our titles that are available through retailers as packaged goods products are also available through direct digital download (from websites we own and others owned by third-parties). In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles after their initial purchase through downloadable offerings, including add-on content, microtransactions and online play. We also publish an expanding variety of titles for tablets and smartphones, which are delivered to consumers through digital download via the Internet. Note 17 to the Consolidated Financial Statements, "Segment and Geographic Information," discloses that net revenue from digital online channels comprised 51.8% of our net revenue by distribution channel for the fiscal year ended March 31, 2017. We expect online delivery of games and game offerings to continue to grow and to become an increasing part of our business over the long-term.

Product Releases

We released the following key titles in fiscal year 2017:

TitlePublishing LabelInternal or External DevelopmentPlatform(s)Date Released
Battleborn2KExternalXbox One, PS4, PCMay 3, 2016
BioShock: The Collection2KInternal/ExternalXbox One, PS4, PC (digital download only)September 13, 2016
NBA 2K172KInternalXbox 360, Xbox One, PS3, PS4, PCSeptember 20, 2016
XCOM 22KInternalXbox One, PS4September 27, 2016
Mafia III2KInternalXbox One, PS4, PCOctober 7, 2016
WWE 2K172KInternal/ExternalXbox 360, Xbox One, PS3, PS4October 11, 2016
Sid Meier's Civilization VI2KInternalPCOctober 21, 2016

Product Pipeline

We have announced the following key titles to date (this list does not represent all titles currently in development):

TitlePublishing LabelInternal or External DevelopmentPlatform(s)Expected Release Date
Red Dead Redemption 2Rockstar GamesInternalPS4, XBox OneSpring 2018
NBA 2K182KInternalXbox 360, Xbox One, PS3, PS4, Switch, PCSeptember 19, 2017
WWE 2K182KInternal/ExternalTBAFall 2017

Fiscal 2017 Financial Summary

Our net revenue for fiscal year ended March 31, 2017 was led by titles from a variety of our top franchises, primarily Grand Theft Auto, NBA 2K and WWE 2K. Our net revenue increased to $1,779.7 million, an increase of $366.1 million or 25.9% compared to the fiscal year ended March 31, 2016.

For the fiscal year ended March 31, 2017, our net income was $67.3 million, as compared to a net loss of $8.3 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2017 was $0.72, as compared to a loss per share of $0.10 for the fiscal year ended March 31, 2016. Our operating income for the fiscal year ended March 31, 2017 increased compared to the operating loss for fiscal year ended March 31, 2016, due primarily to higher gross profit from sales of our titles and the business reorganization charges incurred in 2016 not recurring in 2017, offset by higher operating expenses, primarily as a result of an increase in selling and marketing expense.

At March 31, 2017 we had $943.4 million of cash and cash equivalents, compared to $798.7 million at March 31, 2016. The increase in cash and cash equivalents from March 31, 2016 was due primarily to cash provided by operating activities partially offset by cash used in investing and financing activities. The increase in net cash provided by operations was due primarily to cash generated from sales of Grand Theft Auto V, NBA 2K17, WWE 2K17, Mafia III, and virtual currency, partially offset by investments in software development and licenses and the funding of internal royalty payments. Net cash used in investing and financing activities related primarily to our acquisition of Social Point and the net share settlements of stock-based awards.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. We base our estimates, assumptions and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our Consolidated Financial Statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are fairly presented in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual amounts could differ significantly from these estimates.

We have identified the policies below as critical to our business operations and the understanding of our financial results and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The effect and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.

Revenue Recognition

We recognize revenue on the sales of software products upon the transfer of title and risk of loss to our customers. Accordingly, we recognize revenue for software titles when there is (1) persuasive evidence that an arrangement with the customer exists, (2) the product is delivered, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. Certain products are sold to customers with a street date (i.e., the earliest date these products may be sold by retailers). For these products we recognize revenue on the later of the street date or the sale date. In addition, some of our software products are sold as full game digital downloads and digital add-on content for which the consumer takes possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is made available to the end user (assuming all other recognition criteria are met).

In providing credit terms to our customers, our payment arrangements typically provide net 30 and 60 day terms. Advances received for licensing and exclusivity arrangements are reported on our Consolidated Balance Sheets as deferred revenue until we meet our performance obligations, at which point we recognize the revenue.

For some of our software products, we enter into multiple element revenue arrangements in which we may provide a combination of full game software, online multi-player functionality, and related post-contract customer support ("PCS") which generally includes additional free unspecified add-on content updates, maintenance, and online support services. For these arrangements, we evaluate the significance of the PCS at the time each game is released based on the guidance in Accounting Standards Codification 985-605, "Software—Revenue Recognition" ("ASC 985-605") to determine if the PCS rises to the level of a separate deliverable. We monitor our initial assessments on an ongoing basis and consider any changes that may arise. In conjunction with our evaluation, we consider such factors as the significance of the development effort, the nature of online features, the extent of anticipated marketing focus on online features, the significance of the online features to the consumers' anticipated overall gameplay experience, and the significance and length of time of our post sale obligations to consumers. Determining whether PCS is significant for a particular game is subjective and requires management's judgment.

When a software arrangement includes multiple elements, the arrangement consideration is allocated to each revenue element based on its relative fair value, based on the vendor specific objective evidence ("VSOE") of fair value for each element. When VSOE of fair value does not exist for all of the elements in the arrangement, ASC 985-605 requires either the use of the residual method or the deferral of revenue until the earlier point at which VSOE of fair value exists for any undelivered element or until only one undelivered element remains. For arrangements that require the deferral of revenue, the related cost of goods sold is deferred and recognized as the related net revenue is recognized. Deferred cost of goods sold includes product costs and licenses. We do not have VSOE for our PCS obligations and in those arrangements where PCS obligations have been determined to be significant we recognize revenue from the sale of software products and the related cost of goods sold ratably over the period we expect to offer the PCS to the consumer ("estimated service period"), assuming all other recognition criteria are met. We also do not have VSOE for our online multi-player functionality; however it is generally delivered at the same time with the full game software. Determining the estimated service period is subjective and requires management's judgment, therefore, the estimated service period may change in the future. The estimated service periods of our current games, with online functionality and related PCS, are generally 12 to 41 months.

When our software products provide insignificant PCS at no additional cost to the consumer, we recognize revenue when the four primary revenue recognition criteria described above have been met for all other deliverables in the arrangement and, in those situations, we estimate and accrue the future costs of providing those services.

Certain of our games provide consumers with the option to purchase virtual currency to use in the game to acquire virtual goods. We currently recognize revenue from the sale of virtual currency, using the game-based model, ratably over the estimated remaining life of the game. Because the service period for our online-enabled games with significant PCS is not an explicitly defined period, we must make an estimate of the service offering period for purposes of recognizing revenue. The estimated service period for current deferred title offerings is based on our estimate of the economic game life of the respective title. Determining the estimated service period (or economic game life) is inherently subjective and is subject to regular revision based on numerous factors and considerations. The factors that we primarily consider as part of our process of initially determining and subsequently reassessing estimated service periods for our titles include:

•the period of time over which the substantial majority of a respective title’s estimated lifetime game sales and in-game virtual currency sales are expected to occur;
•the period of time over which we plan to provide free unspecified add-on content updates, maintenance or other remaining material online support services associated with our online-enabled games;
•the time over which we plan to dedicate internal resources to support the online functionality of a title;
•known and expected online gameplay trends;
•the results from prior analyses;
•the nature of the game (e.g., annual title, genre, period of time between franchise title releases, etc.); and
•the disclosed service periods for competitors’ games.

