filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| December 31, 2021 | March 31, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 986,741 | $ | 1,422,884 | |||||||
| Short-term investments | 1,479,013 | 1,308,692 | |||||||||
| Restricted cash and cash equivalents | 267,010 | 538,822 | |||||||||
| Accounts receivable, net of allowances of $350 and $350 at December 31, 2021 and March 31, 2021, respectively | 647,907 | 552,762 | |||||||||
| Inventory | 11,678 | 17,742 | |||||||||
| Software development costs and licenses | 47,576 | 43,443 | |||||||||
| Deferred cost of goods sold | 15,369 | 15,524 | |||||||||
| Prepaid expenses and other | 249,719 | 320,646 | |||||||||
| Total current assets | 3,705,013 | 4,220,515 | |||||||||
| Fixed assets, net | 235,957 | 149,364 | |||||||||
| Right-of-use assets | 212,491 | 164,763 | |||||||||
| Software development costs and licenses, net of current portion | 737,935 | 490,892 | |||||||||
| Goodwill | 679,997 | 535,306 | |||||||||
| Other intangibles, net | 274,297 | 121,591 | |||||||||
| Deferred tax assets | 77,721 | 90,206 | |||||||||
| Long-term restricted cash and cash equivalents | 103,445 | 98,541 | |||||||||
| Other assets | 331,097 | 157,040 | |||||||||
| Total assets | $ | 6,357,953 | $ | 6,028,218 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 100,720 | $ | 71,001 | |||||||
| Accrued expenses and other current liabilities | 1,026,246 | 1,204,090 | |||||||||
| Deferred revenue | 910,899 | 928,029 | |||||||||
| Lease liabilities | 34,480 | 31,595 | |||||||||
| Total current liabilities | 2,072,345 | 2,234,715 | |||||||||
| Non-current deferred revenue | 68,218 | 37,302 | |||||||||
| Non-current lease liabilities | 209,646 | 159,671 | |||||||||
| Non-current software development royalties | 113,991 | 110,127 | |||||||||
| Other long-term liabilities | 228,016 | 154,511 | |||||||||
| Total liabilities | $ | 2,692,216 | $ | 2,696,326 | |||||||
| Commitments and contingencies (See Note 13) | |||||||||||
| Stockholders' equity: | |||||||||||
| Preferred stock, $0.01 par value, 5,000 shares authorized; no shares issued and outstanding at December 31, 2021 and March 31, 2021 | — | — | |||||||||
| Common stock, $0.01 par value, 200,000 shares authorized; 139,007 and 137,584 shares issued and 115,326 and 115,163 outstanding at December 31, 2021 and March 31, 2021, respectively | 1,391 | 1,376 | |||||||||
| Additional paid-in capital | 2,541,492 | 2,288,781 | |||||||||
| Treasury stock, at cost; 23,681 and 22,421 common shares at December 31, 2021 and March 31, 2021, respectively | (1,020,584) | (820,572) | |||||||||
| Retained earnings | 2,178,021 | 1,870,971 | |||||||||
| Accumulated other comprehensive loss | (34,583) | (8,664) | |||||||||
| Total stockholders' equity | $ | 3,665,737 | $ | 3,331,892 | |||||||
| Total liabilities and stockholders' equity | $ | 6,357,953 | $ | 6,028,218 |
See accompanying Notes.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share amounts)
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net revenue | $ | 903,252 | $ | 860,889 | $ | 2,574,796 | $ | 2,533,341 | |||||||||||||||
| Cost of goods sold | 350,379 | 346,244 | 1,136,776 | 1,255,438 | |||||||||||||||||||
| Gross profit | 552,873 | 514,645 | 1,438,020 | 1,277,903 | |||||||||||||||||||
| Selling and marketing | 135,286 | 139,906 | 375,159 | 338,376 | |||||||||||||||||||
| General and administrative | 130,706 | 98,624 | 362,484 | 292,230 | |||||||||||||||||||
| Research and development | 116,656 | 86,428 | 310,458 | 233,752 | |||||||||||||||||||
| Depreciation and amortization | 15,996 | 14,007 | 44,642 | 40,116 | |||||||||||||||||||
| Business reorganization | 123 | (377) | 546 | (138) | |||||||||||||||||||
| Total operating expenses | 398,767 | 338,588 | 1,093,289 | 904,336 | |||||||||||||||||||
| Income from operations | 154,106 | 176,057 | 344,731 | 373,567 | |||||||||||||||||||
| Interest and other, net | (5,629) | 1,098 | (7,228) | 12,022 | |||||||||||||||||||
| Gain on long-term investments, net | 3,662 | 39,291 | 6,054 | 38,636 | |||||||||||||||||||
| Income before income taxes | 152,139 | 216,446 | 343,557 | 424,225 | |||||||||||||||||||
| Provision for income taxes | 7,642 | 34,198 | 36,507 | 54,151 | |||||||||||||||||||
| Net income | $ | 144,497 | $ | 182,248 | $ | 307,050 | $ | 370,074 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic earnings per share | $ | 1.25 | $ | 1.58 | $ | 2.66 | $ | 3.23 | |||||||||||||||
| Diluted earnings per share | $ | 1.24 | $ | 1.57 | $ | 2.63 | $ | 3.20 |
See accompanying Notes.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income | $ | 144,497 | $ | 182,248 | $ | 307,050 | $ | 370,074 | |||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Foreign currency translation adjustment | (13,497) | 30,135 | (24,096) | 53,697 | |||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Change in unrealized gains | — | — | — | (3,817) | |||||||||||||||||||
| Reclassification to earnings | — | (600) | — | (1,933) | |||||||||||||||||||
| Tax effect on effective cash flow hedges | — | — | — | 845 | |||||||||||||||||||
| Change in fair value of effective cash flow hedge | — | (600) | — | (4,905) | |||||||||||||||||||
| Change in fair value of available for sale securities | (1,339) | (295) | (1,823) | 4,000 | |||||||||||||||||||
| Other comprehensive (loss) income | (14,836) | 29,240 | (25,919) | 52,792 | |||||||||||||||||||
| Comprehensive income | $ | 129,661 | $ | 211,488 | $ | 281,131 | $ | 422,866 |
