What changed in this filing

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Item 1. Financial Statements

2020-08-04 compared with 2020-02-07 · 105 added, 248 removed, 391 unchanged (47% of the section changed)

3 unchanged sentences

(in thousands, except per share amounts)

December 31, 2019 March 31, 2019

June 30, 2020 March 31, 2020

Current assets:

2 unchanged sentences

Restricted cash and cash equivalents 467,622 546,604

Accounts receivable, net of allowances of $443 and $995 at December 31, 2019 and March 31, 2019, respectively 647,460 395,729

Accounts receivable, net of allowances of $ 2,201 and $ 443 at June 30, 2020 and March 31, 2020, respectively

685,169 592,555

Inventory 19,486 19,108

6 unchanged sentences

Software development costs and licenses, net of current portion 409,962 401,778

Deferred cost of goods sold, net of current portion 912 1,028

Goodwill 389,825 386,494

1 unchanged sentence

Deferred tax assets 120,892 116,676

Long-term restricted cash and cash equivalents 289,526 89,124

Other assets 138,435 123,977

9 unchanged sentences

Non-current lease liabilities 153,506 152,059

Non-current software development royalties 300,970 104,417

Other long-term liabilities 82,146 86,234

3 unchanged sentences

Preferred stock, $ .01 par value, 5,000 shares authorized;

no shares issued and outstanding at December 31, 2019 and March 31, 2019 — —

no shares issued and outstanding at June 30, 2020 and March 31, 2020

Common stock, $ .01 par value, 200,000 shares authorized;

135,771 and 134,602 shares issued and 113,350 and 112,181 outstanding at December 31, 2019 and March 31, 2019, respectively 1,358 1,346

136,689 and 135,927 shares issued and 114,268 and 113,506 outstanding at June 30, 2020 and March 31, 2020, respectively

Additional paid-in capital 2,151,774 2,134,748

Treasury stock, at cost;

22,421 common shares at December 31, 2019 and March 31, 2019 ( 820,572 ) ( 820,572 )

22,421 common shares at June 30, 2020 and March 31, 2020

( 820,572 ) ( 820,572 )

Retained earnings 1,370,590 1,282,085

6 unchanged sentences

(in thousands, except per share amounts)

Three Months Ended December 31, Nine Months Ended December 31,

2019 2018 2019 2018

Three Months Ended June 30,

Net revenue $ 831,310 $ 540,459

1 unchanged sentence

Gross profit 354,621 298,990

Selling and marketing 137,068 161,322 378,455 313,793

General and administrative 102,173 74,833

Selling and marketing 84,779 91,821

Research and development 73,108 68,963

5 unchanged sentences

Income before income taxes 90,361 62,155

Provision for (benefit from) income taxes 25,134 ( 120,098 ) 52,068 ( 108,750 )

Provision for income taxes 1,856 15,875

Net income $ 88,505 $ 46,280

7 unchanged sentences

Three Months Ended

December 31, Nine Months Ended December 31,

2019 2018 2019 2018

Net income $ 88,505 $ 46,280

7 unchanged sentences

Change in fair value of available for sale securities 5,849 722

Other comprehensive (loss) income 15,975 ( 13,755 ) ( 1,298 ) ( 35,222 )

Other comprehensive income (loss) 6,245 ( 6,799 )

Comprehensive income $ 94,750 $ 39,481

3 unchanged sentences

(in thousands)

Nine Months Ended December 31,

Three Months Ended June 30,

Operating activities:

26 unchanged sentences

Issuance of common stock 6,503 —

Repurchase of common stock — ( 262,392 )

Net cash used in financing activities ( 32,003 ) ( 52,118 )

Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash ( 1,705 ) ( 15,124 )

Net change in cash, cash equivalents, and restricted cash 350,448 49,124

Cash, cash equivalents, and restricted cash, beginning of year 1,391,986 1,246,371

Cash, cash equivalents, and restricted cash, end of period $ 1,742,434 $ 1,295,495

Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents 1,925 ( 3,201 )

Net change in cash, cash equivalents, and restricted cash and cash equivalents 167,880 220,009

Cash, cash equivalents, and restricted cash and cash equivalents, beginning of year 1,993,392 1,391,986

Cash, cash equivalents, and restricted cash and cash equivalents, end of period $ 2,161,272 $ 1,611,995

See accompanying Notes.