To the extent we have recorded significant amounts of revenue deferred for specific titles, changes in the estimated service periods could have a material impact on the revenue recognized in a particular period.

As part of our on-going assessment of estimated service periods during the three months ended March 31, 2017, we changed Grand Theft Auto V's estimated service period from 36 to 41 months. The change in estimate resulted in a decrease in net revenues

of $29,367 and income from operations of $27,070 to our fiscal 2017 financial results, with such revenues expected to be recognized in fiscal 2018.

Revenue is recognized after deducting estimated price protection, reserves for returns and other allowances. In circumstances when we do not have a reliable basis to estimate price protection, returns and other allowances or are unable to determine that collection of a receivable is probable, we defer the revenue until we can reliably estimate any related returns and allowances and determine that collection of the receivable is probable.

Price protection and Allowances for Returns

We grant price protection and accept returns in connection with our publishing arrangements. Following reductions in the price of our products, we grant price protection to permit customers to take credits against amounts they owe us with respect to merchandise unsold by them. Our customers must satisfy certain conditions to entitle them to receive price protection or return products, including compliance with applicable payment terms and confirmation of field inventory levels.

Generally, our distribution arrangements with customers do not give them the right to return titles or to cancel firm orders. However, we occasionally accept returns from our customers for stock balancing and make accommodations to customers, which include credits and returns, when demand for specific titles falls below expectations.

We make estimates of future price protection and product returns related to current period product revenue. We estimate the amount of future price protection and returns for published titles based upon, among other factors, historical experience and performance of the titles in similar genres, historical performance of the hardware platform, customer inventory levels, analysis of sell-through rates, sales force and retail customer feedback, industry pricing, market conditions and changes in demand and acceptance of our products by consumers.

Significant management judgments and estimates must be made and used in connection with establishing price protection and the allowance for returns in any accounting period. We believe we can make reliable estimates of price protection and returns. However, actual results may differ from initial estimates as a result of changes in circumstances, market conditions and assumptions. Adjustments to estimates are recorded in the period in which they become known.

Software Development Costs and Licenses

Capitalized software development costs include direct costs incurred for internally developed titles and payments made to third-party software developers under development agreements.

We capitalize internal software development costs (including stock-based compensation, specifically identifiable employee payroll expense and incentive compensation costs related to the completion and release of titles), third-party production and other content costs, subsequent to establishing technological feasibility of a software title. Technological feasibility of a product includes the completion of both technical design documentation and game design documentation. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For products where proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product by product basis.

We enter into agreements with third-party developers that require us to make payments for game development and production services. In exchange for our payments, we receive the exclusive publishing and distribution rights to the finished game title as well as, in some cases, the underlying intellectual property rights. Such agreements typically allow us to fully recover these payments to the developers at an agreed upon royalty rate earned on the subsequent sales of such software, net of any agreed upon costs. Prior to establishing technological feasibility of a product we record any costs incurred by third-party developers as research and development expenses. Subsequent to establishing technological feasibility of a product we capitalize all development and production service payments to third-party developers as software development costs and licenses. We typically enter into agreements with third-party developers after completing the technical design documentation for our products and therefore record the design costs leading up to a signed development contract as research and development expense. When we contract with third-party developers, we generally select those that have proven technology and experience in the genre of the software being developed, which often allows for the establishment of technological feasibility early in the development cycle. In instances where the documentation of the design and technology are not in place prior to an executed contract, we monitor the software development process and require our third-party developers to adhere to the same technological feasibility standards that apply to our internally developed products.

Licenses consist of payments and guarantees made to holders of intellectual property rights for use of their trademarks, copyrights or other intellectual property rights in the development of our products. Agreements with license holders generally provide for guaranteed minimum payments for use of their intellectual property. Certain licenses, especially those related to our sports products, extend over multi-year periods and encompass multiple game titles. In addition to guaranteed minimum payments, these licenses frequently contain provisions that could require us to pay royalties to the license holder based on pre-agreed unit sales thresholds.

Amortization of capitalized software development costs and licenses commences when a product is released and is recorded on a title-by-title basis in cost of goods sold. For capitalized software development costs, amortization is calculated using (1) the proportion of current year revenues to the total revenues expected to be recorded over the life of the title or (2) the straight-line method over the remaining estimated useful life of the title, whichever is greater. For capitalized licenses, amortization is calculated as a ratio of (1) current period revenues to the total revenues expected to be recorded over the remaining life of the title or (2) the contractual royalty rate based on actual net product sales as defined in the licensing agreement, whichever is greater.

We evaluate the future recoverability of capitalized software development costs and licenses on a quarterly basis. Recoverability is primarily assessed based on the actual title's performance. For products that are scheduled to be released in the future, recoverability is evaluated based on the expected performance of the specific products to which the cost or license relates. We utilize a number of criteria in evaluating expected product performance, including: historical performance of comparable products developed with comparable technology; market performance of comparable titles; orders for the product prior to its release; general market conditions; and, past performance of the franchise. When we determine that the value of the title is unlikely to be recovered by product sales, capitalized costs are charged to cost of goods sold in the period in which such determination is made.

We have profit and unit sales based internal royalty programs that allow selected employees to each participate in the success of software titles that they assist in developing. Royalties earned under this program are recorded as a component of cost of goods sold in the period earned.

Fair Value Estimates

The preparation of financial statements in conformity with U.S. GAAP often requires us to determine the fair value of a particular item to fairly present our Consolidated Financial Statements. Without an independent market or another representative transaction, determining the fair value of a particular item requires us to make several assumptions that are inherently difficult to predict and can have a material influence on the conclusion of the appropriate accounting.

Various valuation techniques are used to estimate fair value. These include (1) the market approach where market transactions for identical or comparable assets or liabilities are used to determine the fair value, (2) the income approach, which uses valuation techniques to convert future amounts (for example, future cash flows or future earnings) to a single present amount, and (3) the cost approach, which is based on the amount that would be required to replace an asset. For many of our fair value estimates, including our estimates of the fair value of acquired intangible assets, we use the income approach. Using the income approach requires the use of financial models, which require us to make various estimates including, but not limited to (1) the potential future cash flows for the asset, liability or equity instrument being measured, (2) the timing of receipt or payment of those future cash flows, (3) the time value of money associated with the delayed receipt or payment of such cash flows, and (4) the inherent risk associated with the cash flows (risk premium). Developing these cash flow estimates is inherently difficult and subjective, and, if any of the estimates used to determine the fair value using the income approach turn out to be inaccurate, our financial results may be negatively affected. Furthermore, relatively small changes in many of these estimates can have a significant influence on the estimated fair value resulting from the financial models or the related accounting conclusion reached. For example, a relatively small change in the estimated fair value of an asset may change a conclusion as to whether an asset is impaired. While we are required to make certain fair value assessments associated with the accounting for several types of transactions, the following areas are the most sensitive to the assessments:

Business Combinations—Goodwill and Intangible Assets. We must estimate the fair value of assets acquired and liabilities assumed in a business combination. Our assessment of the estimated fair value of each of these can have a material effect on our reported results as intangible assets are amortized over various lives. Goodwill represents the excess of purchase price over the fair value of the net tangible assets and intangible assets acquired in a business combination. A change in the estimated fair value of an acquired asset or liability assumed often has a direct influence on the amount recognized as goodwill, which is an asset that is not amortized. Often determining the fair value of these acquired assets and liabilities assumed requires an assessment of expected use of the asset, the expected cost to extinguish the liability or our expectations related to the timing and the successful completion of development of an acquired in-process technology. Such estimates are inherently difficult and subjective and can have a material influence on our financial statements.