See accompanying Notes.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
| Nine Months Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | 307,050 | $ | 370,074 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Amortization of software development costs and licenses | 112,117 | 113,392 | |||||||||
| Impairment of software development costs and licenses | 65,689 | — | |||||||||
| Depreciation | 44,732 | 40,790 | |||||||||
| Amortization of intellectual property | 49,506 | 22,006 | |||||||||
| Stock-based compensation | 142,540 | 139,835 | |||||||||
| Gain on long-term investments | (6,054) | (40,588) | |||||||||
| Other, net | 12,200 | (89) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (85,788) | 19,544 | |||||||||
| Inventory | 5,929 | (6,452) | |||||||||
| Software development costs and licenses | (376,455) | (144,951) | |||||||||
| Prepaid expenses and other assets | (123,709) | (49,321) | |||||||||
| Deferred revenue | 10,615 | 208,182 | |||||||||
| Deferred cost of goods sold | 126 | 463 | |||||||||
| Accounts payable, accrued expenses and other liabilities | (139,337) | 114,776 | |||||||||
| Net cash provided by operating activities | 19,161 | 787,661 | |||||||||
| Investing activities: | |||||||||||
| Change in bank time deposits | (43,921) | 73,000 | |||||||||
| Proceeds from available-for-sale securities | 494,919 | 363,628 | |||||||||
| Purchases of available-for-sale securities | (632,530) | (563,815) | |||||||||
| Purchases of fixed assets | (133,392) | (40,207) | |||||||||
| Proceeds from sale of long-term investment | — | 22,472 | |||||||||
| Purchases of long-term investments | (8,650) | (16,452) | |||||||||
| Business acquisitions | (157,291) | (79,525) | |||||||||
| Other | 1,100 | — | |||||||||
| Net cash used in investing activities | (479,765) | (240,899) | |||||||||
| Financing activities: | |||||||||||
| Tax payment related to net share settlements on restricted stock awards | (59,131) | (60,586) | |||||||||
| Issuance of common stock | 19,658 | 14,215 | |||||||||
| Loan repayment | (235) | — | |||||||||
| Repurchase of common stock | (200,012) | — | |||||||||
| Net cash used in financing activities | (239,720) | (46,371) | |||||||||
| Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents | (2,727) | 19,006 | |||||||||
| Net change in cash, cash equivalents, and restricted cash and cash equivalents | (703,051) | 519,397 | |||||||||
| Cash, cash equivalents, and restricted cash and cash equivalents, beginning of year (1) | 2,060,247 | 1,993,392 | |||||||||
| Cash, cash equivalents, and restricted cash and cash equivalents, end of period (1) | $ | 1,357,196 | $ | 2,512,789 |
(1) Cash, cash equivalents and restricted cash and cash equivalents shown on our Condensed Consolidated Statements of Cash Flow includes amounts in the Cash and cash equivalents, Restricted cash and cash equivalents, and Long-term restricted cash and cash equivalents on our Condensed Consolidated Balance Sheet.
See accompanying Notes.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(in thousands)
| Three Months Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholder's Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 138,891 | $ | 1,390 | $ | 2,475,085 | (23,681) | $ | (1,020,584) | $ | 2,033,524 | $ | (19,747) | $ | 3,469,668 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 144,497 | — | 144,497 | ||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | — | — | (13,497) | (13,497) | ||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on available-for-sale securities, net of taxes | — | — | — | — | — | — | (1,339) | (1,339) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 61,741 | — | — | — | — | 61,741 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and cancellations | 76 | 1 | (1) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net share settlement of restricted stock awards | (32) | (1) | (5,760) | — | — | — | — | (5,761) | ||||||||||||||||||||||||||||||||||||||||||
| Employee share purchase plan settlement | 72 | 1 | 10,427 | — | — | — | — | 10,428 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 139,007 | $ | 1,391 | $ | 2,541,492 | (23,681) | $ | (1,020,584) | $ | 2,178,021 | $ | (34,583) | $ | 3,665,737 |
| Three Months Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 137,349 | $ | 1,373 | $ | 2,285,394 | (22,421) | $ | (820,572) | $ | 1,469,911 | $ | (34,824) | $ | 2,901,282 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 182,248 | — | 182,248 | ||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | — | — | 30,135 | 30,135 | ||||||||||||||||||||||||||||||||||||||||||
| Changes in gains on cash flow hedge, net | — | — | — | — | — | — | (600) | (600) | ||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on available-for-sale securities, net of tax | — | — | — | — | — | — | (295) | (295) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 47,192 | — | — | — | — | 47,192 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and cancellations | 141 | 2 | (1) | — | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||
| Net share settlement of restricted stock awards | (60) | (1) | (12,383) | — | — | — | — | (12,384) | ||||||||||||||||||||||||||||||||||||||||||
| Employee share purchase plan settlement | 74 | 1 | 7,711 | — | — | — | — | 7,712 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 137,504 | $ | 1,375 | $ | 2,327,913 | (22,421) | $ | (820,572) | $ | 1,652,159 | $ | (5,584) | $ | 3,155,291 |
See accompanying Notes.