2 unchanged sentences

(in thousands)

Three Months Ended December 31, 2019

Common Stock Additional

Capital Treasury Stock Retained

Earnings Accumulated

Comprehensive

Income (Loss) Total

Stockholders'

Shares Amount Shares Amount

Balance, September 30, 2019 135,616 $ 1,356 $ 2,059,720 ( 22,421 ) $ ( 820,572 ) $ 995,721 $ ( 54,462 ) $ 2,181,763

Net income — — — — — 163,642 — 163,642

Change in cumulative foreign currency translation adjustment — — — — — — 18,172 18,172

Change in unrealized gains on cash flow hedge, net — — — — — — ( 1,930 ) ( 1,930 )

Net unrealized gain on available-for-sale securities, net of taxes — — — — — — ( 267 ) ( 267 )

Stock-based compensation — — 45,055 — — — — 45,055

Issuance of restricted stock, net of forfeitures and cancellations 171 2 ( 2 ) — — — — —

Net share settlement of restricted stock awards ( 80 ) ( 1 ) ( 9,781 ) — — — — ( 9,782 )

Employee share purchase plan settlement 64 1 5,381 — — — — 5,382

Balance, December 31, 2019 135,771 $ 1,358 $ 2,100,373 ( 22,421 ) $ ( 820,572 ) $ 1,159,363 $ ( 38,487 ) $ 2,402,035

Three Months Ended December 31, 2018

Common Stock Additional

Capital Treasury Stock Retained

Earnings Accumulated

Comprehensive

Income (Loss) Total

Stockholders'

Shares Amount Shares Amount

Balance, September 30, 2018 134,106 $ 1,341 $ 1,951,128 ( 20,302 ) $ ( 611,680 ) $ 640,848 $ ( 37,199 ) $ 1,944,438

Net income — — — — — 179,948 — 179,948

Change in cumulative foreign currency translation adjustment — — — — — — ( 16,331 ) ( 16,331 )

Change in unrealized gains on cash flow hedge, net — — — — — — 2,408 2,408

Net unrealized gain on available-for-sale securities, net of taxes — — — — — — 168 168

Stock-based compensation — — 42,529 — — — — 42,529

Repurchased common stock — — — ( 1,000 ) ( 108,892 ) — — ( 108,892 )

Issuance of restricted stock, net of forfeitures and cancellations 440 4 ( 4 ) — — — — —

Net share settlement of restricted stock awards ( 207 ) ( 2 ) ( 21,869 ) — — — — ( 21,871 )

Employee share purchase plan settlement 57 1 5,069 — — — — 5,070

Balance, December 31, 2018 134,396 $ 1,344 $ 1,976,853 ( 21,302 ) $ ( 720,572 ) $ 820,796 $ ( 50,954 ) $ 2,027,467

Nine Months Ended December 31, 2019

Three Months Ended June 30, 2020

Common Stock Additional

14 unchanged sentences

Employee share purchase plan settlement 65 1 6,502 — — — — 6,503

Balance, December 31, 2019 135,771 $ 1,358 $ 2,100,373 ( 22,421 ) $ ( 820,572 ) $ 1,159,363 $ ( 38,487 ) $ 2,402,035

Nine Months Ended December 31, 2018

Balance, June 30, 2020 136,689 $ 1,367 $ 2,151,774 ( 22,421 ) $ ( 820,572 ) $ 1,370,590 $ ( 52,131 ) $ 2,651,028

Three Months Ended June 30, 2019

Common Stock Additional

13 unchanged sentences

Issuance of restricted stock, net of forfeitures and cancellations 1,339 13 ( 13 ) — — — — —

Conversion of 1.00% Convertible Notes Due 2018 378 4 8,109 — — — — 8,113

Net share settlement of restricted stock awards ( 476 ) ( 5 ) ( 52,113 ) — — — — ( 52,118 )

Employee share purchase plan settlement 62 1 5,132 — — — — 5,133

Impact from adoption of New Revenue Accounting Standard — — — — — 470,273 4,653 474,926

Balance, December 31, 2018 134,396 $ 1,344 $ 1,976,853 ( 21,302 ) $ ( 720,572 ) $ 820,796 $ ( 50,954 ) $ 2,027,467

Balance, June 30, 2019 135,527 $ 1,355 $ 2,025,626 ( 22,421 ) $ ( 820,572 ) $ 923,906 $ ( 43,988 ) $ 2,086,327

See accompanying Notes.

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We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe.

We develop and publish products through our labels Rockstar Games, 2K, and Private Division, as well as Social Point, a leading developer of mobile games.

We develop and publish products principally through Rockstar Games, 2K, Private Division, and Social Point.