We use either the income, cost or market approach to aid in our conclusions of such fair values and asset lives. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market approach estimates value based on what other participants in the market have paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the approach ultimately selected is based on the characteristics of the asset and the availability of information.

We test our goodwill for impairment annually, in our second fiscal quarter, or more frequently if events and circumstances indicate the fair value of a reporting unit may be below its carrying amount. A reporting unit is defined as an operating segment or one

level below an operating segment. We have determined that we operate in one reporting unit, which is our operating segment. The determination of whether or not goodwill has become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of our reporting units. Changes in our strategy and/or market conditions could significantly affect these judgments and require reductions to recorded intangible asset balances. We have the option to first perform a qualitative assessment to determine if the fair value of its reporting unit is more likely than not (i.e., a likelihood of more than 50%) less than its carrying value before performing the two-step impairment test. If the two-step impairment test for goodwill is utilized, step one compares the fair value of the reporting unit to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit's goodwill to its implied fair value (i.e., fair value of reporting unit less the fair value of the unit's assets and liabilities, including identifiable intangible assets). If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment is recognized. Based on our annual impairment assessment process for goodwill, no impairments were recorded during the fiscal year ended March 31, 2017 or 2016.

Long-lived assets. We review long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the related carrying amount of an asset or asset group may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset's residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset with future undiscounted cash flows expected to be generated from the use and eventual disposition of the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Inventory Obsolescence. We regularly review inventory quantities on-hand and in the retail channels and record an inventory provision for excess or obsolete inventory based on the future expected demand for our products. Significant changes in demand for our products would affect management's estimates in establishing our inventory provision. We write down inventory based on excess or obsolete inventories determined primarily by future anticipated demand for our products. Inventory write-downs are measured as the difference between the cost of the inventory and net realizable value, based upon assumptions about future demand that are inherently difficult to assess.

Stock-based Compensation

We account for stock-based awards under the fair value method of accounting. The fair value of all stock-based compensation is either capitalized and amortized in accordance with our software development cost accounting policy or recognized as expense on a straight-line basis over the full vesting period of the awards.

We estimate the fair value of time-based awards to employees using our closing stock price on the date of grant. We estimate the fair value of market-based awards using a Monte Carlo Simulation method which takes into account assumptions such as the expected volatility of our common stock, the risk-free interest rate based on the contractual term of the award, expected dividend yield, vesting schedule and the probability that the market conditions of the awards will be achieved.

We apply variable accounting to our non-employee stock-based awards, whereby we remeasure the value of such awards at each balance sheet date and adjust the value of the awards based on its fair value at the end of the reporting period. For non-employee time-based awards fair value is determined by the closing price of our common stock at the end of the reporting period. For non-employee market-based awards fair value is determined using a Monte Carlo Simulation method which takes into account assumptions such as the expected volatility of our common stock, the risk-free interest rate based on the contractual term of the award, expected dividend yield, vesting schedule and the probability that the market conditions of the awards will be achieved. For non-employee performance-based awards we do not record an expense until a performance target(s) have been achieved and once achieved fair value is determined by the closing price of our common stock at the end of the reporting period.

We issue time and performance based restricted stock units to certain employees, which currently can only be settled in cash. These awards are accounted for as liability awards. Changes in the value of the awards from period to period are recorded as stock-based compensation expense over the vesting period.

See Note 15 to the Consolidated Financial Statements for a full discussion of our stock-based compensation arrangements.

Income Taxes

We record a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred income taxes are recognized for differences between

the financial statement and tax bases of assets and liabilities at currently enacted statutory tax rates for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Our history of pre-tax losses represents sufficient evidence for us to determine that the establishment of a valuation allowance against the deferred tax asset is appropriate. This valuation allowance offsets deferred tax assets associated with future tax deductions as well as carryforward items.

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or interpretations thereof. In addition, our filed tax returns are subject to examination by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Recently Issued Accounting Pronouncements

Accounting for Acquisitions or Disposals

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2017-01, Clarifying the Definition of a Business, with the objective of providing additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide new guidance to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The new guidance requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new guidance is expected to reduce the number of transactions that need to be further evaluated. The new standard, as amended, will be effective for the Company prospectively for interim and annual reporting periods beginning on January 1, 2018 (April 1, 2018 for the Company), with early adoption permitted. We intend to early adopt this ASU for the quarterly period ending June 30, 2017 and believe that the evaluation of whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses will be simplified under the new standard.

Accounting for Goodwill

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU eliminates Step 2 from the goodwill impairment test. Under the new guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, this ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 (April 1, 2020 for the Company), including interim periods within those fiscal years, and is applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. While we are currently evaluating the impact of the adoption of this ASU, we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

Accounting for Restricted Cash

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU amends the presentation of restricted cash within the statement of cash flows. The new guidance requires that changes in restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2017 (April 1, 2018 for the Company), including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of this ASU.

Accounting for Stock Compensation

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation. This new guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This update is effective for annual periods beginning after December 15, 2016 (April 1, 2017 for the Company) and interim periods within those annual periods. In the first quarter of fiscal 2018, the Company will apply a modified retrospective transition method to account for the changes under the standard related to income taxes and the policy election for recording forfeitures as they occur.

Accounting for Leases

In February 2016, the FASB issued ASU 2016-02, Leases. This new guidance requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. This update is effective for annual periods, and interim periods within those years, beginning after December 15, 2018 (April 1, 2019 for the Company). This new guidance must be adopted using a modified retrospective approach whereby, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the impact of adopting this update on our Consolidated Financial Statements, which will consist primarily of a balance sheet gross up of our operating leases, mostly for office space.

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB recently issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).

The new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017 (April 1, 2018 for the Company), with early adoption permitted for annual reporting periods beginning after December 15, 2016 (April 1, 2017 for the Company). We will adopt the new standard effective April 1, 2018 using the cumulative catch-up method.

We anticipate this standard will have a material impact on our Consolidated Financial Statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for on-line enabled games that benefit from meaningful game related services such as unspecified content updates and online support services for which we do not have vendor specific objective evidence of fair value ("VSOE").

Under the current accounting standards, for titles that do not have VSOE we recognize the entire sales price ratably over the titles estimated service period. The VSOE requirement will be eliminated under the new standard. Accordingly, we may be required to recognize as revenue a portion of the sales price upon delivery of the software, as compared to the current requirement of recognizing the entire sales price ratably over an estimated offering period.

Results of Operations

The following table sets forth, for the periods indicated, our statements of operations, net revenue by geographic region, net revenue by platform and net revenue by distribution channel:

Fiscal Year Ended March 31,
201720162015
Net revenue$1,779,748100.0%$1,413,698100.0%$1,082,938100.0%
Cost of goods sold1,022,95957.5%813,87357.6%794,86773.4%
Gross profit756,78942.5%599,82542.4%288,07126.6%
Selling and marketing285,45316.0%198,30914.0%235,34121.7%
General and administrative211,40911.9%192,45213.6%175,09316.2%
Research and development137,9157.8%119,8078.5%115,04310.6%
Business reorganization——%71,2855.1%——
Depreciation and amortization30,7071.7%28,8002.0%21,0572.0%
Total operating expenses665,48437.4%610,65343.2%546,53450.5%
Income (loss) from operations91,3055.1%(10,828)(0.8)%(258,463)(23.9)%
Interest and other, net(15,690)(0.9)%(30,205)(2.1)%(31,893)(2.9)%
Gain on long-term investments, net1,3500.1%2,6830.2%17,4761.6%
Income (loss) before income taxes76,9654.3%(38,350)(2.7)%(272,880)(25.2)%
Provision for (benefit from) income taxes9,6620.5%(30,048)(2.1)%6,5900.6%
Net income (loss)$67,3033.8%$(8,302)(0.59)%$(279,470)(25.8)%
Fiscal Year Ended March 31,
201720162015
Net revenue by geographic region:
United States$999,12856.1%$742,96352.6%$623,08057.5%
International780,62043.9%670,73547.4%459,85842.5%
Net revenue by platform:
Console1,440,72481.0%1,167,62382.6%881,51681.4%
PC and other339,02419.0%246,07517.4%201,42218.6%
Net revenue by distribution channel:
Digital online921,73451.8%697,65849.3%455,29942.0%
Physical retail and other858,01448.2%716,04050.7%627,63958.0%

