TAKE TWO INTERACTIVE SOFTWARE INC 10-Q

Item 1. Financial Statements TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) June 30, 2021 March 31, 2021 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,400,876 $ 1,422,884 Short-term investments 1,135,188 1,308,692 Restricted cash and cash equivalents 653,069 538,822 Accounts receivable, net of allowances of $ 350 and $ 350 at June 30, 2021 and March 31, 2021, respectively 487,171 552,762 Inventory 11,491 17,742 Software development costs and licenses 14,620 43,443 Deferred cost of goods sold 10,820 15,524 Prepaid expenses and other 300,377 320,646 Total current assets 4,013,612 4,220,515 Fixed assets, net 224,880 149,364 Right-of-use assets 163,464 164,763 Software development costs and licenses, net of current portion 607,207 490,892 Goodwill 645,591 535,306 Other intangibles, net 305,707 121,591 Deferred tax assets 78,383 90,206 Long-term restricted cash and cash equivalents 103,433 98,541 Other assets 171,978 157,040 Total assets $ 6,314,255 $ 6,028,218 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 67,136 $ 71,001 Accrued expenses and other current liabilities 1,242,312 1,204,090 Deferred revenue 824,520 928,029 Lease liabilities 31,361 31,595 Total current liabilities 2,165,329 2,234,715 Non-current deferred revenue 51,318 37,302 Non-current lease liabilities 156,951 159,671 Non-current software development royalties 111,652 110,127 Other long-term liabilities 197,698 154,511 Total liabilities $ 2,682,948 $ 2,696,326 Commitments and contingencies (See Note 13 ) Equity: Take-Two Interactive Software, Inc. stockholders' equity Preferred stock, $ .01 par value, 5,000 shares authorized; no shares issued and outstanding at June 30, 2021 and March 31, 2021 — — Common stock, $ .01 par value, 200,000 shares authorized; 138,846 and 137,584 shares issued and 116,425 and 115,163 outstanding at June 30, 2021 and March 31, 2021, respectively 1,389 1,376 Additional paid-in capital 2,417,658 2,288,781 Treasury stock, at cost; 22,421 common shares at June 30, 2021 and March 31, 2021 ( 820,572 ) ( 820,572 ) Retained earnings 2,023,227 1,870,971 Accumulated other comprehensive loss ( 2,770 ) ( 8,664 ) Total Take-Two Interactive Software, Inc. stockholders' equity 3,618,932 3,331,892 Non-controlling interest (See Note 15 ) 12,375 — Total equity $ 3,631,307 $ 3,331,892 Total liabilities and equity $ 6,314,255 $ 6,028,218 See accompanying Notes. 2 Table of Contents TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) Three Months Ended June 30, 2021 2020 Net revenue $ 813,346 $ 831,310 Cost of goods sold 329,715 476,689 Gross profit 483,631 354,621 General and administrative 104,447 102,173 Selling and marketing 103,854 84,779 Research and development 92,294 73,108 Depreciation and amortization 12,465 12,418 Business reorganization 97 — Total operating expenses 313,157 272,478 Income from operations 170,474 82,143 Interest and other, net ( 1,027 ) 8,218 Gain on long-term investments, net 1,997 — Income before income taxes 171,444 90,361 Provision for income taxes 19,188 1,856 Net income $ 152,256 $ 88,505 Earnings per share: Basic earnings per share $ 1.32 $ 0.78 Diluted earnings per share $ 1.30 $ 0.77 See accompanying Notes. 3 Table of Contents TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Three Months Ended June 30, 2021 2020 Net income $ 152,256 $ 88,505 Other comprehensive income: Foreign currency translation adjustment 6,132 4,701 Cash flow hedges: Change in unrealized gains — ( 3,817 ) Reclassification to earnings — ( 1,333 ) Tax effect on effective cash flow hedges — 845 Change in fair value of effective cash flow hedge — ( 4,305 ) Change in fair value of available for sale securities ( 238 ) 5,849 Other comprehensive income 5,894 6,245 Comprehensive income $ 158,150 $ 94,750 See accompanying Notes. 