Our products are designed for console systems and personal computers, including smart phones and tablets, and are delivered through physical retail, digital download, online platforms, and cloud streaming services.

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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.

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.

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Recently Adopted Accounting Pronouncements

Accounting for Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the accounting for leases codified under Topic 842, Leases .

The new lease accounting standard replaces all current U.S.

GAAP guidance on this topic.

The new standard, among other things, requires a lessee to classify a lease as either an operating or financing lease and to recognize a lease liability and a right-of-use (“ROU”) asset for its leases.

On April 1, 2019, we adopted the new lease accounting standard using the alternative transition approach provided in ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which allows initial application of the new standard using the modified retrospective method.

As part of the adoption, the new lease accounting standard allows a number of practical expedients and exemptions.

At transition, we elected the following:

• The package of practical expedients, which allows us to carryforward our historical lease classification, our assessment of whether a contract is or contains a lease and our initial direct costs for any leases that exist prior to adoption of the new standard;

• The practical expedient to not separate non-lease components from the related lease components;

• The exemption to not apply the balance sheet recognition requirements for leases with a lease term of 12 months or less and instead expense those costs on a straight-line basis over the lease term or in the period in which the obligation is incurred, if such costs are variable.

As a result of the adoption, we have updated our significant accounting policy disclosure as set forth below to include our accounting policy under Topic 842 for transactions from April 1, 2019 and thereafter:

We determine if an arrangement is a lease at contract inception.

If there is an identified asset in the contract (either explicitly or implicitly) and we have control over its use, the contract is (or contains) a lease.

In certain of our lease arrangements, primarily those related to our data center arrangements, judgment is required in determining if a contract contains a lease.

For these arrangements, there is judgment in evaluating if the arrangement provides us with an asset that is physically distinct, or that represents substantially all of the capacity of the asset, and if we have the right to direct the use of the asset.

Lease assets and liabilities are recognized based on the present value of future lease payments over the lease term at the commencement date.

Included in the lease liability are future lease payments that are fixed, in-substance fixed, or payments based on an index or rate known at the commencement date of the lease.

Variable lease payments are recognized as lease expenses as incurred.

The operating lease ROU asset also includes any lease payments made prior to commencement, initial direct costs incurred, and lease incentives received.

All ROU assets are reviewed for impairment.

As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate in determining the present value of future lease payments.

The incremental borrowing rate represents the rate required to borrow funds over a similar term to purchase the leased asset and is based on an unsecured borrowing rate and risk-adjusted to approximate a collateralized rate at the commencement date of the lease.

In determining our lease liability, the lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise such option.

For operating leases, the lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Lease modifications result in remeasurement of the lease liability.

Leases with an initial term of 12 months or less are not recorded on the balance sheet, and we recognize lease expense for these leases on a straight-line basis over the lease term.

Impact of adoption

As a result of adopting Topic 842, the following adjustments, including reclassifying prepaid and deferred rent to ROU assets, were made to our Condensed Consolidated Balance Sheet at April 1, 2019:

March 31, 2019 Adjustments April 1, 2019

Prepaid expenses and other $ 186,688 $ ( 792 ) $ 185,896

Right-of-use assets $ — $ 118,799 $ 118,799

LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued expenses and other current liabilities $ 1,035,695 $ ( 2,976 ) $ 1,032,719

Lease liabilities $ — $ 18,937 $ 18,937

Non-current lease liabilities $ — $ 122,041 $ 122,041

Other long-term liabilities $ 229,633 $ ( 19,995 ) $ 209,638

The adoption of Topic 842 did not have an impact on our Condensed Consolidated Statements of Operation or Condensed Consolidated Statements of Cash Flows.

Recently Issued 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.

ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning December 15, 2020 (April 1, 2021 for the Company), with early adoption permitted.

We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements.

Accounting for Fair Value Measurement

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Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement , which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures.

ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning December 15, 2019 (April 1, 2020 for the Company), with early adoption

Certain disclosures in ASU 2018-13 are required to be applied on a retrospective basis and others on a prospective basis.

We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements.

We adopted this update effective April 1, 2020.

The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.

Accounting for Credit Losses

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For most financial instruments, the standard will require the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which will generally result in the earlier recognition of credit losses on financial instruments.

We adopted this update effective April 1, 2020 under a modified retrospective basis.

No adjustment to retained earnings was recorded as a result of the adoption of this standard, which did not have a material impact on our Condensed Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

Accounting for Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary optional guidance to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR.