Fiscal Years ended March 31, 2017 and 2016

(thousands of dollars)2017% of net revenue2016% of net revenueIncrease/(decrease)% Increase/(decrease)
Net revenue$1,779,748100.0%$1,413,698100.0%$366,05025.9%
Software development costs and royalties(1)335,67518.9%223,51215.8%112,16350.2%
Internal royalties330,78218.6%328,61023.2%2,1720.7%
Product costs255,91414.4%200,20614.2%55,70827.8%
Licenses100,5885.6%61,5454.4%39,04363.4%
Cost of goods sold1,022,95957.5%813,87357.6%209,08625.7%
Gross profit$756,78942.5%$599,82542.4%$156,96426.2%
(1)Includes $21,056 and $15,323 of stock-based compensation expense in 2017 and 2016, respectively.

For the fiscal year ended March 31, 2017, net revenue increased by $366.1 million, as compared to the prior year. This increase was due primarily to (1) an increase of $265.8 million in revenues from our NBA 2K franchise; (2) an increase of $161.2 million in net revenues from Mafia III, which released in October 2016; and (3) an increase of $63.8 million in net revenues from Civilization VI, which released in October 2016. The increase was partially offset by a decrease of $91.2 million in net revenue from our Grand Theft Auto franchise, due primarily to lower net revenues from Grand Theft Auto V, and a decrease of $80.3 million in net revenues from Evolve, which released in fiscal 2016.

Net revenue from console games increased by $273.1 million, and accounted for 81.0% of our total net revenue in the fiscal year ended March 31, 2017, as compared to 82.6% in the prior year. The increase in net revenues from console games was due primarily to higher net revenue from our NBA 2K franchise and Mafia III. Net revenue from PC and other increased by $92.9 million, as

compared to the prior year, and increased as a percentage of revenue to 19.0% compared to 17.4% in the prior year. The increase in net revenue from PC and other was due primarily to higher net revenues from Civilization VI, which released on the PC in the current year and higher net revenues from Grand Theft Auto V and Grand Theft Auto Online.

Net revenue from digital online channels increased by $224.1 million and accounted for 51.8% of our total net revenue for the fiscal year ended March 31, 2017, as compared to 49.3% in the prior year. The increase in net revenue from digital online channels was due primarily to higher revenues related to our NBA 2K franchise, Civilization VI, Mafia III, and Grand Theft Auto Online, partially offset by lower revenues from Evolve. Recurrent consumer spending (including virtual currency, add-on content, and microtransactions) increased by $97.2 million and accounted for 49.8% of net revenue from digital online channels for the fiscal year ended March 31, 2017, as compared to 51.8% for the prior year. The increase in recurrent consumer spending was due primarily to higher virtual currency net revenues from our NBA 2K franchise. Net revenue from physical retail and other channels increased by $142.0 million and accounted for 48.2% of our total net revenues for the fiscal year ended March 31, 2017, as compared to 50.7% for the prior year. The increase in net revenue from physical retail and other channels was due primarily to higher net revenues from the current year release of Mafia III and the performance of our NBA 2K franchise, which was partially offset by lower net revenues from our Grand Theft Auto franchise.

Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2017 was 42.5%, as compared to 42.4% in the prior year.

Net revenue earned outside of the United States increased by $109.9 million and accounted for 43.9% of our total net revenue in the fiscal year ended March 31, 2017, as compared to 47.4%. The increase in net revenue was due primarily to an increase in net revenues from the current year release of Mafia III and our NBA 2K franchise outside of the United States, which was partially offset by lower net revenues from our Grand Theft Auto franchise. Changes in foreign currency exchange rates decreased net revenue and gross profit by $18.7 million and $8.1 million, respectively, in the fiscal year ended March 31, 2017 as compared to the prior year.

Operating Expenses

(thousands of dollars)2017% of net revenue2016% of net revenueIncrease/(decrease)% Increase/(decrease)
Selling and marketing$285,45316.0%$198,30914.0%$87,14443.9%
General and administrative211,40911.9%192,45213.6%18,9579.9%
Research and development137,9157.8%119,8078.5%18,10815.1%
Business reorganization——%71,2855.1%(71,285)(100.0)%
Depreciation and amortization30,7071.7%28,8002.0%1,9076.6%
Total operating expenses(1)$665,48437.4%$610,65343.2%$54,8319.0%
(1)Includes stock-based compensation expense, which was allocated as follows (in thousands):
20172016
Selling and marketing$9,963$9,425
General and administrative$42,908$40,322
Research and development$7,952$4,926

Foreign currency exchange rates decreased total operating expenses by $11.4 million in the fiscal year ended March 31, 2017 as compared to the prior year.

Selling and marketing

Selling and marketing expenses increased by $87.1 million in the fiscal year ended March 31, 2017 as compared to the prior year, due primarily to $81.4 million in higher advertising expenses. Advertising expenses were higher in the current year due primarily to the fiscal 2017 releases of Mafia III, Battleborn, and Civilization VI, and BioShock: The Collection. These were slightly offset by lower advertising expense for Grand Theft Auto V and Grand Theft Auto Online.

General and administrative

General and administrative expenses increased by $19.0 million for the fiscal year ended March 31, 2017, as compared to the prior year, due to increases in professional fees for our acquisition of Social Point and litigation related charges, stock compensation associated with our management agreement, expenses associated with unclaimed property, personnel expenses due to an increase in headcount, and external software costs.

General and administrative expenses for the fiscal years ended March 31, 2017 and 2016 include occupancy expense (primarily rent, utilities and office expenses) of $15.8 million and $17.2 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $18.1 million for the fiscal year ended March 31, 2017, as compared to the prior year, due primarily to higher production expenses for new titles in development that have not reached technological feasibility as well as higher personnel expenses related to employees in our development studios.

Business Reorganization

Business reorganization expense decreased by $71.3 million for the fiscal year ended March 31, 2017, as compared to the prior year. During the fiscal year ended March 31, 2016, we incurred business reorganization expenses of $71.3 million due primarily to employee separation costs in connection with reorganizing one development studio and closing two development studios. Through March 31, 2017, we have paid $5.4 million related to these reorganization activities and $65.9 million remains accrued for in Accrued expenses and other current liabilities. See Note 20 to the Consolidated Financial Statements.

Depreciation and amortization

Depreciation and amortization expenses increased by $1.9 million for the fiscal year ended March 31, 2017, as compared to the prior year, due primarily to higher purchases of fixed assets for information technology infrastructure and studio build-outs as well as the amortization of intangible assets related to our acquisition of Social Point.