4 TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended June 30, 2021 2020 Operating activities: Net income $ 152,256 $ 88,505 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and impairment of software development costs and licenses 24,511 57,441 Depreciation 12,464 12,298 Amortization and impairment of intellectual property 15,215 4,986 Stock-based compensation 49,050 53,411 Other, net 13,802 ( 2,924 ) Changes in assets and liabilities: Accounts receivable 74,681 ( 91,846 ) Inventory 6,336 ( 131 ) Software development costs and licenses ( 85,887 ) ( 60,219 ) Prepaid expenses and other assets 17,622 80,759 Deferred revenue ( 94,660 ) 153,525 Deferred cost of goods sold 4,850 5,398 Accounts payable, accrued expenses and other liabilities ( 41,998 ) 144,220 Net cash provided by operating activities 148,242 445,423 Investing activities: Change in bank time deposits 311,893 ( 161,026 ) Proceeds from available-for-sale securities 161,151 117,738 Purchases of available-for-sale securities ( 302,485 ) ( 188,372 ) Purchases of fixed assets ( 86,433 ) ( 8,905 ) Purchases of long-term investments ( 96 ) ( 6,900 ) Business acquisitions ( 97,887 ) — Net cash used in investing activities ( 13,857 ) ( 247,465 ) Financing activities: Tax payment related to net share settlements on restricted stock awards ( 48,261 ) ( 38,506 ) Issuance of common stock 9,230 6,503 Net cash used in financing activities ( 39,031 ) ( 32,003 ) Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents 1,777 1,925 Net change in cash, cash equivalents, and restricted cash and cash equivalents 97,131 167,880 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) $ 2,157,378 $ 2,161,272 (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. 5 TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (in thousands) Three Months Ended June 30, 2021 Take-Two Interactive Software, Inc. stockholders Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Non-controlling interest ( Note 15 ) Total 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 — — — — — 152,256 — — 152,256 Change in cumulative foreign currency translation adjustment — — — — — — 6,132 — 6,132 Net unrealized gain on available-for-sale securities, net of taxes — — — — — — ( 238 ) — ( 238 ) Stock-based compensation — — 73,767 — — — — — 73,767 Issuance of restricted stock, net of forfeitures and cancellations 943 9 ( 9 ) — — — — — — Net share settlement of restricted stock awards ( 266 ) ( 2 ) ( 48,259 ) — — — — — ( 48,261 ) Employee share purchase plan settlement 70 1 9,229 — — — — — 9,230 Issuance of shares related to Nordeus acquisition 515 5 94,149 — — — — — 94,154 Call option related to Nordeus Acquisition — — — — — — — 12,375 12,375 Balance, June 30, 2021 138,846 $ 1,389 $ 2,417,658 ( 22,421 ) $ ( 820,572 ) $ 2,023,227 $ ( 2,770 ) $ 12,375 $ 3,631,307 Three Months Ended June 30, 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 — — — — — 88,505 — 88,505 Change in cumulative foreign currency translation adjustment — — — — — — 4,701 4,701 Change in gains on cash flow hedge, net — — — — — — ( 4,305 ) ( 4,305 ) Net unrealized gain on available-for-sale securities, net of taxes — — — — — — 5,849 5,849 Stock-based compensation — — 49,037 — — — — 49,037 Repurchased common stock — — — — — — — — Issuance of restricted stock, net of forfeitures and cancellations 979 10 ( 10 ) — — — — — Net share settlement of restricted stock awards ( 282 ) ( 3 ) ( 38,503 ) — — — — ( 38,506 ) Employee share purchase plan settlement 65 1 6,502 — — — — 6,503 Balance, June 30, 2020 136,689 $ 1,367 $ 2,151,774 ( 22,421 ) $ ( 820,572 ) $ 1,370,590 $ ( 52,131 ) $ 2,651,028 See accompanying Notes. 6 Table of Contents 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 standard did not have a material impact on our Condensed Consolidated Financial Statements. 2. REVENUE FROM CONTRACTS WITH CUSTOMERS Disaggregation of revenue Service and other revenue 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. 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). 