| Nine Months Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 137,584 | $ | 1,376 | $ | 2,288,781 | (22,421) | $ | (820,572) | $ | 1,870,971 | $ | (8,664) | $ | 3,331,892 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 307,050 | — | 307,050 | ||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | — | — | (24,096) | (24,096) | ||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on available-for-sale securities, net of taxes | — | — | — | — | — | — | (1,823) | (1,823) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 198,045 | — | — | — | — | 198,045 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchased common stock | — | — | — | (1,260) | (200,012) | — | — | (200,012) | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and cancellations | 1,096 | 11 | (11) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net share settlement of restricted stock awards | (330) | (3) | (59,128) | — | — | — | — | (59,131) | ||||||||||||||||||||||||||||||||||||||||||
| Employee share purchase plan settlement | 142 | 2 | 19,656 | — | — | — | — | 19,658 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares related to Nordeus acquisition | 515 | 5 | 94,149 | — | — | — | — | 94,154 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 139,007 | $ | 1,391 | $ | 2,541,492 | (23,681) | $ | (1,020,584) | $ | 2,178,021 | $ | (34,583) | $ | 3,665,737 |
| Nine Months Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 135,927 | $ | 1,359 | $ | 2,134,748 | (22,421) | $ | (820,572) | $ | 1,282,085 | $ | (58,376) | $ | 2,539,244 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 370,074 | — | 370,074 | ||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | — | — | 53,697 | 53,697 | ||||||||||||||||||||||||||||||||||||||||||
| Change in gains on cash flow hedge, net | — | — | — | — | — | — | (4,905) | (4,905) | ||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on available-for-sale securities, net of taxes | — | — | — | — | — | — | 4,000 | 4,000 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 141,904 | — | — | — | — | 141,904 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and cancellations | 1,235 | 13 | (12) | — | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||
| Net share settlement of restricted stock awards | (401) | (5) | (60,581) | — | — | — | — | (60,586) | ||||||||||||||||||||||||||||||||||||||||||
| Employee share purchase plan settlement | 139 | 2 | 14,213 | — | — | — | — | 14,215 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares related to Playdots, Inc. acquisition | 604 | 6 | 97,641 | — | — | — | — | 97,647 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 137,504 | $ | 1,375 | $ | 2,327,913 | (22,421) | $ | (820,572) | $ | 1,652,159 | $ | (5,584) | $ | 3,155,291 |
See accompanying Notes.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Take-Two Interactive Software, Inc. (the "Company," "we," "us," or similar pronouns) was incorporated in the state of Delaware in 1993. We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe. We develop and publish products principally through Rockstar Games, 2K, Private Division, and T2 Mobile Games, which includes Socialpoint, Playdots, and Nordeus. Our products are designed for console systems, including but not limited to, Sony's PlayStation®4 ("PS4") and PlayStation 5 ("PS5"), Microsoft's Xbox One® ("Xbox One") and Xbox Series X|S ("Xbox Series X|S"), and Nintendo's Switch™ ("Switch"), personal computers ("PC"), and mobile including smart phones and tablets ("Mobile"), and are delivered through physical retail, digital download, online platforms, and cloud streaming services.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements are unaudited and include the accounts of the Company and its wholly-owned subsidiaries and, in our opinion, reflect all normal and recurring adjustments necessary for the fair presentation of our financial position, results of operations, and cash flows. Interim results may not be indicative of the results that may be expected for the full fiscal year. All intercompany accounts and transactions have been eliminated in consolidation. The preparation of these Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. As permitted under U.S. GAAP, interim accounting for certain expenses, including income taxes, are based on full year assumptions when appropriate. Actual results could differ materially from those estimates, including as a result of the COVID-19 pandemic, which may affect economic conditions in a number of different ways and result in uncertainty and risk.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), although we believe that the disclosures are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with our annual Consolidated Financial Statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021.
Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.
Recently Adopted Accounting Pronouncements
Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. We adopted this update effective April 1, 2021. The adoption of this update did not have a material impact on our Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
Accounting for Government Assistance
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on any entity's financial statements. ASU 2021-10 is effective for fiscal years, and interim periods within those fiscal years, beginning December 15, 2021 (April 1, 2022 for the Company), with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our disclosures.
Accounting for Contract Assets and Contract Liabilities
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under this new standard, deferred revenue acquired in a business
combination is measured pursuant to ASC 606, Revenue from Contracts with Customers, rather than its assumed acquisition date fair value under the current guidance. ASU 2021-08 is effective for fiscal years, and interim periods within those fiscal years, beginning December 15, 2022 (April 1, 2023 for the Company), with early adoption permitted. However, adoption in an interim period other than the first fiscal quarter requires an entity to apply the new guidance to all prior business combinations that have occurred since the beginning of the annual period in which the new guidance is adopted. We expect to early adopt this update for our fiscal year 2023 on April 1, 2022. We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements.
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of revenue
Timing of recognition
Product revenue is primarily comprised of the portion of revenue from software products that is recognized when the customer takes control of the product (i.e., upon delivery of the software product).
Service and other revenue is primarily comprised of revenue from game related services, virtual currency transactions, and in-game purchases which are recognized over an estimated service period.
Net revenue by timing of recognition was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| Service and other (over time) | $ | 604,587 | $ | 578,830 | $ | 1,847,250 | $ | 1,662,456 | ||||||||||||||||||
| Product (point in time) | 298,665 | 282,059 | 727,546 | 870,885 | ||||||||||||||||||||||
| Total net revenue | $ | 903,252 | $ | 860,889 | $ | 2,574,796 | $ | 2,533,341 |
Content
Recurrent consumer spending revenue is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases.
Full game and other revenue primarily includes the initial sale of full game software products, which may include offline and/or significant game related services.
Net revenue by content was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| Recurrent consumer spending | $ | 547,788 | $ | 552,320 | $ | 1,683,703 | $ | 1,569,070 | ||||||||||||||||||
| Full game and other | 355,464 | 308,569 | 891,093 | 964,271 | ||||||||||||||||||||||
| Total net revenue | $ | 903,252 | $ | 860,889 | $ | 2,574,796 | $ | 2,533,341 |
Geography
We attribute net revenue to geographic regions based on software product destination. Net revenue by geographic region was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| United States | $ | 534,869 | $ | 528,324 | $ | 1,542,975 | $ | 1,502,397 | ||||||||||||||||||
| International | 368,383 | 332,565 | 1,031,821 | 1,030,944 | ||||||||||||||||||||||
| Total net revenue | $ | 903,252 | $ | 860,889 | $ | 2,574,796 | $ | 2,533,341 |
Platform
Net revenue by platform was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| Console | $ | 665,535 | $ | 656,079 | $ | 1,864,058 | $ | 1,909,033 | ||||||||||||||||||
| PC and other | 133,907 | 135,565 | 409,554 | 439,511 | ||||||||||||||||||||||
| Mobile | 103,810 | 69,245 | 301,184 | 184,797 | ||||||||||||||||||||||
| Total net revenue | $ | 903,252 | $ | 860,889 | $ | 2,574,796 | $ | 2,533,341 |
Distribution channel
Our products are delivered through digital online services (digital download, online platforms, and cloud streaming) and physical retail and other.