Interest and other, net

(thousands of dollars)2017% of net revenue2016% of net revenueIncrease/(decrease)% Increase/(decrease)
Interest income (expense), net$(21,700)(1.2)%$(29,239)(2.0)%$7,539(25.8)%
Foreign exchange gain (loss)4,9900.3%(1,407)(0.1)%6,397(454.7)%
Other1,0190.1%441—%579131.3%
Interest and other, net$(15,690)(0.9)%$(30,205)(2.1)%$14,515(48.1)%

Interest and other, net was an expense of $15.7 million for the fiscal year ended March 31, 2017, as compared to an expense of $30.2 million for the fiscal year ended March 31, 2016. The decrease was due primarily to a $7.5 million decrease in interest expense, as our 1.75% Convertible Note due 2016 (the "1.75% Convertible Notes") settled in December 2016 and to foreign exchange gains.

Provision for (benefit from) income taxes

Income tax expense was $9.7 million for the fiscal year ended March 31, 2017 as compared to income tax benefit of $30.0 million for the fiscal year ended March 31, 2016. The increase in income tax expense was primarily attributable to a discrete tax benefit of approximately $26.4 million recognized in the previous year relating to a tax deduction and due to an increase in net income in the current year. Our effective rate differed from the federal statutory rate due primarily to changes in valuation allowances related to tax loss and tax credit carryforwards and mix of earnings. Our valuation allowances increased by $13.5 million during the fiscal year ended March 31, 2017 and increased by $37.1 million during the fiscal year ended March 31, 2016 due to changes in net operating loss and tax credit carryforwards.

For the fiscal year ended March 31, 2016, we recognized an income tax benefit based on becoming eligible to claim certain tax deductions in the UK on applicable video games. It is possible that we may become eligible to claim certain tax deductions on additional video games in the future periods, which could result in tax benefits that could have a material impact on our effective tax rate.

As of March 31, 2017, we had gross unrecognized tax benefits, including interest and penalties, of $120.2 million, of which $36.9 million would affect our effective tax rate if realized. For the fiscal year ended March 31, 2017, gross unrecognized tax benefits increased by $64.2 million.

We are no longer subject to audit for U.S. federal income tax returns for periods prior to our fiscal year ended March 31, 2013 and state income tax returns for periods prior to the fiscal year ended March 31, 2012. With few exceptions, we are no longer subject to income tax examinations in non-U.S. jurisdictions for years prior to fiscal year ended March 31, 2012. The IRS is currently examining our income tax return for fiscal years ended March 31, 2015. Certain U.S. state taxing authorities are currently examining our income tax returns for the fiscal years ended March 31, 2013 through March 31, 2015.

We are regularly audited by domestic and foreign taxing authorities. We believe that our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments.

Net income (loss) and earnings (loss) per share

For the fiscal year ended March 31, 2017, our net income was $67.3 million, as compared to a net loss of $8.3 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2017 was $0.72, as compared basic and diluted loss per share of $0.10 for the fiscal year ended March 31, 2016. Basic weighted average shares outstanding were higher compared to the prior fiscal year due primarily to the issuance of 4.6 million shares for settlements of conversions our 1.00% Convertible Notes and our 1.75% Convertible Notes (together, the "Convertible Notes" and net stock-based compensation activity of 1.5 million shares. See Notes 1 and 12 to the Consolidated Financial Statements for additional information regarding earnings (loss) earnings per share.

Fiscal Years Ended March 31, 2016 and 2015

(thousands of dollars)2016% of net revenue2015% of net revenueIncrease/(decrease)% Increase/(decrease)
Net revenue$1,413,698100.0%$1,082,938100.0%$330,76030.5%
Internal royalties328,61023.2%306,71728.3%21,8937.1%
Software development costs and royalties(1)223,51215.8%231,61521.4%(8,103)(3.5)%
Product costs200,20614.2%178,81016.5%21,39612.0%
Licenses61,5454.4%77,7257.2%(16,180)(20.8)%
Cost of goods sold813,87357.6%794,86773.4%19,0062.4%
Gross profit$599,82542.4%$288,07126.6%$311,754108.2%
(1)Includes $15,323 and $17,121 of stock-based compensation expense in 2016 and 2015, respectively.

For the fiscal year ended March 31, 2016, net revenue increased by $330.8 million, as compared to the prior year. This increase was due primarily to an increase of $467.7 million in revenue from our Grand Theft Auto franchise, due principally to higher revenue from the console versions of Grand Theft Auto V and Grand Theft Auto Online, and the release of Grand Theft Auto V and Grand Theft Auto Online for PC in April 2015. Also contributing to the increase was higher revenue from Evolve. These increases were partially offset by lower revenues from the Borderlands franchise, as the prior fiscal year benefited from the release of Borderlands: The Pre-Sequel and lower revenues from our NBA 2K franchise, due to the deferral of revenues from NBA 2K16.

Net revenue from console games increased by $286.1 million, and accounted for 82.6% of our total net revenue in the fiscal year ended March 31, 2016, as compared to 81.4% in the prior year, due primarily to higher revenue from the console versions of Grand Theft Auto V and Grand Theft Auto Online. Net revenue from PC and other increased by $44.7 million, as compared to the prior year, and decreased as a percentage of revenue to 17.4% compared to 18.6% in the prior year. The increase in net revenue from PC was due primarily to higher revenue from the PC versions of Grand Theft Auto V and Grand Theft Auto Online, partially offset by lower revenue from Sid Meier's Civilization: Beyond Earth, which was released for PC in the prior year.

For the fiscal year ended March 31, 2016, net revenue from physical retail and other channels increased by $88.4 million, as compared to the prior year, and decreased as a percentage of total net revenue to 50.7%, compared to 58.0% in the prior year. The increase in net revenue from physical retail and other channels was due primarily to higher revenues from Grand Theft Auto V. Net revenue from digital online channels increased by $242.4 million and accounted for 49.3% of our total net revenue in the fiscal year ended March 31, 2016, as compared to 42.0% in the prior year, driven by increased recurrent consumer spending and full game digital downloads of Grand Theft Auto V. Recurrent consumer spending (including add-on content, microtransactions and online play) increased to 51.8% of net revenue from digital online channels in the fiscal year ended March 31, 2016, as compared to 49.4% of net revenue from digital online channels in the prior year, due primarily to revenue related to virtual currency for Grand Theft Auto Online and our NBA 2K franchise.

Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2016 was 42.4%, as compared to 26.6% in the prior year. The increase was due primarily to (1) lower internal royalties as a percentage of revenue due to the timing of when internal royalties are earned, (2) lower software development costs and royalties as a percentage of net revenues due primarily to the sales mix and a higher percentage of revenues from catalog titles, which typically have lower capitalized software costs, and (3) lower product costs as a percentage of net revenues due primarily to an increase in the proportion of net revenues from digital online channels.

Net revenue earned outside of the United States accounted for 47.4% of our total net revenue in the fiscal year ended March 31, 2016, as compared to 42.5% in the prior year, due to an increase in Grand Theft Auto V sales outside of the United States. Changes

in foreign currency exchange rates decreased net revenue and gross profit by $29.5 million and $18.6 million, respectively, in the fiscal year ended March 31, 2016 as compared to the prior year.

Operating Expenses

(thousands of dollars)2016% of net revenue2015% of net revenueIncrease/(decrease)% Increase/(decrease)
Selling and marketing$198,30914.0%$235,34121.7%$(37,032)(15.7)%
General and administrative192,45213.6%175,09316.2%17,3599.9%
Research and development119,8078.5%115,04310.6%4,7644.1%
Business reorganization71,2855.1%——%71,285100.0%
Depreciation and amortization28,8002.0%21,0572.0%7,74336.8%
Total operating expenses(1)$610,65343.2%$546,53450.5%$64,11911.7%
(1)Includes stock-based compensation expense, which was allocated as follows (in thousands):
20162015
Selling and marketing$9,425$8,798
General and administrative$40,322$33,636
Research and development$4,926$5,691

Foreign currency exchange rates decreased total operating expenses by $13.0 million in the fiscal year ended March 31, 2016 as compared to the prior year.