The guidance includes practical expedients for contract modifications due to reference rate reform.

Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date.

This guidance is effective immediately and is only available through December 31, 2022.

We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements.

Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning December 15, 2020 (April 1, 2021 for the Company), with early adoption permitted.

These changes will be applied on a modified retrospective basis, with the cumulative effect of adoption recorded as an adjustment to retained earnings.

We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements.

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Product revenue

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).

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

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Net revenue by product revenue and service and other was as follows:

Three Months Ended December 31, Nine Months Ended December 31,

2019 2018 2019 2018

Three Months Ended June 30,

Net revenue recognized:

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Net revenue by full game and other revenue and recurrent consumer spending was as follows:

Three Months Ended December 31, Nine Months Ended December 31,

2019 2018 2019 2018

Three Months Ended June 30,

Net revenue recognized:

Full game and other 589,633 952,182 1,354,607 1,351,202

Recurrent consumer spending 479,405 314,858

Full game and other 351,905 225,601

Total net revenue $ 831,310 $ 540,459

1 unchanged sentence

Net revenue by geographic region was as follows:

Three Months Ended December 31, Nine Months Ended December 31,

2019 2018 2019 2018

Three Months Ended June 30,

Net revenue recognized:

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Net revenue by platform was as follows:

Three Months Ended December 31, Nine Months Ended December 31,

2019 2018 2019 2018

Three Months Ended June 30,

Net revenue recognized:

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Net revenue by distribution channel was as follows:

Three Months Ended December 31, Nine Months Ended December 31,

2019 2018 2019 2018

Three Months Ended June 30,

Net revenue recognized:

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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, 2019 and March 31, 2019 were $ 874,776 and $ 864,360 , respectively.

For the nine months ended December 31, 2019, 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, 2019 and 2018, $ 193,468 and $ 80,471 , 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, 2019 and 2018, $ 758,301 and $ 504,600 , respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the period.

As of December 31, 2019, the aggregate amount of contract revenue allocated to unsatisfied performance obligations is $ 967,609 , which includes our deferred revenue balances and amounts to be invoiced and recognized in future periods.

Deferred revenue, including current and non-current balances as of June 30, 2020 and March 31, 2020 were $ 960,951 and $ 806,123 , respectively.

For the three months ended June 30, 2020, 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 June 30, 2020 and 2019, $ 371,213 and $ 330,421 , respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the respective period.

As of June 30, 2020, the aggregate amount of contract revenue allocated to unsatisfied performance obligations is $ 1,070,511 , which includes our deferred revenue balances and amounts to be invoiced and recognized in future periods.

We expect to recognize approximately $ 980,660 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, 2019 and March 31, 2019, our contract asset balances were $ 74,412 and $ 57,643 , respectively, which are recorded within Prepaid expenses and other in our Condensed Consolidated Balance Sheets.

As of June 30, 2020 and March 31, 2020, our contract asset balances were $ 92,733 and $ 81,625 , respectively, which are recorded within Prepaid expenses and other in our Condensed Consolidated Balance Sheets.

MANAGEMENT AGREEMENT

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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 $ 3,166 and $ 3,432 during the three months ended December 31, 2019 and 2018, respectively, and $ 6,541 and $ 6,842 during the nine months ended December 31, 2019 and 2018, respectively.

We recorded stock-based compensation expense for restricted stock units granted to ZelnickMedia, which is included in General and administrative expenses, of $ 5,956 and $ 5,555 during the three months ended December 31, 2019 and 2018, respectively, and $ 17,457 and $ 15,574 during the nine months ended December 31, 2019 and 2018, respectively.

In consideration for ZelnickMedia's services, we recorded consulting expense (a component of General and administrative expenses) of $ 2,665 and $ 1,670 during the three months ended June 30, 2020 and 2019, respectively.

We recorded stock-based compensation expense for restricted stock units granted to ZelnickMedia, which is included in General and administrative expenses, of $ 6,740 and $ 5,545 during the three months ended June 30, 2020 and 2019, respectively.

In connection with the 2017 Management Agreement, we have granted restricted stock units as follows:

Nine Months Ended December 31,

Three Months Ended June 30,

Time-based 79 92

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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 613 and 526 as of December 31, 2019 and March 31, 2019, respectively.

209 restricted stock units previously granted to ZelnickMedia vested and 20 restricted stock units were forfeited by ZelnickMedia during the nine months ended December 31, 2019.

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 588 and 613 as of June 30, 2020 and March 31, 2020, respectively.