Net revenue by distribution channel was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| Digital online | $ | 795,715 | $ | 743,141 | $ | 2,315,618 | $ | 2,204,401 | ||||||||||||||||||
| Physical retail and other | 107,537 | 117,748 | 259,178 | 328,940 | ||||||||||||||||||||||
| Total net revenue | $ | 903,252 | $ | 860,889 | $ | 2,574,796 | $ | 2,533,341 |
Deferred Revenue
We record deferred revenue when payments are due or received in advance of the fulfillment of our associated performance obligations. Deferred revenue, including current and non-current balances as of December 31, 2021 and March 31, 2021 were $979,117 and $965,331, respectively. For the three months ended December 31, 2021, the additions to our deferred revenue balance were due primarily to cash payments received or due in advance of satisfying our performance obligations, while the reductions to our deferred revenue balance were due primarily to the recognition of revenue upon fulfillment of our performance obligations, both of which were in the ordinary course of business.
During the three months ended December 31, 2021 and 2020, $121,324 and $109,713, respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the respective period. During the nine months ended December 31, 2021 and 2020, $862,870 and $722,658, respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the respective period. As of December 31, 2021, the aggregate amount of contract revenue allocated to unsatisfied performance obligations is $1,185,724, which includes our deferred revenue balances and amounts to be invoiced and recognized in future periods. We expect to recognize approximately $1,024,805 of this balance as
revenue over the next 12 months, and the remainder thereafter. This balance does not include an estimate for variable consideration arising from sales-based royalty license revenue in excess of the contractual minimum guarantee.
As of December 31, 2021 and March 31, 2021, our contract asset balances were $104,889 and $105,554, respectively, which are recorded within Prepaid expenses and other in our Condensed Consolidated Balance Sheets.
3. MANAGEMENT AGREEMENT
In November 2017, we entered into a new management agreement (the "2017 Management Agreement"), with ZelnickMedia Corporation ("ZelnickMedia") that replaces our previous agreement with ZelnickMedia and pursuant to which ZelnickMedia provides financial and management consulting services to the Company through March 31, 2024. The 2017 Management Agreement became effective January 1, 2018. As part of the 2017 Management Agreement, Strauss Zelnick, the President of ZelnickMedia, continues to serve as Executive Chairman and Chief Executive Officer of the Company, and Karl Slatoff, a partner of ZelnickMedia, continues to serve as President of the Company. The 2017 Management Agreement provides for an annual management fee of $3,100 over the term of the agreement and a maximum annual bonus opportunity of $7,440 over the term of the agreement, based on the Company achieving certain performance thresholds.
In consideration for ZelnickMedia's services, we recorded consulting expense (a component of General and administrative expenses) of $3,446 and $2,655 during the three months ended December 31, 2021 and 2020, respectively, and $6,856 and $7,925 during the nine months ended December 31, 2021 and 2020, respectively. We recorded stock-based compensation expense for restricted stock units granted to ZelnickMedia, which is included in General and administrative expenses, of $7,365 and $6,887 during the three months ended December 31, 2021 and 2020, respectively, and $21,948 and $20,544 during the nine months ended December 31, 2021 and 2020, respectively.
In connection with the 2017 Management Agreement, we have granted restricted stock units to ZelnickMedia as follows:
| Nine Months Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Time-based | 51 | 79 | |||||||||
| Market-based(1) | 93 | 145 | |||||||||
| Performance-based(1) | |||||||||||
| IP | 16 | 24 | |||||||||
| Recurrent Consumer Spending ("RCS") | 16 | 24 | |||||||||
| Total Performance-based | 32 | 48 | |||||||||
| Total Restricted Stock Units | 176 | 272 |
(1)Represents the maximum number of shares eligible to vest.
Time-based restricted stock units granted in fiscal year 2022 will vest on April 13, 2023, and those granted in fiscal year 2021 will vest on April 13, 2022, in each case provided that the 2017 Management Agreement has not been terminated prior to such vesting date.
Market-based restricted stock units granted in fiscal year 2022 are eligible to vest on April 13, 2023, and those granted in fiscal year 2021 are eligible to vest on April 13, 2022, in each case provided that the 2017 Management Agreement has not been terminated prior to such vesting date. Market-based restricted stock units are eligible to vest based on the Company's Total Shareholder Return (as defined in the relevant grant agreement) relative to the Total Shareholder Return (as defined in the relevant grant agreement) of the companies that constitute the NASDAQ Composite Index as of the grant date measured over a two-year period. To earn the target number of market-based restricted stock units (which represents 50% of the number of the market-based restricted stock units set forth in the table above), the Company must perform at the 50th percentile, with the maximum number of market-based restricted stock units earned if the Company performs at the 75th percentile.
Performance-based restricted stock units granted in fiscal year 2022 are eligible to vest on April 13, 2023, and those granted in fiscal year 2021 are eligible to vest on April 13, 2022, in each case provided that the 2017 Management Agreement has not been terminated prior to such vesting date. The performance-based restricted stock units, of which 50% are tied to "IP" and 50% to "RCS" (as defined in the relevant grant agreement), are eligible to vest based on the Company's achievement of certain performance metrics (as defined in the relevant grant agreement) of either individual product releases of "IP" or "RCS" measured over a two-year period. The target number of performance-based restricted stock units that may be earned pursuant to
these grants is equal to 50% of the grant amounts set forth in the above table (the numbers in the table represent the maximum number of performance-based restricted stock units that may be earned). At the end of each reporting period, we assess the probability of each performance metric and upon determination that certain thresholds are probable, we record expense for the unvested portion of the shares of performance-based restricted stock units.
The unvested portion of time-based, market-based and performance-based restricted stock units held by ZelnickMedia were 449 and 588 as of December 31, 2021 and March 31, 2021, respectively. During the three and nine months ended December 31, 2021, 315 restricted stock units previously granted to ZelnickMedia vested, and no restricted stock units were forfeited by ZelnickMedia.
4. FAIR VALUE MEASUREMENTS
Recurring fair value measurements
The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, prepaid expenses and other, accounts payable, and accrued expenses and other current liabilities, approximate fair value because of their short maturities.
We follow a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of "observable inputs" and minimize the use of "unobservable inputs." The three levels of inputs used to measure fair value are as follows:
-
Level 1—Quoted prices in active markets for identical assets or liabilities.
-
Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data.