Selling and marketing

Selling and marketing expenses decreased by $37.0 million in the fiscal year ended March 31, 2016 as compared to the prior year, due primarily to $38.6 million in lower advertising expenses. Advertising expenses were higher in the prior year due primarily to the releases of Evolve, Grand Theft Auto V for PS4 and Xbox One, and Borderlands: The Pre-Sequel, offset in part by expenses for the releases of Battleborn and XCOM 2, and higher expenses for the NBA 2K series. Also contributing to the decrease was $5.3 million in lower performance based compensation at our labels. Partially offsetting the decrease to selling and marketing expenses was $8.3 million in higher third party customer service costs to support our growing online titles.

General and administrative

General and administrative expenses increased by $17.4 million for the fiscal year ended March 31, 2016, as compared to the prior year, due to (1) a $6.7 million increase in stock-based compensation expense, which was due primarily to this year's grants of employee restricted stock units having a higher fair value on the grant date, (2) a $4.9 million increase in personnel costs, due primarily to higher headcount, and (3) a $3.1 million increase in third party legal and tax consulting fees.

General and administrative expenses for the fiscal years ended March 31, 2016 and 2015 include occupancy expense (primarily rent, utilities and office expenses) of $17.2 million and $17.9 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $4.8 million for the fiscal year ended March 31, 2016, as compared to the prior year, due primarily to $8.7 million in higher production expenses for new titles in development that have not reached technological feasibility, and $3.1 million in lower government grants recognized at certain of our development studios. This increase was partially offset by higher payroll capitalization at our development studios due to upcoming product releases.

Business Reorganization

During the fiscal year ended March 31, 2016, we incurred Business reorganization expenses of $71.3 million due primarily to employee separation costs in connection with reorganizing one development studio and closing two development studios.

Through March 31, 2016, we have paid $5.0 million related to these reorganization activities and $66.3 million remains accrued for in Accrued expenses and other current liabilities. See Note 20 to the Consolidated Financial Statements.

Depreciation and amortization

Depreciation and amortization expenses increased by $7.7 million for the fiscal year ended March 31, 2016, as compared to the prior year, due primarily to higher purchases of fixed assets for information technology infrastructure and studio build-outs.

Interest and other, net

(thousands of dollars)2016% of net revenue2015% of net revenue(Increase)/ decrease% Increase/ (decrease)
Interest income (expense), net$(29,239)(2.0)%$(29,901)(2.7)%$662(2.2)%
Foreign exchange loss(1,407)(0.1)%(2,068)(0.2)%661(32.0)%
Other441—%76—%365480.3%
Interest and other, net$(30,205)(2.1)%$(31,893)(2.9)%$1,688(5.3)%

Interest and other, net was an expense of $30.2 million for the fiscal year ended March 31, 2016, as compared to an expense of $31.9 million for the fiscal year ended March 31, 2015. The change of $1.7 million in interest and other, net was due primarily to $2.0 million in increased interest income, due primarily to higher short-term investment balances and lower foreign currency exchange losses of $0.7 million, which was partially offset by $1.4 million in higher interest expense related to the amortization of the discount related to our Convertible Notes.

Gain on long-term investments, net

We recognized a $2.7 million and a $17.5 million net gain on long-term investments for the fiscal years ended March 31, 2016 and 2015, respectively. The net gain in both years was primarily comprised of the sale of our investment in Twitch Interactive, Inc.'s ("Twitch") Class C Preferred stock, which was accounted for under the cost method of accounting.

(Benefit from) provision for income taxes

Income tax benefit was $30.0 million for the fiscal year ended March 31, 2016 as compared to income tax expense of $6.6 million for the fiscal year ended March 31, 2015. The increase in income tax benefit was primarily attributable to the Company becoming eligible to claim certain tax deductions on applicable video games in the United Kingdom, which was recognized during fiscal 2016. Our effective tax rate differed from the federal statutory rate due primarily to the benefit recognized from the tax incentive relating to a prior period and the current period, changes in valuation allowances related to tax loss and tax credit carryforwards anticipated to be utilized and the mix of earnings. Our valuation allowances increased by $37.1 million during the fiscal year ended March 31, 2016 and increased by $92.7 million during the fiscal year ended March 31, 2015 due to changes in net operating loss and tax credit carryforwards.

As of March 31, 2016, we had gross unrecognized tax benefits, including interest and penalties, of $56.0 million, of which $41.3 million would affect our effective tax rate if recognized. For the fiscal year ended March 31, 2016, gross unrecognized tax benefits increased by $13.3 million.

We generally are no longer subject to audit for U.S. federal income tax returns for periods prior to our fiscal year ended March 31, 2012 and state income tax returns for periods prior to the fiscal year ended March 31, 2011. With few exceptions, we are no longer subject to income tax examinations in non-U.S. jurisdictions for years prior to the fiscal year ended March 31, 2011. Certain U.S. state taxing authorities are currently examining our income tax returns from the fiscal years ended March 31, 2011 through March 31, 2013. The determination as to further adjustments to our gross unrecognized tax benefits during the next 12 months is not practicable.

We are regularly audited by domestic and foreign taxing authorities. Audits may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe that our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments.

Net loss and loss per share

For the fiscal year ended March 31, 2016, our net loss was $8.3 million, as compared to $279.5 million in the prior year. Basic and diluted loss per share for the fiscal year ended March 31, 2016 was $0.10, as compared to $3.48 for the fiscal year ended March 31, 2015. Basic and diluted weighted average shares outstanding were higher compared to the prior fiscal year due primarily to the vesting of 4.2 million shares for stock-based awards, which was partially offset by the repurchase of 1.0 million shares during the fiscal year ended March 31, 2016. See Notes 1 and 12 to the Consolidated Financial Statements for additional information regarding (loss) earnings per share

Liquidity and Capital Resources

Our primary cash requirements have been to fund (i) the development, manufacturing and marketing of our published products, (ii) working capital, (iii) acquisitions and (iv) capital expenditures. We expect to rely on cash and cash equivalents as well as on short-term investments, funds provided by our operating activities, and our Credit Agreement to satisfy our working capital needs.

Short-term Investments

As of March 31, 2017, we had $448.9 million of short-term investments, which are highly-liquid in nature and represent an investment of cash that is available for current operations. From time to time, we may purchase additional short-term investments depending on future market conditions and liquidity needs.

Credit Agreement

In April 2016, we entered into a Sixth Amendment to our Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement provides for borrowings of up to $100.0 million which may be increased by up to $100.0 million pursuant to the terms of the Credit Agreement and which is secured by substantially all of our assets and the equity of our subsidiaries. The Credit Agreement expires on August 18, 2019. Revolving loans under the Credit Agreement bear interest at our election of (a) 0.25% to 0.75% above a certain base rate (4.25%at March 31, 2017), or (b) 1.25% to 1.75% above the LIBOR Rate (approximately 2.23% at March 31, 2017), with the margin rate subject to the achievement of certain average liquidity levels. We are also required to pay a monthly fee on the unused available balance, ranging from 0.25% to 0.375% based on availability. We had no outstanding borrowings at March 31, 2017 and 2016.

Availability under the Credit Agreement is unrestricted when liquidity, as defined in the Credit Agreement, is at least $300.0 million. When liquidity is below $300.0 million availability under the Credit Agreement is restricted by our United States and United Kingdom based accounts receivable and inventory balances. The Credit Agreement also allows for the issuance of letters of credit in an aggregate amount of up to $5.0 million.