7 Net revenue by product revenue and service and other was as follows: Three Months Ended June 30, 2021 2020 Net revenue recognized: Service and other $ 633,638 $ 532,050 Product 179,708 299,260 Total net revenue $ 813,346 $ 831,310 Recurrent consumer spending revenue 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 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 full game and other revenue and recurrent consumer spending was as follows: Three Months Ended June 30, 2021 2020 Net revenue recognized: Recurrent consumer spending $ 572,266 $ 496,853 Full game and other 241,080 334,457 Total net revenue $ 813,346 $ 831,310 Geography We attribute net revenue to geographic regions based on software product destination. Net revenue by geographic region was as follows: Three Months Ended June 30, 2021 2020 Net revenue recognized: United States $ 493,186 $ 470,490 International 320,160 360,820 Total net revenue $ 813,346 $ 831,310 Platform Net revenue by platform was as follows: Three Months Ended June 30, 2021 2020 Net revenue recognized: Console $ 602,443 $ 611,685 PC and other 128,645 165,260 Mobile 82,258 54,365 Total net revenue $ 813,346 $ 831,310 8 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 June 30, 2021 2020 Net revenue recognized: Digital online $ 740,806 $ 735,576 Physical retail and other 72,540 95,734 Total net revenue $ 813,346 $ 831,310 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 June 30, 2021 and March 31, 2021 were $ 875,838 and $ 965,331 , respectively. For the three months ended June 30, 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 June 30, 2021 and 2020, $ 463,241 and $ 371,213 , respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the respective period. As of June 30, 2021, the aggregate amount of contract revenue allocated to unsatisfied performance obligations is $ 998,074 , which includes our deferred revenue balances and amounts to be invoiced and recognized in future periods. We expect to recognize approximately $ 878,756 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 June 30, 2021 and March 31, 2021, our contract asset balances were $ 103,772 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 $ 1,705 and $ 2,665 during the three months ended June 30, 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 $ 7,218 and $ 6,740 during the three months ended June 30, 2021 and 2020, respectively. 9 Table of Contents In connection with the 2017 Management Agreement, we have granted restricted stock units to ZelnickMedia as follows: Three Months Ended June 30, 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 June 30, 2021 and March 31, 2021, respectively. During the three months ended June 30, 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. 10 Table of Contents • 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. June 30, 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 $ 633,114 $ 633,114 $ — $ — Cash and cash equivalents Bank-time deposits 382,000 382,000 — — Cash and cash equivalents Commercial paper 17,980 — 17,980 — Cash and cash equivalents US Agencies 5,000 — 5,000 — Cash and cash equivalents Corporate bonds 1,001 — 1,001 — Cash and cash equivalents Corporate bonds 661,790 — 661,790 — Short-term investments Bank-time deposits 266,869 266,869 — — Short-term investments US Treasuries 55,489 55,489 — — Short-term investments Asset-backed securities 229 — 229 — Short-term investments Commercial paper 150,811 — 150,811 — Short-term investments Money market funds 642,912 642,912 — — Restricted cash and cash equivalents Bank-time deposits 557 557 — — Restricted cash and cash equivalents Money market funds 103,433 103,433 — — Long-term restricted cash and cash equivalents Private equity 9,670 — — 9,670 Other assets Foreign currency forward contracts ( 161 ) — ( 161 ) — Accrued expenses and other current liabilities Contingent earn-out consideration ( 28,294 ) — — ( 28,294 ) Accrued expenses and other current liabilities Contingent earn-out consideration ( 50,370 ) — — ( 50,370 ) Other long-term liabilities Total recurring fair value measurements, net $ 2,852,030 $ 2,084,374 $ 836,650 $ ( 68,994 ) 11 Table of Contents 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 1 5 - Ac quisiti ons ), we recorded $ 78,664 as the initial fair value of contingent earn-out consideration. Due to the timing of the acquisition, the preliminary initial fair value was estimated using a simplified approach that had a limited number of scenarios and inputs, including projected financial information and relevant discount rates, which are considered significant unobservable Level 3 inputs. Subsequently, we will finalize our initial fair value using several scenarios and additional inputs, including market volatility. 