During the three months ended June 30, 2020, 297 restricted stock units previously granted to ZelnickMedia vested, and no restricted stock units were forfeited by ZelnickMedia.

FAIR VALUE MEASUREMENTS

The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and other current liabilities, approximate fair value because of their short maturities.

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.

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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, 2019 Quoted prices

June 30, 2020 Quoted prices

(level 1) Significant

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US Treasuries 28,684 28,684 — — Short-term investments

US Agencies 3,499 — 3,499 — Short-term investments

Asset-backed securities 1,007 — 1,007 — Short-term investments

Commercial paper 97,910 — 97,910 — Short-term investments

Money market funds 467,298 467,298 — — Restricted cash and cash equivalents

Cross-currency swap 3,115 — 3,115 — Prepaid expenses and other

Bank-time deposits 324 324 — — Restricted cash and cash equivalents

Money market funds 289,526 289,526 — — Long-term restricted cash and cash equivalents

Private equity 5,364 — — 5,364 Other assets

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Money market funds $ 497,861 $ 497,861 $ — $ — Cash and cash equivalents

Bank-time deposits 313,757 313,757 — — Cash and cash equivalents

Commercial paper 97,544 — 97,544 — Cash and cash equivalents

US Treasuries 25,449 25,449 — — Cash and cash equivalents

Money market funds 565,461 565,461 — — Restricted cash and cash equivalents

Bank-time deposits 387,720 387,720 — — Short-term investments

Corporate bonds 9,888 — 9,888 — Cash and cash equivalents

Money market funds 546,604 546,604 — — Restricted cash and cash equialents

Corporate bonds 334,631 — 334,631 — Short-term investments

Bank-time deposits 191,000 191,000 — — Short-term investments

US Treasuries 30,819 30,819 — — Short-term investments

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Cross-currency swap 11,275 — 11,275 — Prepaid expenses and other

Money market funds 89,124 89,124 — — Long-term restricted cash and cash equivalents

Private equity 2,759 — — 2,759 Other assets

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Total recurring fair value measurements, net $ 2,212,804 $ 1,669,165 $ 540,880 $ 2,759

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, 2019.

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 three months ended June 30, 2020

SHORT-TERM INVESTMENTS

Our Short-term investments consisted of the following:

December 31, 2019

June 30, 2020

Amortized Cost Gains Losses Fair Value

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US Treasuries 28,444 240 — 28,684

US Agencies 3,499 — — 3,499

Asset-backed securities 1,000 7 — 1,007

Commercial paper 97,910 — — 97,910

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Total short-term investments $ 646,786 $ 645 $ ( 3,428 ) $ 644,003

Based on our review of investments with unrealized losses, we did not consider these investments to be other-than-temporarily impaired as of December 31, 2019 or March 31, 2019.

We do not intend to sell any of our investments with unrealized losses, nor is it more likely than not that we will be required to sell those investments.

The following table summarizes the contracted maturities of our short-term investments at December 31, 2019:

December 31, 2019

The following table summarizes the contracted maturities of our short-term investments at June 30, 2020:

June 30, 2020

Short-term investments

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Due in 1 - 2 years 129,539 130,946

Due in 2 - 3 years 1,000 1,007

Total short-term investments $ 878,172 $ 880,825

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The following table shows the gross notional amounts of foreign currency forward contracts:

December 31, 2019 March 31, 2019

June 30, 2020 March 31, 2020

Forward contracts to sell foreign currencies $ 126,114 $ 122,024

Forward contracts to purchase foreign currencies 81,751 52,596

For the three months ended December 31, 2019 and 2018, we recorded a loss of $ 556 and a gain of $ 10,811 , respectively, and for the nine months ended December 31, 2019 and 2018, we recorded a loss of $ 1,643 and gain of $ 12,968 , respectively, related to foreign currency forward contracts in Interest and other, net in our Condensed Consolidated Statements of Operations.

For the three months ended June 30, 2020 and 2019, we recorded a loss of $ 2,657 and a loss of $ 3,298 , 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 and are used to reduce the impact of foreign currency on certain balance sheet exposures and certain revenue and expense.

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.

Cross-currency swaps

We entered into a cross-currency swap agreement in August 2017 related to an intercompany loan that has been designated and accounted for as a cash flow hedge of foreign currency exchange risk.

The intercompany loan is related to the acquisition of Social Point.

As of December 31, 2019, the notional amount of the cross-currency swap is $ 115,641 .