As of March 31, 2017, there was $98.3 million available to borrow under the Credit Agreement and we had $1.7 million of letters of credit outstanding. At March 31, 2017 and 2016, we had no outstanding borrowings under the Credit Agreement.

The Credit Agreement contains covenants that substantially limit our and our subsidiaries' ability to: create, incur, assume or be liable for indebtedness; dispose of assets outside the ordinary course of business; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of their respective properties; make investments; or pay dividends or make distributions (each subject to certain limitations); or optionally prepay any indebtedness (subject to certain exceptions, including an exception permitting the redemption of the Company's unsecured convertible senior notes upon the meeting of certain minimum liquidity requirements). In addition, the Credit Agreement provides for certain events of default such as nonpayment of principal and interest, breaches of representations and warranties, noncompliance with covenants, acts of insolvency, default on indebtedness held by third parties and default on certain material contracts (subject to certain limitations and cure periods). The Credit Agreement also contains a requirement that we maintain an interest coverage ratio of more than one to one for the trailing twelve month period, if certain average liquidity levels fall below $30,000.

1.75% Convertible Notes Due 2016

On November 16, 2011, we issued $250.0 million aggregate principal amount of 1.75% Convertible Notes due 2016. The issuance of the 1.75% Convertible Notes included $30.0 million related to the exercise of an over-allotment option by the underwriters. Interest on the 1.75% Convertible Notes was payable semi-annually in arrears on June 1st and December 1st of each year, commencing on June 1, 2012. The 1.75% Convertible Notes matured on December 1, 2016, unless earlier repurchased by the Company or converted. We did not have the right to redeem the 1.75% Convertible Notes prior to maturity.

The 1.75% Convertible Notes were convertible at an initial conversion rate of 52.3745 shares of our common stock per $1 principal amount of 1.75% Convertible Notes (representing an initial conversion price of approximately $19.093 per share of common stock for a total of approximately 13,094,000 underlying conversion shares) subject to adjustment in certain circumstances. As of June 1, 2016 until the close of business on the business day immediately preceding the maturity date, holders were eligible to convert their 1.75% Convertible Notes at any time. Prior to September 27, 2016, upon conversion, the 1.75% Convertible Notes were eligible to be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of the Company's common stock. On September 27, 2016, we elected to settle our conversion obligations in connection with the 1.75% Convertible Notes solely in shares of our common stock and accordingly notified the Trustee. As such, we continued to classify these 1.75% Convertible Notes as long-term debt until their maturity.

Prior to December 1, 2016, holders of the 1.75% Convertible Notes elected to convert such notes, and we settled all such notes during the period by converting them to shares of our common stock using the initial conversion rate.

1.00% Convertible Notes Due 2018

On June 18, 2013, we issued $250.0 million aggregate principal amount of 1.00% Convertible Notes due 2018. The 1.00% Convertible Notes were issued at 98.5% of par value for proceeds of $246.3 million. Interest on the 1.00% Convertible Notes is payable semi-annually in arrears on July 1st and January 1st of each year, commencing on January 1, 2014. The 1.00% Convertible Notes mature on July 1, 2018, unless earlier repurchased by the Company or converted. We do not have the right to redeem the 1.00% Convertible Notes prior to maturity. We also granted the underwriters a 30-day option to purchase up to an additional $37.5 million principal amount of 1.00% Convertible Notes to cover overallotments, if any. On July 17, 2013, we closed its public offering of $37.5 million principal amount of our 1.00% Convertible Notes as a result of the underwriters exercising their overallotment option in full on July 12, 2013, bringing the total proceeds to $283.2 million.

The 1.00% Convertible Notes are convertible at an initial conversion rate of 46.4727 shares of our common stock per $1 principal amount of 1.00% Convertible Notes (representing an initial conversion price of approximately $21.52 per share of common stock for a total of approximately 13,361,000 underlying conversion shares) subject to adjustment in certain circumstances. Holders may convert the 1.00% Convertible Notes at their option prior to the close of business on the business day immediately preceding January 1, 2018 only under the following circumstances: (1) during any fiscal quarter commencing after September 30, 2013, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of 1.00% Convertible Notes for each day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such day; or (3) upon the occurrence of specified corporate events. On and after January 1, 2018 until the close of business on the business day immediately preceding the maturity date, holders may convert their 1.00% Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 1.00% Convertible Notes may be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. Our common stock price exceeded 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ended March 31, 2017. Accordingly, as of April 1, 2017, the 1.00% Convertible Notes may be converted at the holder's option through June 30, 2017. During the year ended March 31, 2017, 1.00% Convertible Notes with an aggregate principal value of $19.4 million were settled and additional 1.00% Convertible Notes with aggregate principal value of $0.1 million were tendered for conversion with April 2017 settlement dates. We elected to settle in shares of our common stock, and our current intent and ability, given our option, would be to settle future conversions in shares of our common stock. As such, we have continued to classify these 1.00% Convertible Notes as long-term debt.

Upon the occurrence of certain fundamental changes involving the Company, holders of the 1.00% Convertible Notes may require us to purchase all or a portion of their 1.00% Convertible Notes for cash at a price equal to 100% of the principal amount of the notes to be purchased, plus accrued and unpaid interest (including additional interest, if any) to, but excluding, the fundamental change purchase date.

The indenture governing the 1.00% Convertible Notes contains customary terms and covenants and events of default. If an event of default (as defined therein) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in aggregate principal amount of the 1.00% Convertible Notes then outstanding by notice to the Company and the Trustee, may, and the Trustee at the request of such holders shall, declare 100% of the principal of and accrued and unpaid interest (including additional interest, if any) on all the 1.00% Convertible Notes to be due and payable. In the case of an event of default arising out of certain bankruptcy events, 100% of the principal of and accrued and unpaid interest (including additional interest, if any), on the 1.00% Convertible Notes will automatically become due and payable immediately.

The 1.00% Convertible Notes are senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the 1.00% Convertible Notes; equal in right of payment to our existing and future indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness incurred by our subsidiaries.

Financial Condition

We are subject to credit risks, particularly if any of our receivables represent a limited number of customers or are concentrated in foreign markets. If we are unable to collect our accounts receivable as they become due, it could adversely affect our liquidity and working capital position.

Generally, we have been able to collect our accounts receivable in the ordinary course of business. We do not hold any collateral to secure payment from customers. We have trade credit insurance on the majority of our customers to mitigate accounts receivable risk.

A majority of our trade receivables are derived from sales to major retailers and distributors. Our five largest customers accounted for 65.5%, 58.9%, and 64.6% of net revenue during the fiscal years ended March 31, 2017, 2016, and 2015, respectively. As of March 31, 2017 and 2016, five customers accounted for 69.9% and 73.9% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 57.6% and 64.1% of such balances at March 31, 2017 and 2016, respectively. We had two customers who accounted for 40.2% and 17.4% of our gross accounts receivable as of March 31, 2017 and three customers who accounted for 35.2%, and 16.8% and 12.1% of our gross accounts receivable as of March 31, 2016. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2017 and 2016. Based upon performing ongoing credit evaluations, maintaining trade credit insurance on a majority of our customers and our past collection experience, we believe that the receivable balances from these largest customers do not represent a significant credit risk, although we actively monitor each customer's credit worthiness and economic conditions that may affect our customers' business and access to capital. We are monitoring the current global economic conditions, including credit markets and other factors as it relates to our customers in order to manage the risk of uncollectible accounts receivable.

We believe our current cash, short term investments and projected cash flow from operations, along with availability under our Credit Agreement will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures and commitments on both a short-term and long-term basis.