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, 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 June 30, 2021, we held $ 20,000 of such investments in Other assets within our Condensed Consolidated Balance Sheet. 12 5. SHORT-TERM INVESTMENTS Our Short-term investments consisted of the following: June 30, 2021 Gross Unrealized Cost or Amortized Cost Gains Losses Fair Value Short-term investments Bank time deposits $ 266,869 $ — $ — $ 266,869 Available-for-sale securities: Corporate bonds 661,327 713 ( 250 ) 661,790 US Treasuries 55,463 26 — 55,489 Asset-backed securities 229 — — 229 Commercial paper 150,811 — — 150,811 Total Short-term investments $ 1,134,699 $ 739 $ ( 250 ) $ 1,135,188 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 June 30, 2021: June 30, 2021 Amortized Cost Fair Value Short-term investments Due in 1 year or less $ 892,200 $ 892,781 Due in 1 - 2 years 242,499 242,407 Total Short-term investments $ 1,134,699 $ 1,135,188 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Our risk management strategy includes the use of derivative financial instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. 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. 13 Table of Contents Foreign currency forward contracts The following table shows the gross notional amounts of foreign currency forward contracts: June 30, 2021 March 31, 2021 Forward contracts to sell foreign currencies $ 64,463 $ 140,510 Forward contracts to purchase foreign currencies 105,830 92,123 For the three months ended June 30, 2021 and 2020, we recorded a loss of $ 1,828 and a loss of $ 2,657 , 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. 7. INVENTORY Inventory balances by category were as follows: June 30, 2021 March 31, 2021 Finished products $ 10,693 $ 16,941 Parts and supplies 798 801 Inventory $ 11,491 $ 17,742 Estimated product returns included in Inventory at June 30, 2021 and March 31, 2021 were $ 220 and $ 186 , respectively. 8. SOFTWARE DEVELOPMENT COSTS AND LICENSES Details of our capitalized software development costs and licenses were as follows: June 30, 2021 March 31, 2021 Current Non-current Current Non-current Software development costs, internally developed $ 7,055 $ 504,520 $ 22,225 $ 412,919 Software development costs, externally developed 3,014 95,966 7,349 75,086 Licenses 4,551 6,721 13,869 2,887 Software development costs and licenses $ 14,620 $ 607,207 $ 43,443 $ 490,892 During the three months ended June 30, 2021 and 2020, we recorded $ 9,771 and $ 19,695 , respectively, of software development impairment charges (a component of Cost of goods sold). The impairment charge recorded during the three months ended June 30, 2021, and 2020, respectively, 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. 14 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following: June 30, 2021 March 31, 2021 Software development royalties $ 892,023 $ 814,998 Compensation and benefits 90,833 122,404 Licenses 82,087 84,330 Deferred acquisition payments 40,382 13,343 Refund liability 33,856 53,361 Marketing and promotions 26,237 32,591 Other 76,894 83,063 Accrued expenses and other current liabilities $ 1,242,312 $ 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 June 30, 2021) or (b) 1.125 % to 1.750 % above LIBOR (approximately 0.10 % at June 30, 2021), which rates are determined by reference to our consolidated total net leverage ratio. We had no outstanding borrowings at June 30, 2021. Information related to availability on our Credit Agreement was as follows: June 30, 2021 March 31, 2021 Available borrowings $ 247,874 $ 197,874 Outstanding letters of credit 2,126 2,126 We recorded interest expense and fees related to the Credit Agreement of $ 145 and $ 82 for the three months ended June 30, 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). 