This cross-currency swap mitigates the exposure to fluctuations in the U.S.

dollar-euro exchange rate related to the intercompany loan.

critical terms of the cross-currency swap agreement correspond to the intercompany loan and both mature at the same time in 2027;

as such, there was no ineffectiveness during the period.

Changes in the fair value of this cross-currency swap are recorded in Accumulated other comprehensive income (loss) and offset the change in value of interest and principal payment as a result of changes in foreign exchange rates.

Resulting gains or losses from the cross-currency swap are reclassified from Accumulated other comprehensive income (loss) to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loan.

We recognize the difference between the U.S.

dollar interest payments received from the swap counterparty and the U.S.

dollar equivalent of the euro interest payments made to the swap counterparty in Interest and other, net on our Consolidated Statement of Operations.

There are no credit-risk related contingent features associated with these swaps.

Cross-currency swap

In August 2017, we entered into a cross-currency swap agreement related to an intercompany loan that has been designated and accounted for as a cash flow hedge of foreign currency exchange risk.

During the three months ended June 30, 2020, we settled the intercompany loan and cross-currency swap, thereby discontinuing the cash flow hedge.

As a result, we reclassified $ 3,109 from Accumulated other comprehensive income (loss) to earnings as an increase to Interest and other, net on our Condensed Consolidated Statement of Operations.

We also received $ 7,420 in cash to settle our corresponding derivative asset.

Inventory balances by category were as follows:

December 31, 2019 March 31, 2019

June 30, 2020 March 31, 2020

Finished products $ 18,039 $ 17,984

1 unchanged sentence

Inventory $ 19,486 $ 19,108

Estimated product returns included in inventory at December 31, 2019 and March 31, 2019 were $ 1,054 and $ 491 , respectively.

Estimated product returns included in inventory at June 30, 2020 and March 31, 2020 were $ 541 and $ 506 , respectively.

SOFTWARE DEVELOPMENT COSTS AND LICENSES

Details of our capitalized software development costs and licenses were as follows:

December 31, 2019 March 31, 2019

June 30, 2020 March 31, 2020

Current Non-current Current Non-current

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Software development costs and licenses $ 31,714 $ 409,962 $ 40,316 $ 401,778

During the three and nine months ended December 31, 2019, we recorded $ 0 , and during the three and nine months ended December 31, 2018, we recorded $ 7,426 , of software development impairment charges (a component of Cost of goods sold).

For the nine months ended December 31, 2018, the impairment charges relate to a decision not to proceed with further development of certain interactive entertainment software.

During the three months ended June 30, 2020 and June 30, 2019, we recorded $ 19,695 and $ 0 , respectively, of software development impairment charges (a component of Cost of goods sold).

The impairment charge recorded during the three months ended June 30, 2020 related to unamortized capitalized costs for the development of a title, which are anticipated to exceed the net realizable value of the asset.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

December 31, 2019 March 31, 2019

June 30, 2020 March 31, 2020

Software development royalties 793,744 $ 822,416

Licenses 82,916 57,651

Compensation and benefits 71,218 81,791

Refund liability 54,820 77,829

Licenses 77,902 56,221

Marketing and promotions 32,684 40,797

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Credit Agreement

On February 8, 2019, we entered into an unsecured Credit Agreement (the “Credit Agreement”).

The Credit Agreement runs through February 8, 2024.

On February 8, 2019, we entered into an unsecured Credit Agreement (the “Credit Agreement”) that runs through February 8, 2024.

The Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $ 200,000 , 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 $ 250,000 in term loans or revolving credit facilities.

Loans under the New Credit Agreement will bear interest at a rate of (a) 0.250 % to 0.750 % above a certain base rate ( 5.50 % at December 31, 2019) or (b) 1.125 % to 1.750 % above LIBOR (approximately 1.66 % at December 31, 2019), which rates are determined by reference to our consolidated total net leverage ratio.

We had no outstanding borrowings at December 31, 2019.

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 June 30, 2020) or (b) 1.125 % to 1.750 % above LIBOR (approximately 1.63 % at June 30, 2020), which rates are determined by reference to our consolidated total net leverage ratio.

We had no outstanding borrowings at June 30, 2020.

Information related to availability on our Credit Agreement was as follows:

December 31, 2019 March 31, 2019

June 30, 2020 March 31, 2020

Available borrowings $ 198,336 $ 198,336

Outstanding letters of credit 1,664 1,664

We recorded interest expense and fees related to the Credit Agreement of $ 82 and $ 248 for the three and nine months ended December 31, 2019, respectively, and $ 111 and $ 332 for the three and nine months ended December 31, 2018, respectively, under a prior credit arrangement, which was terminated on the same day that we entered into the Credit Agreement.