-
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
The table below segregates all assets and liabilities that are measured at fair value on a recurring basis (which is measured at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
| December 31, 2021 | Quoted prices in active markets for identical assets (level 1) | Significant other observable inputs (level 2) | Significant unobservable inputs (level 3) | Balance Sheet Classification | |||||||||||||||||||||||||
| Money market funds | $ | 475,950 | $ | 475,950 | $ | — | $ | — | Cash and cash equivalents | ||||||||||||||||||||
| Bank-time deposits | 115,000 | 115,000 | — | — | Cash and cash equivalents | ||||||||||||||||||||||||
| Commercial paper | 16,645 | — | 16,645 | — | Cash and cash equivalents | ||||||||||||||||||||||||
| Corporate bonds | 9,826 | — | 9,826 | — | Cash and cash equivalents | ||||||||||||||||||||||||
| Corporate bonds | 706,698 | — | 706,698 | — | Short-term investments | ||||||||||||||||||||||||
| Bank-time deposits | 622,683 | 622,683 | — | — | Short-term investments | ||||||||||||||||||||||||
| US Treasuries | 35,711 | 35,711 | — | — | Short-term investments | ||||||||||||||||||||||||
| Commercial paper | 113,921 | — | 113,921 | — | Short-term investments | ||||||||||||||||||||||||
| Money market funds | 264,018 | 264,018 | — | — | Restricted cash and cash equivalents | ||||||||||||||||||||||||
| Bank-time deposits | 521 | 521 | — | — | Restricted cash and cash equivalents | ||||||||||||||||||||||||
| Money market funds | 103,445 | 103,445 | — | — | Long-term restricted cash and cash equivalents | ||||||||||||||||||||||||
| Private equity | 12,160 | — | — | 12,160 | Other assets | ||||||||||||||||||||||||
| Foreign currency forward contracts | (202) | — | (202) | — | Accrued expenses and other current liabilities | ||||||||||||||||||||||||
| Contingent earn-out consideration | (57,941) | — | — | (57,941) | Accrued expenses and other current liabilities | ||||||||||||||||||||||||
| Contingent earn-out consideration | (32,697) | — | — | (32,697) | Other long-term liabilities | ||||||||||||||||||||||||
| Total recurring fair value measurements, net | $ | 2,385,738 | $ | 1,617,328 | $ | 846,888 | $ | (78,478) |
| March 31, 2021 | Quoted prices in active markets for identical assets (level 1) | Significant other observable inputs (level 2) | Significant unobservable inputs (level 3) | Balance Sheet Classification | |||||||||||||||||||||||||
| Money market funds | $ | 837,614 | $ | 837,614 | $ | — | $ | — | Cash and cash equivalents | ||||||||||||||||||||
| Bank-time deposits | 95,000 | 95,000 | — | — | Cash and cash equivalents | ||||||||||||||||||||||||
| Commercial paper | 100,105 | — | 100,105 | — | Cash and cash equivalents | ||||||||||||||||||||||||
| Corporate bonds | — | — | — | — | Cash and cash equivalents | ||||||||||||||||||||||||
| Money market funds | 528,659 | 528,659 | — | — | Restricted cash and cash equivalents | ||||||||||||||||||||||||
| Bank-time deposits | 563 | 563 | — | — | Restricted cash and cash equivalents | ||||||||||||||||||||||||
| Corporate bonds | 521,224 | — | 521,224 | — | Short-term investments | ||||||||||||||||||||||||
| Bank-time deposits | 578,762 | 578,762 | — | — | Short-term investments | ||||||||||||||||||||||||
| US Treasuries | 60,086 | 60,086 | — | — | Short-term investments | ||||||||||||||||||||||||
| Commercial paper | 148,150 | — | 148,150 | — | Short-term investments | ||||||||||||||||||||||||
| Asset-backed securities | 470 | — | 470 | — | Short-term investments | ||||||||||||||||||||||||
| Money market funds | 98,541 | 98,541 | — | — | Long-term restricted cash and cash equivalents | ||||||||||||||||||||||||
| Private equity | 7,578 | — | — | 7,578 | Other assets | ||||||||||||||||||||||||
| Foreign currency forward contracts | $ | (125) | $ | — | $ | (125) | $ | — | Accrued expenses and other current liabilities | ||||||||||||||||||||
| Total recurring fair value measurements, net | $ | 2,976,627 | $ | 2,199,225 | $ | 769,824 | $ | 7,578 |
In connection with the Nordeus acquisition (see Note 15 - Acquisitions), we recorded $61,055 as the initial fair value of contingent earn-out consideration. The fair value was estimated using a Monte-Carlo simulation model, which included significant unobservable Level 3 inputs, such as projected financial performance over the earn-out period along with estimates for market volatility and the discount rate applicable to potential cash payouts.
During the nine months ended December 31, 2021, we recognized General and administrative expense of $30,000 within our Condensed Consolidated Statements of Operations for the increase in fair value of the contingent earn-out consideration liability associated with the Nordeus acquisition, which increased the fair value of the contingent consideration liability to $90,638. The increase resulted from a higher probability of Nordeus achieving certain performance measures in the 12- and 24-month periods following the closing.
We did not have any transfers between Level 1 and Level 2 fair value measurements, nor did we have any transfers into or out of Level 3 during the nine months ended December 31, 2021.
Nonrecurring fair value measurements
We hold equity investments in certain unconsolidated entities without a readily determinable fair value. These strategic investments represent less than a 20% ownership interest in each of the privately-held affiliates, and we do not maintain significant influence over or control of the entities. We have elected the practical expedient in Topic 321, Investments-Equity Securities, to measure these investments at cost less any impairment, adjusted for observable price changes, if any. Based on these considerations, we estimate that the carrying value of the acquired shares represents the fair value of the investment. At December 31, 2021, we held $20,000 of such investments in Other assets within our Condensed Consolidated Balance Sheet.