15 11. EARNINGS PER SHARE ("EPS") The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended June 30, 2021 2020 Computation of Basic earnings per share: Net income $ 152,256 $ 88,505 Weighted average shares outstanding—basic 115,702 113,862 Basic earnings per share $ 1.32 $ 0.78 Computation of Diluted earnings per share: Net income $ 152,256 $ 88,505 Weighted average shares outstanding—basic 115,702 113,862 Add: dilutive effect of common stock equivalents 1,428 1,094 Weighted average common shares outstanding—diluted 117,130 114,956 Diluted earnings per share $ 1.30 $ 0.77 During the three months ended June 30, 2021, 943 restricted stock awards vested, we granted 893 unvested restricted stock awards, and 17 unvested restricted stock awards were forfeited. 12. ACCUMULATED OTHER COMPREHENSIVE LOSS The following table provides the components of accumulated other comprehensive loss: Three Months Ended June 30, 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 income (loss) before reclassifications 6,132 ( 238 ) 5,894 Amounts reclassified from accumulated other comprehensive loss — — — Balance at June 30, 2021 $ ( 3,150 ) $ 380 $ ( 2,770 ) Three Months Ended June 30, 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 4,701 — ( 2,972 ) 5,849 7,578 Amounts reclassified from accumulated other comprehensive loss — — ( 1,333 ) — ( 1,333 ) Balance at June 30, 2020 $ ( 55,834 ) $ 600 $ — $ 3,103 $ ( 52,131 ) 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 Part II, Item 7 of 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. 16 Table of Contents 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 June 30, 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 $ 19,188 for the three months ended June 30, 2021, as compared to $ 1,856 for the prior year period. When compared to the statutory rate of 21%, the effective tax rate of 11.2 % for the three months ended June 30, 2021 was due primarily to a tax benefit of $ 12,082 due to tax credits and excess tax benefits of $ 9,448 from employee stock-based compensation and 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 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 to the shares we acquired, we have a call option to purchase the remaining 5.5 % of the outstanding equity of Nordeus for cash consideration of $ 12,375 in September 2021. We are accounting for the call option as Non-controlling interest in our Condensed Statement of Stockholder's Equity. Income attributable to our Non-controlling interest for the three months ended June 30, 2021 is immaterial. 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 $ 306,306 , which consisted of the following: Fair value of purchase consideration Cash $ 120,488 Common stock ( 515 shares) 94,154 Call option 12,375 Contingent earn-out 78,664 Deferred payment 625 Total $ 306,306 The fair value of the contingent earn-out consideration arrangement at the acquisition date was $ 78,664 . 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. 17 Table of Contents (Refer to Note 4 - Fair Value Meas uremen ts .) As of June 30, 2021, there were no significant changes in the range of outcomes for the contingent earn-out consideration recognized as a result of the acquisition of Nordeus. We reported $ 28,294 within Accrued expenses and $ 50,370 within Other long-term liabilities in our Condensed Consolidated Balance Sheet. 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 $ 22,600 N/A Other tangible assets 18,858 N/A Other liabilities assumed ( 38,690 ) 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 106,738 N/A Total $ 306,306 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 June 30, 2021 Net revenue 1,936 Net loss 4,490 The following table summarizes the pro-forma consolidated results of operations (unaudited) for the three months ended June 30, 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 June 30, 2021 2020 Pro forma Net revenue $ 823,190 $ 841,265 Pro forma Net income $ 154,436 $ 83,571 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. 18 Table of Contents Transaction costs of $ 2,003 for the three months ended June 30, 2021, 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 asset 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 19 Table of Contents