We recorded interest expense and fees related to the Credit Agreement of $ 82 and $ 82 for the three months ended June 30, 2020 and 2019, 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:

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The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended December 31, Nine Months Ended December 31,

2019 2018 2019 2018

Three Months Ended June 30,

Computation of Basic earnings per share:

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Diluted earnings per share $ 0.77 $ 0.41

Certain of our unvested stock-based awards (including restricted stock units and restricted stock awards) are considered participating securities since these securities have non-forfeitable rights to dividends or dividend equivalents during

the contractual period of the award and thus requires the two-class method of computing EPS.

As of December 31, 2019, we have no material participating securities outstanding.

During the nine months ended December 31, 2019, 1,674 restricted stock awards vested, we granted 887 unvested restricted stock awards, and 80 unvested restricted stock awards were forfeited.

During the three months ended June 30, 2020, 979 restricted stock awards vested, we granted 645 unvested restricted stock awards, and 3 unvested restricted stock awards were forfeited.

ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table provides the components of accumulated other comprehensive loss:

Nine Months Ended December 31, 2019

Three Months Ended June 30, 2020

adjustments Unrealized

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Amounts reclassified from accumulated other comprehensive loss — — ( 1,333 ) — ( 1,333 )

Balance at December 31, 2019 $ ( 36,282 ) $ 600 $ ( 3,844 ) $ 1,039 $ ( 38,487 )

Nine Months Ended December 31, 2018

Balance at June 30, 2020 $ ( 55,834 ) $ 600 $ — $ 3,103 $ ( 52,131 )

Three Months Ended June 30, 2019

adjustments Unrealized

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Amounts reclassified from accumulated other comprehensive loss — — 1,083 — 1,083

Balance at December 31, 2018 $ ( 44,953 ) $ 600 $ ( 5,805 ) $ ( 796 ) $ ( 50,954 )

Balance at June 30, 2019 $ ( 41,887 ) $ 600 $ ( 4,009 ) $ 1,308 $ ( 43,988 )

COMMITMENTS AND CONTINGENCIES

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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 condition or results of operations.

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.

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In the first quarter of fiscal year 2018, we announced and initiated actions to implement a strategic reorganization at one of our labels (the "2018 Plan").

In connection with this initiative, we recorded a benefit of $ 246 and expense of $ 467 for business reorganization during the three and nine months ended December 31, 2019, respectively, due to updating estimates for employee separation costs and did not make any payments related to these reorganization activities.

As of December 31, 2019, $ 3,747 remained accrued in Accrued expenses and other current liabilities and $ 2,991 in Other non-current liabilities.

we may record additional expense or benefit in future periods to true-up estimates, we do not expect to incur additional reorganization costs in connection with the 2018 Plan.

In fiscal 2016, we announced and initiated actions to implement a strategic reorganization at one of our labels (the "2016 Plan"), including reorganizing one development studio and closing two development studios and incurred business reorganization expense of $ 71,285 due primarily to employee separation costs in connection with this initiative.

During the three and nine months ended December 31, 2018, we recognized a benefit of $ 5,930 as a result of updating our estimate of costs to complete the 2016 Plan.

The provision for income taxes for the three months ended December 31, 2019 is based on our projected annual effective tax rate for fiscal year 2020, adjusted for specific items that are required to be recognized in the period in which they are incurred.

The provision for income taxes was $ 25,134 for the three months ended December 31, 2019 as compared to a benefit of $ 120,098 for the prior year period due primarily to a change in our valuation allowance.

When compared to the statutory rate of 21%, the effective tax rate of 13.3 % for the three months ended December 31, 2019 was due primarily to tax benefits of $ 9,118 as a result of tax credits anticipated to be utilized and $ 2,638 due to geographic mix of earnings.

The provision for income taxes for the nine months ended December 31, 2019 is based on our projected annual effective tax rate for fiscal year 2020, adjusted for specific items that are required to be recognized in the period in which they are incurred.

The provision for income taxes was $ 52,068 for the nine months ended December 31, 2019 as compared to a benefit of $ 108,750 for the prior year period.

When compared to the statutory rate of 21%, the effective tax rate of 15.6 % for the nine months ended December 31, 2019 was due primarily to a tax benefit of $ 11,641 from changes in unrecognized tax benefits due to audit settlements, a benefit of $ 15,144 as a result of tax credits anticipated to be utilized, and a benefit of $ 5,808 from our geographic mix of earnings.