5. SHORT-TERM INVESTMENTS
Our Short-term investments consisted of the following:
| December 31, 2021 | |||||||||||||||||||||||
| Gross Unrealized | |||||||||||||||||||||||
| Cost or Amortized Cost | Gains | Losses | Fair Value | ||||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Bank time deposits | $ | 622,683 | $ | — | $ | — | $ | 622,683 | |||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Corporate bonds | 708,246 | 77 | (1,625) | 706,698 | |||||||||||||||||||
| US Treasuries | 35,709 | 2 | — | 35,711 | |||||||||||||||||||
| Commercial paper | 113,921 | — | — | 113,921 | |||||||||||||||||||
| Total Short-term investments | $ | 1,480,559 | $ | 79 | $ | (1,625) | $ | 1,479,013 |
| March 31, 2021 | |||||||||||||||||||||||
| Gross Unrealized | |||||||||||||||||||||||
| Cost or Amortized Cost | Gains | Losses | Fair Value | ||||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Bank time deposits | $ | 578,762 | $ | — | $ | — | $ | 578,762 | |||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Corporate bonds | 520,486 | 994 | (256) | 521,224 | |||||||||||||||||||
| US Treasuries | 60,029 | 57 | — | 60,086 | |||||||||||||||||||
| Asset-backed securities | 469 | 1 | — | 470 | |||||||||||||||||||
| Commercial paper | 148,149 | 1 | — | 148,150 | |||||||||||||||||||
| Total Short-term investments | $ | 1,307,895 | $ | 1,053 | $ | (256) | $ | 1,308,692 |
The following table summarizes the contracted maturities of our short-term investments at December 31, 2021:
| December 31, 2021 | |||||||||||
| Amortized Cost | Fair Value | ||||||||||
| Short-term investments | |||||||||||
| Due in 1 year or less | $ | 1,214,757 | $ | 1,214,427 | |||||||
| Due in 1 - 2 years | 265,802 | 264,586 | |||||||||
| Total Short-term investments | $ | 1,480,559 | $ | 1,479,013 |
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Our risk management strategy includes the use of derivative financial instruments to reduce the volatility associated with changes in foreign currency exchange rates on earnings, cash flows, and certain balance sheet amounts . We do not enter into derivative financial contracts for speculative or trading purposes. We recognize derivative instruments as either assets or liabilities on our Consolidated Balance Sheets, and we measure those instruments at fair value. We classify cash flows from derivative transactions as cash flows from operating activities in our Consolidated Statements of Cash Flows.
Foreign currency forward contracts
The following table shows the gross notional amounts of foreign currency forward contracts:
| December 31, 2021 | March 31, 2021 | ||||||||||
| Forward contracts to sell foreign currencies | $ | 173,127 | $ | 140,510 | |||||||
| Forward contracts to purchase foreign currencies | 96,953 | 92,123 |
For the three months ended December 31, 2021 and 2020, we recorded a gain of $4,107 and a loss of $5,832, respectively, and for the nine months ended December 31, 2021 and 2020 we recorded a gain of $2,881 and a loss of $9,518, respectively, related to foreign currency forward contracts in Interest and other, net in our Condensed Consolidated Statements of Operations. Our foreign currency exchange forward contracts are not designated as hedging instruments under hedge accounting. These instruments are generally short-term in nature, with typical maturities of less than one year, and are subject to fluctuations in foreign exchange rates.
7. INVENTORY
Inventory balances by category were as follows:
| December 31, 2021 | March 31, 2021 | ||||||||||
| Finished products | $ | 10,141 | $ | 16,941 | |||||||
| Parts and supplies | 1,537 | 801 | |||||||||
| Inventory | $ | 11,678 | $ | 17,742 |
Estimated product returns included in Inventory at December 31, 2021 and March 31, 2021 were $96 and $186, respectively.
8. SOFTWARE DEVELOPMENT COSTS AND LICENSES
Details of our capitalized software development costs and licenses were as follows:
| December 31, 2021 | March 31, 2021 | ||||||||||||||||||||||
| Current | Non-current | Current | Non-current | ||||||||||||||||||||
| Software development costs, internally developed | $ | 42,921 | $ | 549,894 | $ | 22,225 | $ | 412,919 | |||||||||||||||
| Software development costs, externally developed | 34 | 164,739 | 7,349 | 75,086 | |||||||||||||||||||
| Licenses | 4,621 | 23,302 | 13,869 | 2,887 | |||||||||||||||||||
| Software development costs and licenses | $ | 47,576 | $ | 737,935 | $ | 43,443 | $ | 490,892 |
During the three months ended December 31, 2021 and 2020, we recorded $640 and $5,532, respectively, of software development impairment charges (a component of Cost of goods sold). The impairment charges recorded during the three months ended December 31, 2021 and 2020 related to decisions not to proceed with further development of certain interactive entertainment software.
During the nine months ended December 31, 2021 and 2020, we recorded $65,689 and $25,227, respectively, of software development impairment charges (a component of Cost of goods sold). The impairment charge recorded during the nine months ended December 31, 2021 related to (i) a decision not to proceed with further development of certain interactive entertainment software and (ii) recognizing unamortized capitalized costs for the development of a title, which were anticipated to exceed the net realizable value of the asset at the time they were impaired. The impairment charges recorded during the nine months ended December 31, 2020 related to unamortized capitalized costs for the development of a title, which were anticipated to exceed the net realizable value of the asset at the time they were impaired.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
| December 31, 2021 | March 31, 2021 | ||||||||||
| Software development royalties | $ | 471,986 | $ | 814,998 | |||||||
| Compensation and benefits | 177,651 | 122,404 | |||||||||
| Licenses | 122,108 | 84,330 | |||||||||
| Deferred acquisition payments | 66,328 | 13,343 | |||||||||
| Refund liability | 56,886 | 53,361 | |||||||||
| Marketing and promotions | 44,244 | 32,591 | |||||||||
| Other | 87,043 | 83,063 | |||||||||
| Accrued expenses and other current liabilities | $ | 1,026,246 | $ | 1,204,090 |
10. DEBT
Credit Agreement
On February 8, 2019, we entered into an unsecured Credit Agreement, and on June 28, 2021, we amended our unsecured Credit Agreement solely to increase the commitments under the facility by $50,000 (as amended, the “Credit Agreement”) that runs through February 8, 2024. The Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $250,000, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $25,000 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $25,000. In addition, the Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional $200,000 in term loans or revolving credit facilities.
Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to 0.750% above a certain base rate (3.25% at December 31, 2021) or (b) 1.125% to 1.750% above LIBOR (approximately 0.10% at December 31, 2021), which rates are determined by reference to our consolidated total net leverage ratio. We had no outstanding borrowings at December 31, 2021.