As of March 31, 2017, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $239.2 million. These balances are dispersed across various locations around the world. We believe that such dispersion meets the business and liquidity needs of our foreign affiliates. In addition, we expect to have the ability to generate sufficient cash domestically to support ongoing operations for the foreseeable future. Consequently, it is the Company's intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. In the event we needed to repatriate funds outside of the U.S., such repatriation may be subject to local laws and tax consequences including foreign withholding taxes or U.S. income taxes. It is not practicable to estimate the tax liability and we would try to minimize the tax effect to the extent possible. However, any repatriation may not result in significant cash payments as the taxable event would likely be offset by the utilization of the then available tax credits.

In January 2013, our Board of Directors authorized the repurchase of up to 7,500,000 shares of our common stock. During the fiscal year ended March 31, 2014, we repurchased 4,217,683 shares of our common stock in the open market for $73.3 million as part of the program. In May 2015, our Board of Directors authorized the repurchase of an additional 6,717,683 shares of our common stock pursuant to the share repurchase program. During the fiscal year ended March 31, 2016 we repurchased 953,647 shares of our common stock in the open market for $26.6 million as part of the program. As of March 31, 2017, we have repurchased a total of 5,171,330 shares of our common stock and have 9,046,353 shares of our common stock that remain available for repurchase under our share repurchase authorization. We are authorized to purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. Repurchases are subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance and other conditions. The program may be suspended or discontinued at any time for any reason.

Our changes in cash flows were as follows:

Fiscal Year Ended March 31,
(thousands of dollars)201720162015
Net cash provided by operating activities$331,429$261,305$212,814
Net cash used in investing activities(129,030)(324,516)(220,141)
Net cash (used in) provided by financing activities(49,772)(48,047)928
Effects of foreign currency exchange rates on cash and cash equivalents(7,973)(1,120)(17,881)
Net increase (decrease) in cash and cash equivalents$144,654$(112,378)$(24,280)

At March 31, 2017 we had $943.4 million of cash and cash equivalents, compared to $798.7 million at March 31, 2016. The increase in cash and cash equivalents from March 31, 2016 was due primarily to cash provided by operating activities partially offset by cash used in investing and financing activities. Net cash provided by operating activites was due primarily to cash generated from sales of Grand Theft Auto V, NBA 2K17, WWE 2K17, Mafia III, and virtual currency, partially offset by investments in software development and licenses and the funding of internal royalty payments. Net cash used in investing and financing activities related primarily to our acquisition of Social Point and the repurchase of common stock and net share settlements of stock-based awards.

Contractual Obligations and Commitments

We have entered into various agreements in the ordinary course of business that require substantial cash commitments over the next several years. Generally, these include:

  • Software Development and Licensing: We make payments to third-party software developers that include contractual payments to developers under several software development agreements that expire at various times through January 2022. Our aggregate outstanding software development commitments assume satisfactory performance by third-party software developers. We also have licensing commitments that primarily consist of obligations to holders of intellectual property rights for use of their trademarks, copyrights, technology or other intellectual property rights in the development of our products.

  • Marketing: We have certain minimum marketing support commitments where we commit to spend specified amounts related to marketing our products. Marketing commitments expire at various times through December 2022.

  • Operating Leases: Our offices are occupied under non-cancelable operating leases expiring at various times through December 2032. We also lease certain furniture, equipment and automobiles under non-cancelable leases expiring through March 2021. Some of the leases have fixed rent increases and also include inducements to enter into the lease. The effect of such amounts are deferred and recognized on a straight-line basis over the related lease term.

  • Purchase obligations primarily related to agreements to purchase services that are enforceable and legally binding on the Company that specifies all significant terms, including fixed, minimum or variable pricing provisions; and the approximate timing of the transactions, expiring at various times through September 2021.

A summary of annual minimum contractual obligations and commitments as of March 31, 2017 is as follows (in thousands of dollars):

Fiscal Year Ending March 31,Software Development and LicensingMarketingOperating LeasesPurchase ObligationsConvertible Notes InterestConvertible NotesTotal
2018$103,726$12,547$27,238$38,243$2,875$—$184,629
201953,42650,45832,3259,8421,438268,149415,638
202034,45012,75023,3864,200——74,786
202115,0323,25020,117205——38,604
202215,0003,25018,26954——36,573
Thereafter—3,25077,987———81,237
Total$221,634$85,505$199,322$52,544$4,313$268,149$831,467

Income Taxes: At March 31, 2017, we had recorded a liability for gross unrecognized tax benefits, including interest and penalties, of $36.9 million, for which we are unable to make a reasonable and reliable estimate of the period in which these liabilities will be settled with the respective tax authorities; therefore, these liabilities have not been included in the contractual obligations table.

Legal and Other Proceedings: We are, or may become, subject to demands and claims (including intellectual property claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial statements. We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material.

On April 11, 2016, we filed a declaratory judgment action in the United States District Court for the Southern District of New York seeking, among other things, a judicial declaration that Leslie Benzies, the former president of one of our subsidiaries with whom we had been in ongoing discussions regarding his separation of employment, is not entitled to any minimum allocation or financial parity with any other person under the applicable royalty plan. We believe we will prevail in this matter, although there can be no assurance of the outcome. On April 12, 2016, Mr. Benzies filed a complaint in the Supreme Court of the State of New York, New York County against us, and certain of our subsidiaries and employees. We removed this case to the United States District Court for the Southern District of New York, but the case was subsequently remanded to state court. The complaint claims damages of at least $150 million and contains allegations of breach of fiduciary duty; fraudulent inducement and fraudulent concealment; aiding and abetting breach of fiduciary duty; breach of various contracts; breach of implied duty of good faith and fair dealing; tortious interference with contract; unjust enrichment; reformation; constructive trust; declaration of rights; constructive discharge; defamation and fraud. Motion practice in both the federal and state actions is ongoing. We believe that we have meritorious defenses to these claims, and we intend to vigorously defend against them and to pursue any counterclaims.

Off-Balance Sheet Arrangements

As of March 31, 2017 and 2016, we did not have any material relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

International Operations

Net revenue earned outside of the United States is principally generated by our operations in Europe, Asia, Australia, Canada and Latin America. For the fiscal years ended March 31, 2017, 2016 and 2015, 43.9%, 47.4% and 42.5%, respectively, of our net revenue was earned outside the United States. We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, shipping delays and international political, regulatory and economic developments, all of which can have a significant effect on our operating results.

Fluctuations in Quarterly Operating Results and Seasonality

We have experienced fluctuations in quarterly and annual operating results as a result of the timing of the introduction of new titles; variations in sales of titles developed for particular platforms; market acceptance of our titles; development and promotional expenses relating to the introduction of new titles; sequels or enhancements of existing titles; projected and actual changes in platforms; the timing and success of title introductions by our competitors; product returns; changes in pricing policies by us and our competitors; the accuracy of retailers' forecasts of consumer demand; the size and timing of acquisitions; the timing of orders from major customers; and order cancellations and delays in product shipment. Sales of our products are also seasonal, with peak shipments typically occurring in the fourth calendar quarter as a result of increased demand for products during the holiday season. For certain of our software products with multiple element revenue arrangements where we do not have VSOE for each element and the deliverables are deemed more-than-inconsequential, we defer the recognition of our net revenues over an estimated service period which generally ranges from 12 to 41 months. As a result, the quarter in which we generate the highest net sales volume may be different from the quarter in which we recognize the highest amount of net revenues. Quarterly comparisons of operating results are not necessarily indicative of future operating results.

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