To a lesser extent the rate was also affected by excess tax benefits from employee stock-based compensation.

These benefits were partially offset by a tax expense of $ 19,826 from the reversal of net deferred tax benefits relating to the Altera case, discussed below.

On July 27, 2015, the U.S.

Tax Court issued an opinion in Altera Corp.

Commissioner, which concluded that related parties in an intercompany cost-sharing arrangement are not required to share costs related to stock-based compensation.

In February 2016, the U.S.

Internal Revenue Service appealed the decision to the U.S Court of Appeals for the Ninth Circuit.

On June 7, 2019, the Ninth Circuit reversed the 2015 decision of the U.S.

As a result of this decision, we are no longer reflecting a net tax benefit within our financial statements related to the removal of stock-based compensation from our intercompany cost-sharing arrangement.

During the nine months ended December 31, 2019, we removed the deferred tax asset and a deferred tax liability associated with this matter from our financial statements, resulting in a cumulative net discrete income tax expense of $ 19,826 .

The taxpayer requested a rehearing before the full Ninth Circuit which was denied on November 12, 2019.

The case remains potentially open for judicial review by the U.S.

Supreme Court.

As a result, the final outcome of the case is uncertain.

We will continue to monitor ongoing developments of this matter and potential impacts to our financial statements.

In connection with this initiative, we recorded a benefit of $ 0 and expense of $ 386 for business reorganization during the three months ended June 30, 2020 and 2019, respectively, due to updating estimates for employee separation costs and made payments of $ 3,500 related to these reorganization activities.

As of June 30, 2020, $ 1,600 remained accrued in Accrued expenses and other current liabilities and $ 1,254 in Other non-current liabilities.

Although we may record additional expense or benefit in future periods to true-up estimates, we do not expect to incur additional reorganization costs in connection with the 2018 Plan.

The provision for income taxes for the three months ended June 30, 2020 is based on our projected annual effective tax rate for fiscal year 2021, adjusted for specific items that are required to be recognized in the period in which they are incurred.

The provision for income taxes was $ 1,856 for the three months ended June 30, 2020 as compared to $ 15,875 for the prior year period.

When compared to the statutory rate of 21%, the effective tax rate of 2.1 % for the three months ended June 30, 2020 was due primarily to excess tax benefits of $ 7,867 from employee stock-based compensation, tax benefits of $ 4,931 due to tax credits, and geographic mix of earnings.

On June 21, 2018, the U.S.

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Although this case is limited to sales tax collection obligations, we continue to monitor the potential impact of this decision on our state income tax footprint.

On May 19, 2019, a public referendum held in Switzerland approved the Federal Act on Tax Reform and AVH (Old-Age and Survivors Insurance) Financing ("TRAF"), which was effective for us on January 1, 2020.

The tax reform abolished preferential tax regimes for holding companies, domicile companies, and mixed companies at the cantonal level.

The TRAF allows the cantons to establish transition rules, the implementation of which may be subject to a ruling from the canton.

Any deferred tax assets arising from tax basis step-up would be recorded once the cantonal process is complete.

As of December 31, 2019, the TRAF did not have a material effect on the Company.

We are regularly examined by domestic and foreign taxing authorities.

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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.

Our lease arrangements are primarily for (1) corporate, administrative, and development studio offices and (2) data centers and server equipment.

Our existing leases have remaining lease terms ranging from one to fifteen years .

In certain instances, such leases include one or more options to renew, with renewal terms that generally extend the lease term by one to five years for each option.

The exercise of lease renewal options is generally at our sole discretion.

Additionally, the majority of our leases are classified as operating leases.

Information related to our operating leases are as follows:

Three Months Ended

December 31, 2019 Nine Months Ended December 31, 2019

Operating lease costs $ 7,340 $ 20,904

Short term lease costs $ 662 $ 2,017

Nine Months Ended December 31, 2019

Supplemental operating cash flow information

Cash paid for amounts included in the measurement of lease liabilities $ 20,718

ROU assets obtained in exchange for lease obligations $ 49,767

At December 31, 2019

Weighted average information

Remaining lease term 9.4

Discount rate 5.0 %

Future undiscounted lease payments for our operating lease liabilities, and a reconciliation of these payments to our operating lease liabilities at December 31, 2019, are as follows:

For the years ending March 31,

Remaining 2020 $ 6,480

Thereafter 97,636

Total future lease payments 220,824

Less imputed interest ( 45,316 )

Total lease liabilities $ 175,508

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements