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