Information related to availability on our Credit Agreement was as follows:
| December 31, 2021 | March 31, 2021 | ||||||||||
| Available borrowings | $ | 247,682 | $ | 197,874 | |||||||
| Outstanding letters of credit | 2,318 | 2,126 |
We recorded interest expense and fees related to the Credit Agreement of $97 and $141 for the three months ended December 31, 2021 and 2020, respectively, and $354 and $305 for the nine months ended December 31, 2021 and 2020, respectively. The Credit Agreement also includes, among other terms and conditions, maximum leverage ratio, minimum cash reserves and, in certain circumstances, minimum interest coverage ratio financial covenants, as well as limitations on us and each of our subsidiaries’ ability to create, incur, assume or be liable for indebtedness; dispose of assets outside the ordinary course; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of its property; make investments; or pay dividends or make distributions, in each case subject to certain exceptions. In addition, the Credit Agreement provides for certain events of default such as nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on indebtedness held by third parties (subject to certain limitations and cure periods).
11. EARNINGS PER SHARE ("EPS")
The following table sets forth the computation of basic and diluted earnings per share:
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Computation of Basic earnings per share: | |||||||||||||||||||||||
| Net income | $ | 144,497 | $ | 182,248 | $ | 307,050 | $ | 370,074 | |||||||||||||||
| Weighted average shares outstanding—basic | 115,269 | 115,004 | 115,572 | 114,436 | |||||||||||||||||||
| Basic earnings per share | $ | 1.25 | $ | 1.58 | $ | 2.66 | $ | 3.23 | |||||||||||||||
| Computation of Diluted earnings per share: | |||||||||||||||||||||||
| Net income | $ | 144,497 | $ | 182,248 | $ | 307,050 | $ | 370,074 | |||||||||||||||
| Weighted average shares outstanding—basic | 115,269 | 115,004 | 115,572 | 114,436 | |||||||||||||||||||
| Add: dilutive effect of common stock equivalents | 1,439 | 1,113 | 1,238 | 1,137 | |||||||||||||||||||
| Weighted average common shares outstanding—diluted | 116,708 | 116,117 | 116,810 | 115,573 | |||||||||||||||||||
| Diluted earnings per share | $ | 1.24 | $ | 1.57 | $ | 2.63 | $ | 3.20 |
During the nine months ended December 31, 2021, 1,096 restricted stock awards vested, we granted 931 unvested restricted stock awards, and 66 unvested restricted stock awards were forfeited.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table provides the components of accumulated other comprehensive loss:
| Nine Months Ended December 31, 2021 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | Unrealized gain (loss) on available-for- sales securities | Total | |||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | (9,282) | $ | 618 | $ | (8,664) | |||||||||||||||||||||||
| Other comprehensive loss before reclassifications | (24,096) | (1,823) | (25,919) | ||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | (33,378) | $ | (1,205) | $ | (34,583) |
| Nine Months Ended December 31, 2020 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | Unrealized gain (loss) on derivative instruments | Unrealized gain (loss) on cross-currency swap | Unrealized gain (loss) on available-for- sales securities | Total | |||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | (60,535) | $ | 600 | $ | 4,305 | $ | (2,746) | $ | (58,376) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 53,697 | — | (2,972) | 4,000 | 54,725 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | (600) | (1,333) | — | (1,933) | ||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | (6,838) | $ | — | $ | — | $ | 1,254 | $ | (5,584) |
13. COMMITMENTS AND CONTINGENCIES
We have entered into various agreements in the ordinary course of business that require substantial cash commitments over the next several years. Other than agreements entered into in the ordinary course of business and in addition to the agreements requiring known cash commitments as reported in Note 15 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, we did not have any significant changes to our commitments since March 31, 2021.
Legal and Other Proceedings
We are, or may become, subject to demands and claims (including intellectual property and employment related 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 condition or results of operations. 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.
14. INCOME TAXES
The provision for income taxes for the three months ended December 31, 2021 is based on our projected annual effective tax rate for fiscal year 2022, adjusted for specific items that are required to be recognized in the period in which they are incurred. The provision for income taxes was $7,642 for the three months ended December 31, 2021, as compared to $34,198 for the prior year period.
When compared to the statutory rate of 21%, the effective tax rate of 5.0% for the three months ended December 31, 2021 was due primarily to excess tax benefits of $9,882 from employee stock-based compensation, tax benefits of $9,651 from tax credits, and a tax benefit of $7,205 related to the geographic mix of earnings.
The provision for income taxes for the nine months ended December 31, 2021 is based on our projected annual effective tax rate for fiscal year 2022, adjusted for specific items that are required to be recognized in the period in which they are incurred. The provision for income taxes was $36,507 for the nine months ended December 31, 2021 as compared to $54,151 for the prior year period.
When compared to the statutory rate of 21%, the effective tax rate of 10.6% for the nine months ended December 31, 2021 was due primarily to a tax benefit of $21,071 due to tax credits and excess tax benefits of $13,890 from employee stock-
based compensation, offset by tax expense of $5,042 related to a nondeductible increase in fair value of the contingent consideration liability associated with the acquisition of Nordeus and by the geographic mix of earnings.
We are regularly examined by domestic and foreign taxing authorities. Examinations may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits or the expiration of the statute of limitations may have an impact on our effective tax rate in future periods.
15. ACQUISITIONS
Nordeus Acquisition
On June 1, 2021, we completed the acquisition of 94.5% of Nordeus Limited ("Nordeus"), a privately-held Irish holding company of a Belgrade, Serbia based free-to-play mobile game developer, for initial consideration of $120,488 in cash, 515 shares of our common stock, and a contingent earn-out consideration arrangement that requires us to pay up to an aggregate of $153,000 in cash if Nordeus achieves certain performance measures over the 12- and 24-month periods following the closing. The cash portion was funded from our cash on hand. In addition, we exercised our option to purchase the remaining 5.5% of the outstanding equity of Nordeus for cash consideration of $12,375, in September 2021.
We acquired Nordeus as part of our ongoing strategy to expand selectively our portfolio of owned intellectual property and to diversify and strengthen further our mobile offerings.
The acquisition-date fair value of the consideration totaled $289,774, which consisted of the following:
| Fair value of purchase consideration | |||||
| Cash, including call option exercise | $ | 132,863 | |||
| Common stock (515 shares) | 94,154 | ||||
| Contingent earn-out | 61,055 | ||||
| Deferred payment | 1,702 | ||||
| Total | $ | 289,774 |
The fair value of the contingent earn-out consideration arrangement at the acquisition date was $61,055. We estimated the fair value of the contingent earn-out consideration using a Monte Carlo simulation model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. (Refer to Note 4 - Fair Value Measurements.)
During the three and nine months ended December 31, 2021 we recognized General and administrative expense of $10,000 and $30,000, respectively, within our Condensed Consolidated Statements of Operations for the increase in fair value of the contingent consideration liability associated with the acquisition of Nordeus. We reported $57,941 within Accrued expenses and $32,697 within Other long-term liabilities in our Condensed Consolidated Balance Sheet as of December 31, 2021.
We used the acquisition method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition, with the excess recorded to goodwill. The preliminary fair values of net tangible and intangible assets are management’s estimates based on the information available at the acquisition date and may change over the measurement period, which will end no later than one year from the acquisition date, as additional information is received. The following table summarizes the preliminary acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Nordeus:
| Fair Value | Weighted average useful life | |||||||
| Cash acquired | $ | 22,566 | N/A | |||||
| Other tangible assets | 18,174 | N/A | ||||||
| Other liabilities assumed | (63,283) | N/A | ||||||
| Intangible Assets | ||||||||
| Developed game technology | 186,500 | 9 | ||||||
| User base | 3,200 | 1 | ||||||
| Branding and trade names | 3,200 | 8 | ||||||
| Game engine technology | 3,900 | 4 | ||||||
| Goodwill | 115,517 | N/A | ||||||
| Total | $ | 289,774 | ||||||
Goodwill, which is not deductible for U.S. income tax purposes, is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.
The amounts of revenue and earnings of Nordeus included in our Condensed Consolidated Statement of Operations from the acquisition date are as follows:
| Three Months Ended December 31, 2021 | Nine Months Ended December 31, 2021 | |||||||
| Net revenue | $ | 16,777 | $ | 29,003 | ||||
| Net loss | $ | 10,676 | $ | 30,411 | ||||
The following table summarizes the pro-forma consolidated results of operations (unaudited) for the three and nine months ended December 31, 2021 and 2020, as though the acquisition had occurred on April 1, 2020, the beginning of fiscal year 2021, and Nordeus had been included in our consolidated results for the entire periods subsequent to that date.
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Pro forma Net revenue | $ | 903,252 | $ | 868,261 | $ | 2,584,640 | $ | 2,562,560 | |||||||||||||||
| Pro forma Net income | $ | 145,226 | $ | 170,297 | $ | 313,629 | $ | 359,176 | |||||||||||||||
The unaudited pro-forma consolidated results above are based on the historical financial statements of the Company and Nordeus and not necessarily indicative of the results of operations that would have been achieved if the acquisition was completed at the beginning of fiscal year 2021 and are not indicative of the future operating results of the combined company. The financial information for Nordeus prior to the acquisition has been included in the pro-forma results of operations and includes certain adjustments to the historical consolidated financial statements of Nordeus to align with our accounting policies. The pro-forma consolidated results of operations also include the business combination accounting effects resulting from the acquisition, including amortization expense related to finite-lived intangible assets acquired and the related tax effects assuming that the business combination occurred on April 1, 2020.
Transaction costs of $34 and $4,986 for the three and nine months ended December 31, 2021, respectively, which have been recorded within General and administrative expense in our Condensed Consolidated Statements of Operations, have been excluded from the above pro-forma consolidated results of operations due to their non-recurring nature.
Asset Acquisition
In June 2021, we acquired two office buildings in the United Kingdom to use for office space for total cash consideration of $72,908. The transaction was treated as an asset acquisition, in which the cash consideration and direct transaction costs were allocated on a relative fair value basis to identified assets. The following table summarizes the acquisition date fair value of tangible assets, which are included within Fixed assets, net on our Condensed Consolidated
Balance Sheets, and intangible assets, which are included within Intangible assets, net on our Condensed Consolidated Balance Sheets, acquired:
| Fair Value | Weighted average useful life | |||||||
| Building | $ | 31,104 | 30 | |||||
| Land | 38,243 | N/A | ||||||
| Lease-in-place intangible asset | 2,176 | 4 | ||||||
| Total | $ | 71,523 |
16. SHARE REPURCHASE
Our Board of Directors has authorized the repurchase of up to 21,660 shares of our common stock, including an increase of 7,442 shares in November 2021. Under this program, we may 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 does not require us to repurchase shares and may be suspended or discontinued at any time for any reason.
During the three months ended December 31, 2021, we did not repurchase shares of our common stock in the open market. During the nine months ended December 31, 2021, we repurchased 1,260 shares of our common stock in the open market for $200,012, including commissions of $13, as part of the program. We have repurchased a total of 11,660 shares of our common stock under the program, and, as of December 31, 2021, 10,000 shares of our common stock remained available for repurchase under the share repurchase program.
All of the repurchased shares are classified as Treasury stock in our Condensed Consolidated Balance Sheets.
17. SUBSEQUENT EVENTS
On January 9, 2022, we entered into a definitive merger agreement to acquire Zynga Inc. ("Zynga"), a leading developer of mobile games. Under the terms and subject to the conditions of the merger agreement, Zynga stockholders will receive $3.50 in cash and a number of shares of our common stock equal to the exchange ratio (ranging from 0.0350 to 0.0406, as further described below) for each share of Zynga common stock outstanding at the closing. The transaction is valued at $9.86 per share of Zynga common stock based on the market closing as of January 7, 2022, implying an enterprise value of $12.7 billion. The transaction includes a collar mechanism on the equity consideration, so that if our 20-day volume weighted average price ("VWAP") ending on the third trading day prior to closing is in a range from $156.50 to $181.88, the exchange ratio would be adjusted to deliver total consideration of $9.86 per Zynga share. If the VWAP exceeds the higher end of that range the exchange ratio would be 0.0350 per share and if the VWAP falls below the lower end of that range, the exchange ratio would be 0.0406 per share.
As part of the transaction, we have received aggregate committed financing of $2.7 billion from J.P. Morgan and certain other lenders, and we intend to fund the cash component of the transaction through a combination of cash from our balance sheet as well as proceeds of new debt issuance.
The transaction, which is expected to close during our first quarter of fiscal year 2023 ending June 30, 2022, is subject to approval by Take-Two and Zynga stockholders and the satisfaction of customary closing conditions, including applicable regulatory approvals.
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