NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and 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. The Company develops and publishes products principally through its
two
wholly-owned labels Rockstar Games and 2K. Our products are designed for console systems and personal computers, including smart phones and tablets, and are delivered through physical retail, digital download, online platforms and cloud streaming services.
Principles of Consolidation
The Consolidated Financial Statements include the financial statements of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Reclassifications
Certain immaterial amounts in the financial statements of the prior years have been reclassified to conform to the current year presentation for comparative purposes.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses during the reporting periods. Our most significant estimates and assumptions relate to the recoverability of software development costs and prepaid royalties, licenses and intangibles, valuation of inventories, realization of deferred income taxes, the adequacy of price protection, allowances for sales returns and doubtful accounts, accrued liabilities, the service period for deferred net revenue and related cost of goods sold, fair value estimates, the valuation of stock-based compensation, and assumptions used in our goodwill impairment tests. These estimates generally involve complex issues and require us to make judgments, involve analysis of historical and the prediction of future trends, and are subject to change from period to period. Actual amounts could differ significantly from these estimates. The Company considers transactions or events that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.
Concentration of Credit Risk and Accounts Receivable
We maintain cash balances at several major financial institutions. While we attempt to limit credit exposure with any single institution, balances often exceed insurable amounts.
If the financial condition and operations of our customers deteriorate, our risk of collection could increase substantially. A majority of our trade receivables are derived from sales to major retailers and distributors. Our
five
largest customers accounted for
65.5%
58.9%
and
64.6%
of net revenue during the fiscal years ended
March 31, 2017
,
2016
and
2015
, respectively. One customer accounted for
26.3%
,
20.7%
and
13.3%
of net revenues during the fiscal years ended
March 31, 2017
,
2016
, and
2015
, respectively. A second customer accounted for
14.2%
,
15.5%
, and
11.7%
of net revenue during the fiscal years ended
March 31, 2017
and
2016
, and
2015
respectively. A third customer accounted for
10.9%
of net revenue during the fiscal year ended
March 31, 2017
. A fourth customer accounted for
21.0%
of net revenue during the fiscal year ended
March 31, 2015
. A fifth customer accounted for
10.4%
of net revenue during the fiscal year ended
March 31, 2015
. As of
March 31, 2017
and
2016
, five customers accounted for
69.9%
and
73.9%
of our gross accounts receivable, respectively. Customers that individually accounted for more than
10%
of our gross accounts receivable balance comprised
57.6%
and
64.1%
of such balances at
March 31, 2017
and
2016
, respectively. We had
two
customers who accounted for
40.2%
and
17.4%
of our gross accounts receivable as of
March 31, 2017
and
three
customers who accounted for
35.2%
,
16.8%
and
12.1%
of our gross accounts receivable as of
March 31, 2016
. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of
March 31, 2017
and
2016
. Based upon performing ongoing credit evaluations, maintaining trade credit insurance on a majority of our customers and our past collection experience, we believe that the receivable balances from these largest customers do not represent a significant credit risk.
Cash and Cash Equivalents
We consider all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents. Our restricted cash balance is primarily related to a dedicated account limited to the payment of certain internal royalty obligations.
Short-term Investments
Short-term investments designated as available-for-sale securities are carried at fair value, which is based on quoted market prices for such securities, if available, or is estimated on the basis of quoted market prices of financial instruments with similar characteristics. Investments with original maturities greater than
90
days and remaining maturities of less than one year are normally classified within short-term investments. In addition, investments with maturities beyond one year at the time of purchase that are highly liquid in nature and represent the investment of cash that is available for current operations are classified as short-term investments.
Unrealized gains and losses of the Company's available-for-sale securities are excluded from earnings and are reported as a component of other comprehensive (loss) income, net of tax, until the security is sold, the security has matured, or the Company determines that the fair value of the security has declined below its adjusted cost basis and the decline is other-than-temporary. Realized gains and losses on short-term investments are calculated based on the specific identification method and would be reclassified from accumulated other comprehensive loss to interest and other, net.
Short-term investments are evaluated for impairment quarterly. The Company considers various factors in determining whether it should recognize an impairment charge, including the credit quality of the issuer, the duration that the fair value has been less than the adjusted cost basis, the severity of the impairment, the reason for the decline in value, and our intent to sell and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. If the Company concludes that an investment is other-than-temporarily impaired, it recognizes an impairment charge at that time in the Consolidated Statements of Operations. In determining whether the decline in fair value is other-than-temporary requires management judgment based on the specific facts and circumstances of each security. The ultimate value realized on these securities is subject to market price volatility until they are sold.
Inventory
Inventory consists of materials, including manufacturing royalties paid to console manufacturers, and is stated at the lower of weighted average cost or net realizable value. Estimated product returns are included in the inventory balance at their cost. We regularly review inventory quantities on-hand and in the retail channels and record an inventory provision for excess or obsolete inventory based on the future expected demand for our products. Significant changes in demand for our products would affect management's estimates in establishing our inventory provision. We write down inventory based on excess or obsolete inventories determined primarily by future anticipated demand for our products. Inventory write-downs are measured as the difference between the cost of the inventory and market value, based upon assumptions about future demand that are inherently difficult to assess.
Software Development Costs and Licenses
Capitalized software development costs include direct costs incurred for internally developed titles and payments made to third-party software developers under development agreements.
We capitalize internal software development costs (including specifically identifiable employee stock-based compensation, payroll expense, and incentive compensation costs related to the completion and release of titles, as well as third-party production and other content costs), subsequent to establishing technological feasibility of a software title. Technological feasibility of a product includes the completion of both technical design documentation and game design documentation. Significant management judgments are made in the assessment of when technological feasibility is established. For products where proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis.
We enter into agreements with third-party developers that require us to make payments for game development and production services. In exchange for our payments, we receive the exclusive publishing and distribution rights to the finished game title as well as, in some cases, the underlying intellectual property rights. Such agreements typically allow us to fully recover these payments to the developers at an agreed upon royalty rate earned on the subsequent sales of such software, net of any agreed upon costs. Prior to establishing technological feasibility of a product, we record any costs incurred by third-party developers as research and development expenses. Subsequent to establishing technological feasibility of a product, we capitalize all development and production service payments to third-party developers as software development costs and licenses. We typically enter into agreements with third-party developers after completing the technical design documentation for our products and therefore record the design costs leading up to a signed development contract as research and development expense. When we contract with third-party developers, we generally select those that have proven technology and experience in the genre of the software being developed, which often allows for the establishment of technological feasibility early in the development cycle. In instances where the documentation of the design and technology are not in place prior to an executed contract, we monitor the software development process and require our third-party developers to adhere to the same technological feasibility standards that apply to our internally developed products.
Licenses consist of payments and guarantees made to holders of intellectual property rights for use of their trademarks, copyrights or other intellectual property rights in the development of our products. Agreements with license holders generally provide for guaranteed minimum payments for use of their intellectual property. Certain licenses, especially those related to our sports products, extend over multi-year periods and encompass multiple game titles. In addition to guaranteed minimum payments, these licenses frequently contain provisions that could require us to pay royalties to the license holder based on pre-agreed unit sales thresholds.
Amortization of capitalized software development costs and licenses commences when a product is released and is recorded on a title-by-title basis in cost of goods sold. For capitalized software development costs, amortization is calculated using (1) the proportion of current year revenues to the total revenues expected to be recorded over the life of the title or (2) the straight-line method over the remaining estimated useful life of the title, whichever is greater. For capitalized licenses, amortization is calculated as a ratio of (1) current period revenues to the total revenues expected to be recorded over the remaining life of the title or (2) the contractual royalty rate based on actual net product sales as defined in the licensing agreement, whichever is greater.
We evaluate the future recoverability of capitalized software development costs and licenses on a quarterly basis. Recoverability is primarily assessed based on the actual title's performance. For products that are scheduled to be released in the future, recoverability is evaluated based on the expected performance of the specific products to which the cost or license relates. We utilize a number of criteria in evaluating expected product performance, including historical performance of comparable products developed with comparable technology; market performance of comparable titles; orders for the product prior to its release; general market conditions; and, past performance of the franchise. When we determine that capitalized cost of the title is unlikely to be recovered by product sales, an impairment of software development and license capitalized costs is charged to cost of goods sold in the period in which such determination is made.
We have profit and unit sales based internal royalty programs that allow selected employees to each participate in the success of software titles that they assist in developing. Royalties earned under this program are recorded as a component of cost of goods sold in the period earned.
Fixed Assets, net
Office equipment, furniture and fixtures are depreciated using the straight-line method over their estimated useful life of
five
years. Computer equipment and software are generally depreciated using the straight-line method over
three
to
five
years. Leasehold improvements are amortized over the lesser of the term of the related lease or the useful life of the underlying asset, typically
seven
years. The cost of additions and betterments are capitalized, and repairs and maintenance costs are charged to operations, in the periods incurred. When depreciable assets are retired or sold, the cost and related allowances for depreciation are removed from the accounts and the gain or loss, if any, is recognized. The carrying amounts of these assets are recorded at historical cost.
Goodwill and Intangible Assets
Goodwill is the excess of purchase price paid over identified intangible and tangible net assets of acquired companies. Intangible assets consist of intellectual property, developed game technology, analytics technology, user base, trade names, and in-process research and development. Certain intangible assets acquired in a business combination are recognized as assets apart from goodwill.
We use either the income, cost or market approach to aid in our conclusions of such fair values and asset lives. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market approach estimates value based on what other participants in the market have paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the approach ultimately selected is based on the characteristics of the asset and the availability of information.
We test our goodwill for impairment annually, at the beginning of August, or more frequently, if events and circumstances indicate the fair value of a reporting unit may be below its carrying amount. A reporting unit is defined as an operating segment or one level below an operating segment. We have determined that we operate in one reporting unit, which is our operating segment. In the evaluation of goodwill for impairment, we have the option to first perform a qualitative assessment to determine if the fair value of its reporting unit is more likely than not (i.e., a likelihood of more than 50%) less than the carrying value before performing the two-step impairment test. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. If the two-step impairment test is utilized to test goodwill for impairment, step one compares the fair value of the reporting unit to its carrying value. In performing the quantitative assessment in step-one, we measure the fair value of the reporting unit using a combination of the income approach, which uses discounted cash flows, and the market approach, which uses market capitalization and comparable companies' data. Each step requires us to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include long-term growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates based on our weighted average cost of capital, future economic and market conditions and the determination of appropriate market comparables. Our estimates for market growth are based on historical data, various internal estimates and observable external sources when available, and are based on assumptions that are consistent with
the plans and estimates we use to manage the underlying business. If the carrying value of the reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and step two must be performed. Step two compares the carrying value of the reporting unit's goodwill to its implied fair value (i.e., fair value of reporting unit less the fair value of the unit's assets and liabilities, including identifiable intangible assets). If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment is recognized. Based on our annual impairment assessment process for goodwill, no impairments were recorded during the fiscal years ended
March 31, 2017
,
2016
or
2015
.
Long-lived Assets
We review all long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amount of an asset or asset group may not be recoverable. We compare the carrying amount of the asset to the estimated undiscounted future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, we record an impairment charge for the difference between the carrying amount of the asset and its fair value. The estimated fair value is generally measured by discounting expected future cash flows using our incremental borrowing rate or fair value, if available. As of
March 31, 2017
, no indicators of impairment existed.
Derivatives and Hedging
We transact business in various foreign currencies and have significant sales and purchase transactions denominated in foreign currencies, subjecting us to foreign currency exchange rate risk. From time to time, we carry out transactions involving foreign currency exchange derivative financial instruments. The transactions are designed to hedge our exposure in currency exchange rate movements. We recognize derivative instruments as either assets or liabilities on our Consolidated Balance Sheets and we measure those instruments at fair value. The changes in fair value of derivatives that are not designated as hedges are recognized currently in earnings as interest and other, net in our Consolidated Statements of Operations. If a derivative meets the definition of a cash flow hedge and is so designated, the effective portion of changes in the fair value of the derivative are recognized, as a component of other comprehensive income (loss) while the ineffective portion of the changes in fair value is recorded currently in earnings as interest and other, net in our Consolidated Statements of Operations. Amounts included in Accumulated other comprehensive income (loss) for cash flow hedges are reclassified into earnings in the same period that the hedged item is recognized in cost of goods sold or research and development expenses, as appropriate.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. Our provision for income taxes is computed using the asset and liability method, under which deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at currently enacted statutory tax rates for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment.
Valuation allowances are established when we determine that it is more likely than not that such deferred tax assets will not be realized. We do not record income tax expense related to foreign withholding taxes or United States income taxes which may become payable upon the repatriation of undistributed earnings of foreign subsidiaries, as such earnings are expected to be reinvested indefinitely outside of the United States.
We use estimates and assumptions to compute the provision for income taxes including allocations of certain transactions to different tax jurisdictions, amounts of permanent and temporary differences, the likelihood of deferred tax assets being recovered and the outcome of contingent tax risks. These estimates and assumptions are revised as new events occur, more experience is acquired and additional information is obtained. The effect of these revisions is recorded in income tax expense or benefit in the period in which they become known.
Revenue Recognition
We recognize revenue on the sales of software products upon the transfer of title and risk of loss to our customers. Accordingly, we recognize revenue for software titles when there is (1) persuasive evidence that an arrangement with the customer exists, (2) the product is delivered, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. Certain products are sold to customers with a street date (
i.e.,
the earliest date these products may be sold by retailers). For these products we recognize revenue on the later of the street date or the sale date. In addition, some of our software products are sold as full game digital downloads and digital add-on content for which the consumer takes possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is made available to the end user (assuming all other recognition criteria are met).
In providing credit terms to our customers, our payment arrangements typically provide net
30
and
60
day terms. Advances received for licensing and exclusivity arrangements are reported on our Consolidated Balance Sheets as deferred revenue until we meet our performance obligations, at which point we recognize the revenue.
For some of our software products, we enter into multiple element revenue arrangements in which we may provide a combination of full game software, online multi-player functionality, and related post-contract customer support ("PCS") which generally includes additional free unspecified add-on content updates, maintenance, and online support services. For these arrangements, we evaluate the significance of the PCS at the time each game is released based on the guidance in Accounting Standards Codification 985-605, "Software—Revenue Recognition" ("ASC 985-605") to determine if the PCS rises to the level of a separate deliverable. We monitor our initial assessments on an ongoing basis and consider any changes that may arise. In conjunction with our evaluation, we consider such factors as the significance of the development effort, the nature of online features, the extent of anticipated marketing focus on online features, the significance of the online features to the consumers' anticipated overall gameplay experience, and the significance and length of time of our post sale obligations to consumers. Determining whether PCS is significant for a particular game is subjective and requires management's judgment.
When a software arrangement includes multiple elements, the arrangement consideration is allocated to each revenue element based on its relative fair value, based on the vendor specific objective evidence ("VSOE") of fair value for each element. When VSOE of fair value does not exist for all of the elements in the arrangement, ASC 985-605 requires either the use of the residual method or the deferral of revenue until the earlier point at which VSOE of fair value exists for any undelivered element or until only one undelivered element remains. For arrangements that require the deferral of revenue, the related cost of goods sold is deferred and recognized as the related net revenue is recognized. Deferred cost of goods sold includes product costs and licenses. We do not have VSOE for our PCS obligations and in those arrangements where PCS obligations have been determined to be significant we recognize revenue from the sale of software products and the related cost of goods sold ratably over the period we expect to offer the PCS to the consumer ("estimated service period"), assuming all other recognition criteria are met. We also do not have VSOE for our online multi-player functionality; however it is generally delivered at the same time with the full game software. Determining the estimated service period is subjective and requires management's judgment, therefore, the estimated service period may change in the future. The estimated service periods of our current games, with online functionality and related PCS, are generally
12
months, with the exception of GTA, which is
41 months
(see below).
When our software products provide insignificant PCS at no additional cost to the consumer, we recognize revenue when the four primary revenue recognition criteria described above have been met for all other deliverables in the arrangement and, in those situations, we estimate and accrue the future costs of providing those services.
Certain of our games provide consumers with the option to purchase virtual currency to use in the game to acquire virtual goods. We currently recognize revenue from the sale of virtual currency, using the game-based model, ratably over the estimated remaining life of the game. Because the service period for our online-enabled games with significant PCS is not an explicitly defined period, we must make an estimate of the service offering period for purposes of recognizing revenue. The estimated service period for current deferred title offerings is based on our estimate of the economic game life of the respective title. Determining the estimated service period (or economic game life) is inherently subjective and is subject to regular revision based on numerous factors and considerations. The factors that we primarily consider as part of our process of initially determining and subsequently reassessing estimated service periods for our titles include:
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the period of time over which the substantial majority of a respective title’s estimated lifetime game sales and in-game virtual currency sales are expected to occur;
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the period of time over which we plan to provide free unspecified add-on content updates, maintenance or other remaining material online support services associated with our online-enabled games;
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the time over which we plan to dedicate internal resources to support the online functionality of a title;
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known and expected online gameplay trends;
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the results from prior analyses;
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the nature of the game (e.g., annual title, genre, period of time between franchise title releases, etc.); and
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the disclosed service periods for competitors’ games.
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To the extent we have recorded significant amounts of revenue deferred for specific titles, changes in the estimated service periods could have a material impact on the revenue recognized in a particular period.
As part of our on-going assessment of estimated service periods during the three months ended
March 31, 2017
, we changed
Grand Theft Auto V's
estimated service period from
36
to
41
months. The change in estimate resulted in a decrease in net revenues of
$29,367
and income from operations of
$27,070
to our fiscal 2017 financial results, with such revenues expected to be recognized in fiscal 2018.
Revenue is recognized after deducting estimated price protection, reserves for returns and other allowances. In circumstances when we do not have a reliable basis to estimate price protection, returns and other allowances or are unable to determine that collection of a receivable is probable, we defer the revenue until we can reliably estimate any related returns and allowances and determine that collection of the receivable is probable.
Price protection and Allowances for Returns
We grant price protection and accept returns in connection with our distribution arrangements with customers. Following reductions in the price of our products, we grant price protection to permit customers to take credits against amounts they owe us with respect to merchandise unsold by them. Our customers must satisfy certain conditions to entitle them to receive price protection or return products, including compliance with applicable payment terms and confirmation of field inventory levels.
Generally, our distribution arrangements with customers do not give them the right to return titles or to cancel firm orders. However, we occasionally accept returns from our customers for stock balancing and make accommodations to customers, which include credits and returns, when demand for specific titles falls below expectations.
We make estimates of future price protection and product returns related to current period product revenue. We estimate the amount of future price protection and returns for published titles based upon, among other factors, historical experience and performance of the titles in similar genres, historical performance of the hardware platform, customer inventory levels, analysis of sell-through rates, sales force and retail customer feedback, industry pricing, market conditions and changes in demand and acceptance of our products by consumers.
Significant management judgments and estimates must be made and used in connection with establishing price protection and the allowance for returns in any accounting period. We believe we can make reliable estimates of price protection and returns. However, actual results may differ from initial estimates as a result of changes in circumstances, market conditions and assumptions. Adjustments to estimates are recorded in the period in which they become known.
Consideration Given to Customers and Received from Vendors
We have various marketing arrangements with retailers and distributors of our products that provide for cooperative advertising and market development funds, among others, which are generally based on single exchange transactions. Such amounts are accrued as a reduction to revenue at the later of: (1) the date at which the related revenue is recognized by us, or (2) the date at which the sales incentive is offered, except for cooperative advertising which is included in selling and marketing expense if there is a separate identifiable benefit and the benefit's fair value can be established.
We receive various incentives from our manufacturers, including up-front cash payments as well as rebates based on a cumulative level of purchases. Such amounts are generally accounted for as a reduction in the price of the manufacturer's product and included as a reduction of inventory or cost of goods sold, based on an agreed upon per unit rebate.
Advertising
We expense advertising costs as incurred. Advertising expense for the fiscal years ended
March 31, 2017
,
2016
and
2015
amounted to
$173,947
,
$94,743
and
$132,990
, respectively, and are included in "Selling and marketing expense" in our Consolidated Statements of Operations.
Earnings (loss) per Share ("EPS")
Basic EPS is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the same period. Diluted EPS is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock and common stock equivalents outstanding.
Certain of our unvested restricted stock awards (including restricted stock units, time-based and market-based restricted stock awards) are considered participating securities since these securities have non-forfeitable rights to dividends or dividend equivalents during the contractual period of the award, and thus require the two-class method of computing EPS. The calculation of EPS for common stock under the two-class method excludes the income attributable to the participating securities from the numerator and excludes the dilutive effect of those awards from the denominator.
We define common stock equivalents as unvested restricted stock awards and common stock equivalents underlying the Convertible Notes (see Note 11) outstanding during the period. Unvested restricted stock awards are measured using the treasury stock method, and common stock equivalents underlying the Convertible Notes are assessed for their effect on diluted EPS using the more dilutive of the treasury stock method or the if-converted method. Under the provisions of the if-converted method, the Convertible Notes are assumed to be converted and included in the denominator of the EPS calculation and the interest expense, net of tax, recorded in connection with the Convertible Notes is added back to the numerator. However, potential common shares are not included in the denominator of the diluted earnings (loss) per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
Stock-based Compensation
We account for stock-based awards under the fair value method of accounting. The fair value of all stock-based compensation is either capitalized and amortized in accordance with our software development cost accounting policy or recognized as expense on a straight-line basis over the full vesting period of the awards for time-based stock awards and on an accelerated attribution method for market-based and performance-based stock awards.
We estimate the fair value of time-based awards to employees using our closing stock price on the date of grant. We estimate the fair value of market-based awards using a Monte Carlo Simulation method which takes into account assumptions such as the expected volatility of our common stock, the risk-free interest rate based on the contractual term of the award, expected dividend yield, vesting schedule and the probability that the market conditions of the awards will be achieved.
We apply variable accounting to our non-employee stock-based awards, whereby we remeasure the value of such awards at each balance sheet date and adjust the value of the awards based on its fair value at the end of the reporting period. For non-employee time-based awards fair value is determined by the closing price of our common stock at the end of the reporting period. For non-employee market-based awards fair value is determined using a Monte Carlo Simulation method which takes into account assumptions such as the expected volatility of our common stock, the risk-free interest rate based on the contractual term of the award, expected dividend yield, vesting schedule and the probability that the market conditions of the awards will be achieved. For non-employee performance-based awards we do not record an expense until a performance target(s) have been achieved and once achieved fair value is determined by the closing price of our common stock at the end of the reporting period.
We issue time and performance based restricted stock units to certain employees, which currently can only be settled in cash. These awards are accounted for as liability awards. Changes in the value of the awards from period to period are recorded as stock-based compensation expense over the vesting period or capitalized as software development costs.
Foreign Currency
The functional currency for our foreign operations is primarily the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using exchange rates for assets and liabilities at the balance sheet date and average prevailing exchange rates for the period for revenue and expense accounts. Adjustments resulting from translation are included in accumulated other comprehensive income (loss). Realized and unrealized transaction gains and losses are included in our Consolidated Statements of Operations in the period in which they occur.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive income (loss) includes foreign currency translation adjustments, which relate to investments that are permanent in nature and therefore do not require tax adjustments, and the net of tax amounts for unrealized gains (losses), net on derivative instruments designated as cash flow hedges and available for sale securities.
Recently Issued Accounting Pronouncements
Accounting for Acquisitions or Disposals
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2017-01,
Clarifying the Definition of a Business
, with the objective of providing additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide new guidance to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The new guidance requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new guidance is expected to reduce the number of transactions that need to be further evaluated. The new standard, as amended, will be effective prospectively for interim and annual reporting periods beginning on January 1, 2018 (April 1, 2018 for the Company), with early adoption permitted. We intend to early adopt this ASU for the quarterly period ending June 30, 2017 and believe that the evaluation
of whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses will be simplified under the new standard.
Accounting for Goodwill
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350)
. This ASU eliminates Step 2 from the goodwill impairment test. Under the new guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, this ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 (April 1, 2020 for the Company), including interim periods within those fiscal years, and is applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. While we are currently evaluating the impact of the adoption of this ASU, we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
Accounting for Restricted Cash
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. This ASU amends the presentation of restricted cash within the statement of cash flows. The new guidance requires that changes in restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2017 (April 1, 2018 for the Company), including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of this ASU.
Accounting for Stock Compensation
In March 2016, the FASB issued ASU 2016-09,
Compensation—Stock Compensation
. This new guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This update is effective for annual periods beginning after December 15, 2016 (April 1, 2017 for the Company) and interim periods within those annual periods. In the first quarter of fiscal 2018, the Company will apply a modified retrospective transition method to account for the changes under the standard related to income taxes and the policy election for recording forfeitures as they occur.
Accounting for Leases
In February 2016, the FASB issued ASU 2016-02,
Leases
. This new guidance requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. This update is effective for annual periods, and interim periods within those years, beginning after December 15, 2018 (April 1, 2019 for the Company). This new guidance must be adopted using a modified retrospective approach whereby, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the impact of adopting this update on our Consolidated Financial Statements, which will consist primarily of a balance sheet gross up of our operating leases, mostly for office space.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration, which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB recently issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).
The new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017 (April 1, 2018 for the Company), with early adoption permitted for annual reporting periods beginning after December 15, 2016 (April 1, 2017 for the Company). The Company will adopt the new standard effective April 1, 2018 using the cumulative catch-up method.
We anticipate this standard will have a material impact on our Consolidated Financial Statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for on-line enabled games that benefit from meaningful game related services such as unspecified content updates and online support services for which we do not have vendor specific objective evidence of fair value ("VSOE").
Under the current accounting standards, for titles that do not have VSOE, we recognize the entire sales price ratably over the title's estimated service period. The VSOE requirement will be eliminated under the new standard. Accordingly, we may be required to recognize as revenue a portion of the sales price upon delivery of the software, as compared to the current requirement of recognizing the entire sales price ratably over an estimated offering period.
2. MANAGEMENT AGREEMENT
In May 2011, we entered into an amended management services agreement, (the "2011 Management Agreement") with ZelnickMedia Corporation ("ZelnickMedia") pursuant to which ZelnickMedia provided us with certain management, consulting and executive level services. In March 2014, we entered into a new management agreement, (the "2014 Management Agreement"), with ZelnickMedia pursuant to which ZelnickMedia continues to provide financial and management consulting services to the Company through March 31, 2019. The 2014 Management Agreement became effective April 1, 2014 and supersedes and replaces the 2011 Management Agreement, except as otherwise contemplated by the 2014 Management Agreement. As part of the 2014 Management Agreement, Strauss Zelnick, the President of ZelnickMedia, continues to serve as Executive Chairman and Chief Executive Officer and Karl Slatoff, a partner of ZelnickMedia, continues to serve as President of the Company. The 2014 Management Agreement provides for an annual management fee of
$2,970
over the term of the agreement and a maximum annual bonus opportunity of
$4,752
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
$7,722
,
$7,722
and
$7,737
for the fiscal years ended
March 31, 2017
,
2016
and
2015
, respectively.
Pursuant to the 2011 Management Agreement and the 2014 Management Agreement, we also issued stock-based awards to ZelnickMedia. During the fiscal years ended
March 31, 2017
,
2016
and
2015
, we recorded
$29,573
,
$26,652
and
$24,449
, respectively, of stock-based compensation expense for non-employee awards, which is included in general and administrative expenses. See Note 15 for a discussion of such awards.
3. FAIR VALUE MEASUREMENTS
The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
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
|
|
$
|
646,386
|
|
|
$
|
646,386
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash and cash equivalents
|
Bank-time deposits
|
|
46,605
|
|
|
46,605
|
|
|
—
|
|
|
—
|
|
|
Cash and cash equivalents
|
Commercial paper
|
|
38,268
|
|
|
—
|
|
|
38,268
|
|
|
—
|
|
|
Cash and cash equivalents
|
Corporate bonds
|
|
273,187
|
|
|
—
|
|
|
273,187
|
|
|
—
|
|
|
Short-term investments
|
Bank-time deposits
|
|
175,745
|
|
|
175,745
|
|
|
—
|
|
|
—
|
|
|
Short-term investments
|
Foreign currency forward contracts
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Prepaid expenses and other
|
Foreign currency forward contracts
|
|
(352
|
)
|
|
—
|
|
|
(352
|
)
|
|
—
|
|
|
Accrued and other current liabilities
|
Private equity
|
|
570
|
|
|
—
|
|
|
—
|
|
|
570
|
|
|
Other assets
|
Contingent consideration
|
|
6,465
|
|
|
—
|
|
|
—
|
|
|
6,465
|
|
|
Other long-term liabilities
|
Total recurring fair value measurements, net
|
|
$
|
1,186,876
|
|
|
$
|
868,736
|
|
|
$
|
311,105
|
|
|
$
|
7,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
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
|
|
$
|
562,726
|
|
|
$
|
562,726
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash and cash equivalents
|
Corporate bonds
|
|
205,250
|
|
|
—
|
|
|
205,250
|
|
|
—
|
|
|
Short-term investments
|
Bank-time deposits
|
|
265,570
|
|
|
265,570
|
|
|
—
|
|
|
—
|
|
|
Short-term investments
|
Foreign currency forward contracts
|
|
(137
|
)
|
|
—
|
|
|
(137
|
)
|
|
—
|
|
|
Accrued and other current liabilities
|
Total recurring fair value measurements, net
|
|
$
|
1,033,409
|
|
|
$
|
828,296
|
|
|
$
|
205,113
|
|
|
$
|
—
|
|
|
|
In connection with the Social Point acquisition (see Note 23), we recorded
$6,409
as the initial fair value of earn-out contingent 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.
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 fiscal year ended
March 31, 2017
.
Debt
As of
March 31, 2017
, the estimated fair value of our
1.00%
Convertible Notes due 2018 (the "
1.00%
Convertible Notes") was
$738,053
. The fair value was determined using Level 2 inputs, observable market data for the
1.00%
Convertible Notes and its embedded option feature. See Note 11 for additional information regarding our Convertible Notes.
4. SHORT-TERM INVESTMENTS
Our short-term investments consisted of the following as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
|
|
|
|
|
|
Gains
|
|
Losses
|
|
Fair Value
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
Bank time deposits
|
|
$
|
175,745
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
175,745
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
273,196
|
|
|
226
|
|
|
(235
|
)
|
|
273,187
|
|
Total short-term investments
|
|
$
|
448,941
|
|
|
$
|
226
|
|
|
$
|
(235
|
)
|
|
$
|
448,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
|
|
|
|
|
|
Gains
|
|
Losses
|
|
Fair Value
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
Bank time deposits
|
|
$
|
265,570
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
265,570
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
205,166
|
|
|
131
|
|
|
(47
|
)
|
|
205,250
|
|
Total short-term investments
|
|
$
|
470,736
|
|
|
$
|
131
|
|
|
$
|
(47
|
)
|
|
$
|
470,820
|
|
Based on our evaluation of impairment for these investments, we did not consider any of these investments to be other-than-temporarily impaired as of
March 31, 2017
or
2016
.
The following table summarizes the contracted maturities of our short-term investments at
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
Amortized Cost
|
|
Fair Value
|
Short-term investments
|
|
|
|
|
|
|
Due in 1 year or less
|
|
$
|
362,259
|
|
|
$
|
362,338
|
|
Due in 1-2 years
|
|
86,682
|
|
|
86,594
|
|
Total short-term investments
|
|
$
|
448,941
|
|
|
$
|
448,932
|
|
5. 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 classify cash flows from its derivative transactions as cash flows from operating activities in the consolidated statements of cash flow.
The following table shows the gross notional amounts of foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Forward contracts to sell foreign currencies
|
|
$
|
177,549
|
|
|
$
|
54,529
|
|
Forward contracts to purchase foreign currencies
|
|
$
|
9,170
|
|
|
$
|
2,409
|
|
For the fiscal years ended
March 31, 2017
,
2016
and
2015
, we recorded gains of
$7,197
,
$144
, and
$18,548
, respectively, related to foreign currency forward contracts in interest and other, net on the Consolidated Statements of Operations. Our derivative contracts are foreign currency exchange forward contracts that 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. As of
March 31, 2017
, no amounts related to derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss).
6. INVENTORY
Inventory balances by category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Finished products
|
|
$
|
15,530
|
|
|
$
|
14,321
|
|
Parts and supplies
|
|
793
|
|
|
1,567
|
|
Inventory
|
|
$
|
16,323
|
|
|
$
|
15,888
|
|
Estimated product returns included in inventory at
March 31, 2017
and
2016
were
$529
and
$527
, respectively.
7. SOFTWARE DEVELOPMENT COSTS AND LICENSES
Details of our capitalized software development costs and licenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
Current
|
|
Non-current
|
|
Current
|
|
Non-current
|
Software development costs, internally developed
|
|
$
|
28,959
|
|
|
$
|
310,229
|
|
|
$
|
131,378
|
|
|
$
|
162,261
|
|
Software development costs, externally developed
|
|
5,455
|
|
|
71,407
|
|
|
46,888
|
|
|
45,703
|
|
Licenses
|
|
7,307
|
|
|
274
|
|
|
121
|
|
|
6,867
|
|
Software development costs and licenses
|
|
$
|
41,721
|
|
|
$
|
381,910
|
|
|
$
|
178,387
|
|
|
$
|
214,831
|
|
Software development costs and licenses as of
March 31, 2017
and
2016
included
$381,910
and
$343,450
, respectively, related to titles that have not been released.
Amortization and impairment of software development costs and licenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Amortization of software development costs and licenses
|
|
$
|
222,801
|
|
|
$
|
117,506
|
|
|
$
|
119,488
|
|
Impairment of software development costs and licenses
|
|
20,166
|
|
|
22,671
|
|
|
23,947
|
|
Less: Portion representing stock-based compensation
|
|
(21,056
|
)
|
|
(5,705
|
)
|
|
(9,982
|
)
|
Amortization and impairment, net of stock-based compensation
|
|
$
|
221,911
|
|
|
$
|
134,472
|
|
|
$
|
133,453
|
|
8. FIXED ASSETS, NET
Fixed asset balances by category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Computer equipment
|
|
$
|
75,281
|
|
|
$
|
74,684
|
|
Computer software
|
|
41,527
|
|
|
39,277
|
|
Leasehold improvements
|
|
56,758
|
|
|
47,773
|
|
Office equipment
|
|
5,843
|
|
|
6,344
|
|
Furniture and fixtures
|
|
9,108
|
|
|
8,051
|
|
|
|
188,517
|
|
|
176,129
|
|
Less: accumulated depreciation
|
|
121,217
|
|
|
99,002
|
|
Fixed assets, net
|
|
$
|
67,300
|
|
|
$
|
77,127
|
|
Depreciation expense related to fixed assets for the fiscal years ended
March 31, 2017
,
2016
and
2015
was
$30,629
,
$28,800
and
$21,057
, respectively.
9. GOODWILL AND INTANGIBLE ASSETS, NET
The change in our goodwill balance is as follows:
|
|
|
|
|
|
|
|
Total
|
Balance at March 31, 2015
|
|
$
|
217,288
|
|
Currency translation adjustment
|
|
(208
|
)
|
Balance at March 31, 2016
|
|
$
|
217,080
|
|
Additions and adjustments (see Note 23)
|
|
143,952
|
|
Currency translation adjustment
|
|
$
|
(1,917
|
)
|
Balance at March 31, 2017
|
|
$
|
359,115
|
|
Included in Intangibles, net are in-process research and development assets of
$14,827
acquired as part of the Social Point acquisition, which are indefinite-lived intangibles and therefore not subject to amortization until the related games are released.
The following table sets forth the intangible assets that are subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2017
|
|
2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Intellectual property
|
$
|
15,931
|
|
|
$
|
(12,943
|
)
|
|
$
|
2,988
|
|
|
$
|
26,859
|
|
|
$
|
(22,250
|
)
|
|
$
|
4,609
|
|
Developed game technology
|
54,421
|
|
|
(2,659
|
)
|
|
51,762
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Analytics technology
|
29,959
|
|
|
(999
|
)
|
|
28,960
|
|
|
—
|
|
|
—
|
|
|
—
|
|
User base
|
9,079
|
|
|
(1,513
|
)
|
|
7,566
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Branding and trade names
|
4,237
|
|
|
(78
|
)
|
|
4,159
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total definite-lived intangible assets
|
$
|
113,627
|
|
|
$
|
(18,192
|
)
|
|
$
|
95,435
|
|
|
$
|
26,859
|
|
|
$
|
(22,250
|
)
|
|
$
|
4,609
|
|
Amortization of intangible assets is included in our Consolidated Statements of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Cost of goods sold
|
|
$
|
4,252
|
|
|
$
|
160
|
|
|
$
|
344
|
|
Selling and marketing
|
|
1,497
|
|
|
—
|
|
|
—
|
|
Research and development
|
|
989
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
78
|
|
|
—
|
|
|
—
|
|
Total amortization of intangible assets
|
|
$
|
6,816
|
|
|
$
|
160
|
|
|
$
|
344
|
|
Estimated future amortization of intangible assets that will be recorded in cost of goods sold and operating expenses for the years ending March 31, are as follows:
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
Amortization
|
|
2018
|
|
$
|
32,617
|
|
2019
|
|
21,672
|
|
2020
|
|
20,290
|
|
2021
|
|
12,354
|
|
2022
|
|
5,918
|
|
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Software development royalties
|
|
$
|
492,133
|
|
|
$
|
414,492
|
|
Business reorganization (see Note 20)
|
|
65,935
|
|
|
66,323
|
|
Compensation and benefits
|
|
44,843
|
|
|
39,919
|
|
Licenses
|
|
37,019
|
|
|
31,825
|
|
Deferred acquisition payments
|
|
25,000
|
|
|
—
|
|
Marketing and promotions
|
|
21,030
|
|
|
14,938
|
|
Other
|
|
64,915
|
|
|
39,982
|
|
Accrued expenses and other current liabilities
|
|
$
|
750,875
|
|
|
$
|
607,479
|
|
11. DEBT
Credit Agreement
In April 2016, we entered into a Sixth Amendment to our Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement provides for borrowings of up to
$100,000
which may be increased by up to
$100,000
pursuant to the terms of the Credit Agreement and which is secured by substantially all of our assets and the equity of our subsidiaries. The Credit Agreement expires on August 18, 2019. Revolving loans under the Credit Agreement bear interest at our election of (a)
0.25%
to
0.75%
above a certain
base rate
(
4.25%
at
March 31, 2017
), or (b)
1.25%
to
1.75%
above the
LIBOR
Rate (approximately
2.23%
at
March 31, 2017
), with the margin rate subject to the achievement of certain average liquidity levels. We are also required to pay a monthly fee on the unused available balance, ranging from
0.25%
to
0.375%
based on availability. We had
no
outstanding borrowings at
March 31, 2017
and
2016
.
Availability under the Credit Agreement is unrestricted when liquidity, as defined in the Credit Agreement, is at least
$300,000
. When liquidity is below
$300,000
availability under the Credit Agreement is restricted by our United States and United Kingdom based accounts receivable and inventory balances. The Credit Agreement also allows for the issuance of letters of credit in an aggregate amount of up to
$5,000
.
Information related to availability on our Credit Agreement is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Available borrowings
|
|
$
|
98,320
|
|
|
$
|
98,335
|
|
Outstanding letters of credit
|
|
$
|
1,664
|
|
|
$
|
1,664
|
|
We recorded interest expense and fees related to the Credit Agreement of
$441
,
$438
and
$518
, for the fiscal years ended
March 31, 2017
,
2016
and
2015
, respectively. The Credit Agreement contains covenants that substantially limit our and our subsidiaries' ability to: create, incur, assume or be liable for indebtedness; dispose of assets outside the ordinary course of business; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of their respective properties; make investments; or pay dividends or make distributions (each subject to certain limitations); or optionally prepay any indebtedness (subject to certain exceptions, including an exception permitting the redemption of the Company's unsecured convertible senior notes upon the meeting of certain minimum liquidity requirements). In addition, the Credit Agreement provides for certain events of default such as nonpayment of principal and interest, breaches of representations and warranties, noncompliance with covenants, acts of insolvency, default on indebtedness held by third parties and default on certain material contracts (subject to certain limitations and cure periods). The Credit Agreement also contains a requirement that we maintain an interest coverage ratio of more than
one
to one for the trailing
twelve
-month period, if certain average liquidity levels fall below
$30,000
.
1.75%
Convertible Notes Due 2016
On November 16, 2011, we issued
$250,000
aggregate principal amount of
1.75%
Convertible Notes due 2016. The issuance of the
1.75%
Convertible Notes included
$30,000
related to the exercise of an over-allotment option by the underwriters. Interest on the
1.75%
Convertible Notes was payable semi-annually in arrears on June 1
st
and December 1
st
of each year, commencing on
June 1, 2012. The
1.75%
Convertible Notes matured on December 1, 2016, unless earlier repurchased by the Company or converted. We did not have the right to redeem the
1.75%
Convertible Notes prior to maturity.
The
1.75%
Convertible Notes were convertible at an initial conversion rate of
52.3745
shares of our common stock per
$1
principal amount of
1.75%
Convertible Notes (representing an initial conversion price of approximately
$19.093
per share of common stock for a total of approximately
13,094,000
underlying conversion shares) subject to adjustment in certain circumstances. As of June 1, 2016 until the close of business on the business day immediately preceding the maturity date, holders were eligible to convert their
1.75%
Convertible Notes at any time. Prior to September 27, 2016, upon conversion, the
1.75%
Convertible Notes were eligible to be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of the Company's common stock. On September 27, 2016, we elected to settle our conversion obligations in connection with the
1.75%
Convertible Notes solely in shares of our common stock and accordingly notified the Trustee. As such, we continued to classify these
1.75%
Convertible Notes as long-term debt until their maturity.
Prior to December 1, 2016, holders of the
1.75%
Convertible Notes elected to convert such notes, and we settled all such notes during the period by converting them to shares of our common stock using the initial conversion rate.
We previously separately accounted for the liability and equity components of the
1.75%
Convertible Notes in a manner that reflected our nonconvertible debt borrowing rate when interest expense is recognized in subsequent periods. We estimated the fair value of the
1.75%
Convertible Notes to be
$197,373
, as of the date of issuance of our
1.75%
Convertible Notes, assuming a
6.9%
non-convertible borrowing rate. The carrying amount of the equity component was determined to be
$52,627
by deducting the fair value of the liability component from the par value of the
1.75%
Convertible Notes. The excess of the principal amount of the liability component over its carrying amount was amortized to interest and other, net over the term of the
1.75%
Convertible Notes using the effective interest method. The equity component was not remeasured as long as it continued to meet the conditions for equity classification. In accounting for the
$6,875
of banking, legal and accounting fees related to the issuance of the
1.75%
Convertible Notes, we allocated
$5,428
to the liability component and
$1,447
to the equity component. Debt issuance costs attributable to the liability component were amortized to interest and other, net over the term of the
1.75%
Convertible Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.
At maturity and as of March 31, 2016, the if-converted value of our
1.75%
Convertible Notes exceeded the principal amount of
$250,000
by
$368,430
and
$243,251
, respectively.
The following table provides additional information related to our
1.75%
Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Additional paid-in capital
|
|
$
|
—
|
|
|
$
|
51,180
|
|
Principal amount of 1.75% Convertible Notes
|
|
$
|
—
|
|
|
$
|
250,000
|
|
Unamortized discount of the liability component
|
|
—
|
|
|
8,014
|
|
Carrying amount of debt issuance costs
|
|
—
|
|
|
657
|
|
Net carrying amount of 1.75% Convertible Notes
|
|
$
|
—
|
|
|
$
|
241,329
|
|
The following table provides the components of interest expense related to our
1.75%
Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Cash interest expense (coupon interest expense)
|
|
$
|
2,898
|
|
|
$
|
4,375
|
|
|
$
|
4,375
|
|
Non-cash amortization of discount on 1.75% Convertible Notes
|
|
8,014
|
|
|
11,372
|
|
|
10,639
|
|
Amortization of debt issuance costs
|
|
657
|
|
|
1,005
|
|
|
1,054
|
|
Total interest expense related to 1.75% Convertible Notes
|
|
$
|
11,569
|
|
|
$
|
16,752
|
|
|
$
|
16,068
|
|
1.00% Convertible Notes Due 2018
On June 18, 2013, we issued
$250,000
aggregate principal amount of
1.00%
Convertible Notes due 2018. The
1.00%
Convertible Notes were issued at
98.5%
of par value for proceeds of
$246,250
. Interest on the
1.00%
Convertible Notes is payable semi-annually in arrears on July 1
st
and January 1
st
of each year, commencing on January 1, 2014. The
1.00%
Convertible Notes mature on July 1, 2018, unless earlier repurchased by the Company or converted. The Company does not have the right to redeem the
1.00%
Convertible Notes prior to maturity. The Company also granted the underwriters a
30
-day option to purchase up to an
additional
$37,500
principal amount of
1.00%
Convertible Notes to cover overallotments, if any. On July 17, 2013, the Company closed its public offering of
$37,500
principal amount of the Company's
1.00%
Convertible Notes as a result of the underwriters exercising their overallotment option in full on July 12, 2013, bringing the total proceeds to
$283,188
.
The
1.00%
Convertible Notes are convertible at an initial conversion rate of
46.4727
shares of our common stock per
$1
principal amount of
1.00%
Convertible Notes (representing an initial conversion price of approximately
$21.52
per share of common stock for a total of approximately
13,361,000
underlying conversion shares) subject to adjustment in certain circumstances. Holders may convert the
1.00%
Convertible Notes at their option prior to the close of business on the business day immediately preceding January 1, 2018 only under the following circumstances: (1) during any fiscal quarter commencing after September 30, 2013, if the last reported sale price of the common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to
130%
of the applicable conversion price on each applicable trading day; (2) during the
five
business day period after any
10
consecutive trading day period (the "measurement period") in which the trading price per
$1
principal amount of
1.00%
Convertible Notes for each day of that measurement period was less than
98%
of the product of the last reported sale price of our common stock and the applicable conversion rate on each such day; or (3) upon the occurrence of specified corporate events. On and after January 1, 2018 until the close of business on the business day immediately preceding the maturity date, holders may convert their
1.00%
Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the
1.00%
Convertible Notes may be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of the Company's common stock. Our common stock price exceeded
130%
of the applicable conversion price per share for at least
20
trading days during the
30
consecutive trading days ended
March 31, 2017
. Accordingly, as of April 1, 2017, the
1.00%
Convertible Notes may be converted at the holder's option through June 30, 2017. During the year ended March 31, 2017,
1.00%
Convertible Notes with an aggregate principal value of
$19,351
were settled and additional
1.00%
Convertible Notes with aggregate principal value of
$93
were tendered for conversion with April 2017 settlement dates. We elected to settle the conversion in shares of our common stock, and our current intent and ability, given our option, would be to settle future conversions in shares of our common stock. As such, we have continued to classify these
1.00%
Convertible Notes as long-term debt.
Upon the occurrence of certain fundamental changes involving the Company, holders of the
1.00%
Convertible Notes may require us to purchase all or a portion of their
1.00%
Convertible Notes for cash at a price equal to
100%
of the principal amount of the notes to be purchased, plus accrued and unpaid interest (including additional interest, if any) to, but excluding, the fundamental change purchase date.
The indenture governing the
1.00%
Convertible Notes contains customary terms and covenants and events of default. If an event of default (as defined therein) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least
25%
in aggregate principal amount of the
1.00%
Convertible Notes then outstanding by notice to the Company and the Trustee, may, and the Trustee at the request of such holders shall, declare
100%
of the principal of and accrued and unpaid interest (including additional interest, if any) on all the
1.00%
Convertible Notes to be due and payable. In the case of an event of default arising out of certain bankruptcy events,
100%
of the principal of and accrued and unpaid interest (including additional interest, if any), on the
1.00%
Convertible Notes will automatically become due and payable immediately.
The
1.00%
Convertible Notes are senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the
1.00%
Convertible Notes; equal in right of payment to our existing and future indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness incurred by our subsidiaries.
We separately account for the liability and equity components of the
1.00%
Convertible Notes in a manner that reflects the Company's nonconvertible debt borrowing rate. We estimated the fair value of the
1.00%
Convertible Notes to be
$225,567
upon issuance of our
1.00%
Convertible Notes, assuming a
6.15%
non-convertible borrowing rate. The carrying amount of the equity component was determined to be approximately
$57,621
by deducting the fair value of the liability component from the net proceeds of the
1.00%
Convertible Notes. The excess of the principal amount of the liability component over its carrying amount is amortized to interest and other, net over the term of the
1.00%
Convertible Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the
$2,815
of banking, legal and accounting fees related to the issuance of the
1.00%
Convertible Notes, we allocated
$2,209
to the liability component and
$606
to the equity component. Debt issuance costs attributable to the liability component are being amortized to interest and other, net over the term of the
1.00%
Convertible Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.
As of
March 31, 2017
and
2016
, the if-converted value of our
1.00%
Convertible Notes exceeded the principal amount of
$268,149
and
$287,500
, respectively, by
$470,456
and
$215,809
, respectively.
The following table provides additional information related to our
1.00%
Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Additional paid-in capital
|
|
$
|
35,784
|
|
|
$
|
35,784
|
|
Principal amount of 1.00% Convertible Notes
|
|
$
|
268,149
|
|
|
$
|
287,500
|
|
Unamortized discount of the liability component
|
|
15,751
|
|
|
29,972
|
|
Carrying amount of debt issuance costs
|
|
469
|
|
|
922
|
|
Net carrying amount of 1.00% Convertible Notes
|
|
$
|
251,929
|
|
|
$
|
256,606
|
|
The following table provides the components of interest expense related to our
1.00%
Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Cash interest expense (coupon interest expense)
|
|
$
|
2,784
|
|
|
$
|
2,875
|
|
|
$
|
2,875
|
|
Non-cash amortization of discount on 1.00% Convertible Notes
|
|
14,221
|
|
|
12,085
|
|
|
11,387
|
|
Amortization of debt issuance costs
|
|
453
|
|
|
443
|
|
|
466
|
|
Total interest expense related to 1.00% Convertible Notes
|
|
$
|
17,458
|
|
|
$
|
15,403
|
|
|
$
|
14,728
|
|
12. EARNINGS (LOSS) PER SHARE ("EPS")
The following table sets forth the computation of basic and diluted EPS (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Computation of Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
67,303
|
|
|
$
|
(8,302
|
)
|
|
$
|
(279,470
|
)
|
Less: net income allocated to participating securities
|
|
(1,275
|
)
|
|
—
|
|
|
—
|
|
Net income (loss) for basic earnings (loss) per share calculation
|
|
$
|
66,028
|
|
|
$
|
(8,302
|
)
|
|
$
|
(279,470
|
)
|
Total weighted average shares outstanding—basic
|
|
91,921
|
|
|
83,417
|
|
|
80,367
|
|
Less: weighted average participating shares outstanding
|
|
(1,741
|
)
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—basic
|
|
90,180
|
|
|
83,417
|
|
|
80,367
|
|
Basic earnings (loss) per share
|
|
$
|
0.73
|
|
|
$
|
(0.10
|
)
|
|
$
|
(3.48
|
)
|
Computation of Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
67,303
|
|
|
$
|
(8,302
|
)
|
|
$
|
(279,470
|
)
|
Less: net income allocated to participating securities
|
|
(1,246
|
)
|
|
—
|
|
|
—
|
|
Net income (loss) for diluted earnings (loss) per share calculation
|
|
$
|
66,057
|
|
|
$
|
(8,302
|
)
|
|
$
|
(279,470
|
)
|
Weighted average common shares outstanding—basic
|
|
91,921
|
|
|
83,417
|
|
|
80,367
|
|
Add: dilutive effect of common stock equivalents
|
|
2,152
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
|
94,073
|
|
|
83,417
|
|
|
80,367
|
|
Less: weighted average participating shares outstanding
|
|
(1,741
|
)
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding- diluted
|
|
92,332
|
|
|
83,417
|
|
|
80,367
|
|
Diluted earnings (loss) per share
|
|
$
|
0.72
|
|
|
$
|
(0.10
|
)
|
|
$
|
(3.48
|
)
|
The calculation of EPS for common stock under the two-class method shown above for the fiscal year ended
March 31, 2017
excludes income attributable to the participating securities from the numerator and excludes the dilutive effect of those awards from the denominator.
We incurred a net loss for the fiscal years ended March 31, 2016 and 2015; therefore, the basic and diluted weighted average shares outstanding exclude the effect of unvested share-based awards that are considered participating securities and all common stock equivalents because their effect would be antidilutive. For the fiscal years ended March 31, 2016 and 2015 we had
6,405,000
, and
6,061,000
, respectively, of unvested share-based awards which are excluded due to the net loss for the periods.
13. COMMITMENTS AND CONTINGENCIES
A summary of annual minimum contractual obligations and commitments as of
March 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending March 31,
|
|
Software
Development
and Licensing
|
|
Marketing
|
|
Operating
Leases
|
|
Purchase
Obligations
|
|
Convertible
Notes Interest
|
|
Convertible
Notes
|
|
Total
|
2018
|
|
$
|
103,726
|
|
|
$
|
12,547
|
|
|
$
|
27,238
|
|
|
$
|
38,243
|
|
|
$
|
2,875
|
|
|
$
|
—
|
|
|
$
|
184,629
|
|
2019
|
|
53,426
|
|
|
50,458
|
|
|
32,325
|
|
|
9,842
|
|
|
1,438
|
|
|
268,149
|
|
|
415,638
|
|
2020
|
|
34,450
|
|
|
12,750
|
|
|
23,386
|
|
|
4,200
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
74,786
|
|
2021
|
|
15,032
|
|
|
3,250
|
|
|
20,117
|
|
|
205
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
38,604
|
|
2022
|
|
15,000
|
|
|
3,250
|
|
|
18,269
|
|
|
54
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
36,573
|
|
Thereafter
|
|
—
|
|
|
3,250
|
|
|
77,987
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
81,237
|
|
Total
|
|
$
|
221,634
|
|
|
$
|
85,505
|
|
|
$
|
199,322
|
|
|
$
|
52,544
|
|
|
$
|
4,313
|
|
|
$
|
268,149
|
|
|
$
|
831,467
|
|
Software Development and Licensing Agreements:
We make payments to third-party software developers that include contractual payments to developers under several software development agreements that expire at various times through January 2022. Our aggregate outstanding software development commitments assume satisfactory performance by third-party software developers. We also have licensing commitments that primarily consist of obligations to holders of intellectual property rights for use of their trademarks, copyrights, technology or other intellectual property rights in the development of our products.
Marketing Agreements:
We have certain minimum marketing support commitments where we commit to spend specified amounts related to marketing our products. Marketing commitments expire at various times through December 2022 and primarily reflect our agreements with major sports leagues and players' associations.
Operating Leases:
Our offices are occupied under non-cancelable operating leases expiring at various times through December 2032. We also lease certain furniture, equipment and automobiles under non-cancelable leases expiring through March 2020. Some of the leases have fixed rent increases and also include inducements to enter into the lease. The effect of such amounts are deferred and recognized on a straight-line basis over the related lease term. Rent expense amounted to
$19,545
,
$18,032
and
$18,120
for the fiscal years ended
March 31, 2017
,
2016
and
2015
, respectively.
Purchase obligations:
These obligations are primarily related to agreements to purchase services that are enforceable and legally binding on the Company that specifies all significant terms, including fixed, minimum or variable pricing provisions; and the approximate timing of the transactions, expiring at various times through January 2019.
Employee Savings Plans:
For our United States employees we maintain a 401(k) retirement savings plan and trust. Our 401(k) plan is offered to all eligible employees and participants may make voluntary contributions. We also have various pension plans for our non-U.S. employees, some of which are required by local laws, and allow or require Company contributions. Employer contributions under all defined contribution and pension plans during the fiscal years ended
March 31, 2017
,
2016
and
2015
were
$8,018
,
$8,348
and
$8,554
, respectively.
Legal and Other Proceedings:
We are, or may become, subject to demands and claims (including intellectual property claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial condition or results of operations. We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material.
On April 11, 2016, we filed a declaratory judgment action in the United States District Court for the Southern District of New York seeking, among other things, a judicial declaration that Leslie Benzies, the former president of one of our subsidiaries with whom we had been in ongoing discussions regarding his separation of employment, is not entitled to any minimum allocation or financial parity with any other person under the applicable royalty plan. We believe we will prevail in this matter, although there can be no assurance of the outcome. On April 12, 2016, Mr. Benzies filed a complaint in the Supreme Court of the State of New York, New York County against us, and certain of our subsidiaries and employees. We removed this case to the United States District Court for the Southern District of New York, but the case was subsequently remanded to state court. The complaint claims damages of at least
$150,000
and contains allegations of breach of fiduciary duty; fraudulent inducement and fraudulent concealment; aiding and abetting breach of fiduciary duty; breach of various contracts; breach of implied duty of good faith and fair dealing; tortious interference with contract; unjust enrichment; reformation; constructive trust; declaration of rights; constructive discharge; defamation and fraud. Motion practice in both the federal and state actions is ongoing. While we believe that we have meritorious defenses to these claims, and we intend to vigorously defend against them and to pursue any counterclaims, we have accrued what we believe to be an adequate amount for this matter, which amounts are classified as
Business reorganization within Accrued expenses and other current liabilities in our Condensed Consolidated Balance Sheet (see Note 20). We do not believe that the ultimate outcome of such litigation, even if in excess of our current accrual, will have a material adverse effect on our business, financial condition or results of operations.
14. INCOME TAXES
Components of income (loss) income from continuing operations before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
|
$
|
86,050
|
|
|
$
|
(94,174
|
)
|
|
$
|
(126,582
|
)
|
Foreign
|
|
(9,085
|
)
|
|
55,824
|
|
|
(146,298
|
)
|
Income (loss) from continuing operations before income taxes
|
|
$
|
76,965
|
|
|
$
|
(38,350
|
)
|
|
$
|
(272,880
|
)
|
Provision (benefit from) for current and deferred income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
19,271
|
|
|
$
|
792
|
|
|
$
|
2,773
|
|
U.S. state and local
|
|
2,521
|
|
|
938
|
|
|
(1,406
|
)
|
Foreign
|
|
(13,012
|
)
|
|
(31,508
|
)
|
|
2,944
|
|
Total current income taxes
|
|
8,780
|
|
|
(29,778
|
)
|
|
4,311
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
969
|
|
|
1,211
|
|
|
1,575
|
|
U.S. state and local
|
|
2,395
|
|
|
(231
|
)
|
|
72
|
|
Foreign
|
|
(2,482
|
)
|
|
(1,250
|
)
|
|
632
|
|
Total deferred income taxes
|
|
882
|
|
|
(270
|
)
|
|
2,279
|
|
Provision (benefit from) for income taxes
|
|
$
|
9,662
|
|
|
$
|
(30,048
|
)
|
|
$
|
6,590
|
|
A reconciliation of our effective tax rate to the U.S. statutory federal income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
U.S. federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local taxes, net of U.S. federal benefit
|
|
4.9
|
%
|
|
1.6
|
%
|
|
0.9
|
%
|
Tax amortization of goodwill
|
|
1.3
|
%
|
|
(3.2
|
)%
|
|
(0.6
|
)%
|
Foreign tax rate differential
(1)
|
|
(1.4
|
)%
|
|
25.8
|
%
|
|
(12.1
|
)%
|
Foreign earnings
|
|
5.5
|
%
|
|
(3.7
|
)%
|
|
(1.5
|
)%
|
Tax credits
(2)
|
|
(45.8
|
)%
|
|
98.7
|
%
|
|
—
|
|
Domestic production deduction
|
|
(2.5
|
)%
|
|
—
|
|
|
—
|
|
Valuation allowance—domestic
|
|
10.1
|
%
|
|
(77.8
|
)%
|
|
(16.8
|
)%
|
Valuation allowance—foreign
|
|
0.1
|
%
|
|
10.4
|
%
|
|
(5.1
|
)%
|
Change in reserves
|
|
2.9
|
%
|
|
(7.0
|
)%
|
|
(1.6
|
)%
|
Other
|
|
2.4
|
%
|
|
(1.4
|
)%
|
|
(0.6
|
)%
|
Effective tax rate
|
|
12.5
|
%
|
|
78.4
|
%
|
|
(2.4
|
)%
|
(1) The foreign rate differential in relation to foreign earnings, for all periods presented, are primarily driven by changes in the mix of our foreign earnings.
(2) Tax benefits were recorded for fiscal years ended March 31, 2017 and March 31,2016 attributable to certain tax credits related to software development activities
The effects of temporary differences that gave rise to our deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
|
Accrued compensation expense
|
|
$
|
131,305
|
|
|
$
|
82,230
|
|
Equity Compensation
|
|
25,048
|
|
|
22,446
|
|
Deferred revenue
|
|
41,977
|
|
|
33,254
|
|
Domestic net operating loss carryforward
|
|
4,495
|
|
|
28,811
|
|
Tax credit carryforward
|
|
52,639
|
|
|
76,565
|
|
Foreign net operating loss carryforwards
|
|
15,636
|
|
|
16,910
|
|
Business reorganization
|
|
24,103
|
|
|
24,143
|
|
Sales returns and allowances (including bad debt)
|
|
3,942
|
|
|
2,257
|
|
Deferred rent
|
|
8,865
|
|
|
5,359
|
|
Other
|
|
4,045
|
|
|
—
|
|
Total deferred tax assets
|
|
312,055
|
|
|
291,975
|
|
Less: Valuation allowance
|
|
(184,085
|
)
|
|
(170,574
|
)
|
Net deferred tax assets
|
|
127,970
|
|
|
121,401
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Capitalized software and depreciation
|
|
(120,715
|
)
|
|
(104,294
|
)
|
Convertible debt
|
|
(5,219
|
)
|
|
(12,716
|
)
|
Intangible amortization
|
|
(38,068
|
)
|
|
(8,306
|
)
|
Other
|
|
—
|
|
|
(896
|
)
|
Total deferred tax liabilities
|
|
(164,002
|
)
|
|
(126,212
|
)
|
Net deferred tax liability
(a)
|
|
(36,032
|
)
|
|
(4,811
|
)
|
(a) As of
March 31, 2017
and
2016
,
$36,032
and
$4,811
, respectively, is included in other long-term liabilities.
The valuation allowance is primarily attributable to deferred tax assets for which no benefit is provided due to uncertainty with respect to their realization. The net deferred tax liability is primarily the result of deferred tax liabilities related to indefinite lived intangibles, which cannot be used to offset deferred tax assets, as well as deferred tax liabilities related to intangibles as a result of the acquisition of Social Point.
At
March 31, 2017
, we had domestic net operating loss carryforwards totaling
$50,208
of which
$640
will expire in
2022
,
$24,022
will expire from
2023 to 2027
,
$24,263
will expire from
2028 to 2032
, and
$1,283
will expire in
2037
. In addition, we had foreign net operating loss carryforwards of
$277,892
, of which
$25,331
will expire in
2020
,
$244,527
will expire in
2022
,
$29
will expire in
2026
,
$727
will expire in
2035
, and the remainder may be carried forward indefinitely.
At
March 31, 2017
, we had domestic credit carryforwards totaling
$150,811
of which
$83,371
expire in
2031 to 2036
, and the remainder may be carried forward indefinitely. In addition, we had foreign credit carryforwards of
$1,691
of which
$1,037
expire in
2019
,
$191
expire in
2028
,
$80
expire in
2029
,
$230
expire in
2030
, and
$153
will expire in
2031
.
The total amount of undistributed earnings of foreign subsidiaries was approximately
$162,800
at
March 31, 2017
and
$197,300
at
March 31, 2016
. It is our intention to reinvest undistributed earnings of our foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly,
no
provision has been made for foreign withholding taxes or U.S. income taxes which may become payable if undistributed earnings of foreign subsidiaries are repatriated. It is not practicable to estimate the tax liability that would arise if these earnings were remitted.
We are regularly audited by domestic and foreign taxing authorities. Audits may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe that our tax return positions comply with applicable tax law and that we have adequately provided for reasonably foreseeable assessments of additional taxes. Additionally, we believe that any assessments in excess of the amounts provided for will not have a material adverse effect on the Consolidated Financial Statements.
We recognize interest and penalties related to uncertain tax positions in the provision for income taxes in our Consolidated Statements of Operations. For the fiscal years ended
March 31, 2017
,
2016
and
2015
, we recognized an increase in interest and penalties of
$877
,
$1,098
and
$771
, respectively. The gross amount of interest and penalties accrued as of
March 31, 2017
and
March 31, 2016
was
$4,090
and
$3,213
, respectively.
As of
March 31, 2017
and
March 31, 2016
, we had gross unrecognized tax benefits, including interest and penalties, of
$120,198
and
$56,012
, of which
$36,940
and
$41,285
, respectively, would affect our effective tax rate if realized.
We are no longer subject to audit for U.S. federal income tax returns for periods prior to our fiscal year ended March 31, 2013 and state income tax returns for periods prior to the fiscal year ended March 31, 2012. With few exceptions, we are no longer subject to income tax examinations in non-U.S. jurisdictions for years prior to our fiscal year ended March 31, 2012. U.S. federal taxing authorities have completed examinations of our income tax returns through the fiscal year ended October 31, 2009. The statute relating to the fiscal year ended March 31, 2013 has expired. The IRS is currently examining our income tax returns for the fiscal year ended March 31, 2015.
The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involve multiple tax periods and jurisdictions, it is reasonably possible that a reduction of up to
$31,000
of unrecognized tax benefits may occur within the next 12 months, some of which, depending on the nature of the settlement or expiration of statutes of limitations, may affect the Company’s income tax provision and therefore benefit the resulting effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.
The aggregate changes to the liability for gross uncertain tax positions, excluding interest and penalties, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Balance, beginning of period
|
|
$
|
52,799
|
|
|
$
|
40,591
|
|
|
$
|
23,536
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
Current year tax positions
|
|
65,669
|
|
|
12,208
|
|
|
8,297
|
|
Prior year tax positions
|
|
5,086
|
|
|
—
|
|
|
9,040
|
|
Reduction of prior year tax positions
|
|
—
|
|
|
—
|
|
|
—
|
|
Lapse of statute of limitations
|
|
(7,469
|
)
|
|
—
|
|
|
(256
|
)
|
Other, net
|
|
—
|
|
|
—
|
|
|
(26
|
)
|
Balance, end of period
|
|
$
|
116,085
|
|
|
$
|
52,799
|
|
|
$
|
40,591
|
|
We believe that we have provided for any reasonably foreseeable outcomes related to our tax audits and that any settlement will not have a material adverse effect on our consolidated financial statements. However, there can be no assurances as to the possible outcomes.
15. STOCK-BASED COMPENSATION
Our stock-based compensation plans are broad-based long-term retention programs intended to attract and retain talented employees and align stockholder and employee interests. For similar reasons, we also granted non-employee equity awards, which are subject to variable accounting, to ZelnickMedia in connection with their contract to provide executive management services to us. In April 2009, our stockholders approved our 2009 Stock Incentive Plan (the "2009 Plan"). The aggregate number of shares issuable under the 2009 Plan is
28,609,000
and as of
March 31, 2017
, there were approximately
2,194,000
shares available for issuance. The 2009 Plan is administered by the Compensation Committee of the Board of Directors and allows for awards of restricted stock and other stock-based awards of our common stock to employees and non-employees. Subject to the provisions of the plans, the Board of Directors or any Committee appointed by the Board of Directors, has the authority to determine the individuals to whom the equity awards are to be granted, the number of shares to be covered by each equity award, the vesting period, restrictions, if any, on the equity award and the terms and conditions of the equity award. Upon the vesting of certain restricted stock awards employees have the option to have the Company withhold shares to satisfy the employee's federal and state tax withholding requirements.
The following table summarizes stock-based compensation expense included in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Cost of goods sold
|
|
$
|
21,056
|
|
|
$
|
15,323
|
|
|
$
|
17,121
|
|
Selling and marketing
|
|
9,963
|
|
|
9,425
|
|
|
8,798
|
|
General and administrative
|
|
42,908
|
|
|
40,322
|
|
|
33,636
|
|
Research and development
|
|
7,952
|
|
|
4,926
|
|
|
5,691
|
|
Stock-based compensation expense
|
|
$
|
81,879
|
|
|
$
|
69,996
|
|
|
$
|
65,246
|
|
Capitalized stock-based compensation expense
|
|
$
|
74,717
|
|
|
$
|
30,367
|
|
|
$
|
17,423
|
|
Restricted Stock Awards
Employee Awards
Restricted stock awards granted to employees under our stock-based compensation plans generally vest annually over
3 years
from the date of grant. Certain restricted stock awards granted to key officers, senior-level employees, and key employees vest based on market conditions, primarily related to the performance of the price of our common stock.
ZelnickMedia Non-Employee Awards
Pursuant to the 2011 Management Agreement, we granted
1,100,000
shares of restricted stock to ZelnickMedia that vested annually through May 15, 2015 and
1,650,000
shares of market-based restricted stock that were eligible to vest through May 15, 2015, based on the Company's Total Shareholder Return (as defined in the relevant grant agreements) relative to the Total Shareholder Return of the companies that constitute the NASDAQ Composite Index measured annually on a cumulative basis. To earn all of the shares of market-based restricted stock, the Company must perform at the
75th
percentile, or top quartile, of the NASDAQ Composite Index.
None
of the shares of restricted stock grant pursuant to the 2011 Management Agreement remained unvested as of
March 31, 2017
and
1,133,000
shares of restricted stock remained unvested as of
March 31, 2016
. During the fiscal year ended
March 31, 2017
,
591,912
shares of restricted stock vested and
27,578
shares of restricted stock were forfeited related to the 2011 Management Agreement.
In connection with the 2014 Management Agreement, we granted
372,935
and
525,591
restricted stock units to ZelnickMedia on May 20, 2016 and May 20, 2015, respectively, as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
Time-based
|
|
107,551
|
|
|
151,575
|
|
Market-based
(1)
|
|
199,038
|
|
|
280,512
|
|
Performance-based
(1)
|
|
|
|
|
|
|
New IP
|
|
33,174
|
|
|
46,752
|
|
Major IP
|
|
33,172
|
|
|
46,752
|
|
Total-Performance-based
|
|
66,346
|
|
|
93,504
|
|
Total Restricted Stock Units
|
|
372,935
|
|
|
525,591
|
|
|
|
(1)
|
Represents the maximum number of shares eligible to vest.
|
Time-based restricted stock units granted on May 20, 2015 vested on April 4, 2017 and those granted on May 20, 2016 will vest on April 1, 2018, provided that the 2014 Management Agreement has not been terminated prior to such vesting date.
Market-based restricted stock units granted on May 20, 2015 vested on April 4, 2017 and those granted on May 20, 2016 are eligible to vest on April 1, 2018, provided that the 2014 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. Each reporting period, we re-measure the fair value of the unvested shares of market-based restricted stock units granted to ZelnickMedia.
Performance-based restricted stock units granted on May 20, 2015 vested on April 4, 2017 and those granted on May 20, 2016 are eligible to vest on April 1, 2018, provided that the 2014 Management Agreement has not been terminated prior to such vesting date. Performance-based restricted stock units, of which
50%
are tied to "New IP" and
50%
to "Major IP" (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 individual product releases of "New IP" or "Major IP" 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 (which represents the maximum number of performance-based restricted stock units that may be earned). Each reporting period, we assess the performance metric and upon achievement of certain thresholds record an expense for the unvested portion of the shares of performance-based restricted stock units. Certain performance metrics, based on unit sales, have been achieved as of
March 31, 2017
and
2016
for the "New IP" and "Major IP" performance-based restricted stock units granted on April 1, 2014, May 20, 2015, and May 20, 2016.
The unvested portion of time-based, market-based and performance-based restricted units granted pursuant to the 2014 Management Agreement as of
March 31, 2017
and
2016
was
898,526
and
1,145,081
, respectively.
The following table summarizes the weighted-average assumptions used in the Monte Carlo Simulation method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Employee
Market-Based
|
|
Non-Employee
Market-Based
|
|
Employee
Market-Based
|
|
Non-Employee
Market-Based
|
|
Employee
Market-Based
|
|
Non-Employee
Market-Based
|
Risk-free interest rate
|
|
0.9
|
%
|
|
0.7
|
%
|
|
0.6
|
%
|
|
0.4
|
%
|
|
0.4
|
%
|
|
0.1
|
%
|
Expected stock price volatility
|
|
31.2
|
%
|
|
30.1
|
%
|
|
33.9
|
%
|
|
32.2
|
%
|
|
31.9
|
%
|
|
33.7
|
%
|
Expected service period (years)
|
|
1.5
|
|
|
1.0
|
|
|
1.9
|
|
|
1.1
|
|
|
2.0
|
|
|
3.7
|
|
Dividends
|
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
The estimated value of time-based restricted stock awards granted to employees during the fiscal years ended
March 31, 2017
,
2016
and
2015
was
$49.43
,
$33.74
and
$21.52
per share, respectively. The estimated value of market-based restricted stock awards granted to employees during the fiscal years ended
March 31, 2017
,
2016
and
2015
was
$63.60
,
$43.66
and
$36.56
per share, respectively. For the fiscal years ended
March 31, 2017
,
2016
and
2015
, the estimated value of time-based restricted stock awards granted to ZelnickMedia was
$36.37
,
$27.65
and
$21.92
per share, respectively. For the fiscal years ended
March 31, 2017
,
2016
and
2015
, the estimated value of the market-based restricted stock awards granted to ZelnickMedia was
$51.92
,
$58.45
and
$24.21
per share, respectively.
The following table summarizes the activity in non-vested restricted stock awards to employees and ZelnickMedia under our stock-based compensation plans with performance and market based restricted stock awards presented at
100%
of target number of shares that may potentially vest:
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted
Average Fair
Value on
Grant Date
|
Non-vested restricted stock at March 31, 2016
|
|
6,405
|
|
|
$
|
24.74
|
|
Granted
|
|
1,161
|
|
|
47.48
|
|
Vested
|
|
(3,220
|
)
|
|
23.54
|
|
Forfeited
|
|
(87
|
)
|
|
20.76
|
|
Non-vested restricted stock at March 31, 2017
|
|
4,259
|
|
|
$
|
32.93
|
|
The maximum number of restricted stock awards that could vest is
228,587
for performance-based and market-based restricted stock awards granted during the current year. As of
March 31, 2017
, the maximum number of shares that could vest is
886,360
for performance-based and market-based restricted stock units outstanding.
As of
March 31, 2017
, the total future unrecognized compensation cost, net of estimated forfeitures, related to outstanding unvested restricted stock was
$95,965
and will be recognized as compensation expense on a straight-line basis over a weighted-average period of approximately
1
year, or capitalized as software development costs.
Liability Awards
During the fiscal year ended March 31, 2016, we issued
5,500,000
of time and performance based restricted stock units, to certain employees, which currently can only be settled in cash and are therefore treated as liability awards. The awards are expected to vest between fiscal 2019 and fiscal 2022. As of
March 31, 2017
, the total future unrecognized compensation cost, based on the estimated cash payment terms, is estimated to be
$165,596
and will be recognized as compensation expense over a weighted-average period of approximately
3.9
years, or capitalized as software development costs.
16. SHARE REPURCHASE PROGRAM
In January 2013, our Board of Directors authorized the repurchase of up to
7,500,000
shares of our common stock. In May 2015, our Board of Directors authorized the repurchase of an additional
6,717,683
shares of our common stock pursuant to the share repurchase program. We did
no
t repurchase any shares of our common stock under this program during the fiscal year ended
March 31, 2017
. During the fiscal year ended March 31, 2016 we repurchased
953,647
shares of our common stock in the open market for
$26,552
, including commissions of
$10
, as part of the program. During the fiscal year ended
March 31, 2014
, we repurchased
4,217,683
shares of our common stock in the open market for
$73,325
, including commissions of
$42
, as part of the program. As of
March 31, 2017
, we have repurchased a total of
5,171,330
shares of our common stock and have
9,046,353
shares of our common stock that remain available for repurchase under our share repurchase authorization. We are authorized to purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. Repurchases are subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance and other conditions. The program may be suspended or discontinued at any time for any reason.
All of the repurchased shares are classified as treasury stock in our Consolidated Balance Sheets.
17. SEGMENT AND GEOGRAPHIC INFORMATION
We are a publisher of interactive software games designed for console systems and personal computers, including smart phones and tablets, which are delivered through physical retail, digital download, online platforms and cloud streaming services. Our business consists principally of our Rockstar Games and 2K labels, which represent a single operating segment, the "publishing segment". Our operations involve similar products and customers worldwide. Revenue earned from our publishing segment is primarily derived from the sale of internally developed software titles and software titles developed by third parties. Our publishing segment is based upon our internal organizational structure, the manner in which our operations are managed and the criteria used by our Chief Executive Officer, our Chief Operating Decision Maker ("CODM"), to evaluate performance and allocate resources. We are centrally managed and the CODM primarily uses consolidated financial information supplemented by sales information by product category, major product title and platform to make operational decisions and assess financial performance.
We attribute net revenue to geographic regions based on product destination. Net revenue by geographic region was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
Net revenue by geographic region:
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
999,128
|
|
|
$
|
742,963
|
|
|
$
|
623,080
|
|
Europe
|
|
515,696
|
|
|
449,577
|
|
|
322,645
|
|
Asia Pacific
|
|
157,183
|
|
|
120,629
|
|
|
69,923
|
|
Canada and Latin America
|
|
107,741
|
|
|
100,529
|
|
|
67,290
|
|
Total net revenue
|
|
$
|
1,779,748
|
|
|
$
|
1,413,698
|
|
|
$
|
1,082,938
|
|
Net revenue by product platform was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
Net revenue by product platform:
|
|
2017
|
|
2016
|
|
2015
|
Console
|
|
$
|
1,440,724
|
|
|
$
|
1,167,623
|
|
|
$
|
881,516
|
|
PC and other
|
|
339,024
|
|
|
246,075
|
|
|
201,422
|
|
Total net revenue
|
|
$
|
1,779,748
|
|
|
$
|
1,413,698
|
|
|
$
|
1,082,938
|
|
Our products are delivered through digital online services (digital download, online platforms and cloud streaming) and physical retail. Net revenue by distribution channel was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
Net revenue by distribution channel:
|
|
2017
|
|
2016
|
|
2015
|
Digital online
|
|
$
|
921,734
|
|
|
$
|
697,658
|
|
|
$
|
455,299
|
|
Physical retail and other
|
|
858,014
|
|
|
716,040
|
|
|
627,639
|
|
Total net revenue
|
|
$
|
1,779,748
|
|
|
$
|
1,413,698
|
|
|
$
|
1,082,938
|
|
18. INTEREST AND OTHER, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Interest expense, net
|
|
$
|
(21,700
|
)
|
|
$
|
(29,239
|
)
|
|
$
|
(29,901
|
)
|
Foreign currency exchange gain (loss)
|
|
4,990
|
|
|
(1,407
|
)
|
|
(2,068
|
)
|
Other
|
|
1,020
|
|
|
441
|
|
|
76
|
|
Interest and other, net
|
|
$
|
(15,690
|
)
|
|
$
|
(30,205
|
)
|
|
$
|
(31,893
|
)
|
19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table provides the components of accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
adjustments
|
|
Unrealized gain
(loss) on
derivative
instruments
|
|
Unrealized gain
(loss) on
available-
for-sales
securities
|
|
Total
|
Balance at March 31, 2015
|
|
$
|
(31,216
|
)
|
|
$
|
617
|
|
|
$
|
(25
|
)
|
|
$
|
(30,624
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(7,364
|
)
|
|
—
|
|
|
73
|
|
|
(7,291
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
(17
|
)
|
|
36
|
|
|
19
|
|
Balance at March 31, 2016
|
|
$
|
(38,580
|
)
|
|
$
|
600
|
|
|
$
|
84
|
|
|
$
|
(37,896
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(9,086
|
)
|
|
—
|
|
|
(169
|
)
|
|
(9,255
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
9
|
|
|
9
|
|
Balance at March 31, 2017
|
|
$
|
(47,666
|
)
|
|
$
|
600
|
|
|
$
|
(76
|
)
|
|
$
|
(47,142
|
)
|
20. BUSINESS REORGANIZATION
During the fiscal years ended
March 31, 2017
and
2016
, the Company incurred business reorganization expenses of
$0
and
$71,285
due primarily to employee separation costs in connection with reorganizing
one
development studio and closing
two
development studios. Through
March 31, 2017
and
2016
, the Company has paid
$5,350
and
$4,962
, respectively, related to these reorganization activities. As of
March 31, 2017
, and
2016
,
$65,935
and
$66,323
, respectively, remained accrued for in Accrued expenses and other current liabilities. See Note 13 for additional information.
21. SUPPLEMENTARY FINANCIAL INFORMATION
The following table provides details of our valuation and qualifying accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Additions
(1)
|
|
Deductions
|
|
Other
|
|
Ending
Balance
|
Fiscal Year Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred income taxes
|
|
$
|
170,574
|
|
|
$
|
13,511
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
184,085
|
|
Price protection, sales returns and other allowances
|
|
$
|
45,153
|
|
|
$
|
127,744
|
|
|
$
|
(100,934
|
)
|
|
$
|
(6,849
|
)
|
|
$
|
65,114
|
|
Allowance for doubtful accounts
|
|
399
|
|
|
974
|
|
|
(4
|
)
|
|
—
|
|
|
1,369
|
|
Total accounts receivable allowances
|
|
$
|
45,552
|
|
|
$
|
128,718
|
|
|
$
|
(100,938
|
)
|
|
$
|
(6,849
|
)
|
|
$
|
66,483
|
|
Fiscal Year Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred income taxes
|
|
$
|
133,468
|
|
|
$
|
37,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
170,574
|
|
Price protection, sales returns and other allowances
|
|
$
|
69,305
|
|
|
$
|
64,498
|
|
|
$
|
(86,622
|
)
|
|
$
|
(2,028
|
)
|
|
$
|
45,153
|
|
Allowance for doubtful accounts
|
|
1,166
|
|
|
—
|
|
|
(767
|
)
|
|
—
|
|
|
399
|
|
Total accounts receivable allowances
|
|
$
|
70,471
|
|
|
$
|
64,498
|
|
|
$
|
(87,389
|
)
|
|
$
|
(2,028
|
)
|
|
$
|
45,552
|
|
Fiscal Year Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred income taxes
|
|
$
|
40,774
|
|
|
$
|
92,694
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
133,468
|
|
Price protection, sales returns and other allowances
|
|
$
|
74,078
|
|
|
$
|
50,114
|
|
|
$
|
(57,982
|
)
|
|
$
|
3,095
|
|
|
$
|
69,305
|
|
Allowance for doubtful accounts
|
|
1,440
|
|
|
—
|
|
|
(274
|
)
|
|
—
|
|
|
1,166
|
|
Total accounts receivable allowances
|
|
$
|
75,518
|
|
|
$
|
50,114
|
|
|
$
|
(58,256
|
)
|
|
$
|
3,095
|
|
|
$
|
70,471
|
|
(1)
Includes price protection of
$65,336
,
$36,546
and
$16,669
; other allowances including rebates, discounts and cooperative advertising of
$45,850
,
$23,073
and
$24,402
; and sales returns of
$16,558
,
$4,879
and
$9,043
for the fiscal years ended
March 31, 2017
,
2016
and
2015
, respectively.
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth quarterly supplementary data for each of the years in the two-year period ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
Fiscal Year Ended March 31, 2017
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenue
|
|
$
|
311,552
|
|
|
$
|
420,167
|
|
|
$
|
476,474
|
|
|
$
|
571,555
|
|
Gross profit
|
|
120,171
|
|
|
214,562
|
|
|
165,399
|
|
|
256,657
|
|
(Loss) income from operations
|
|
(38,983
|
)
|
|
47,194
|
|
|
(28,409
|
)
|
|
111,503
|
|
Net (loss) income
|
|
$
|
(38,567
|
)
|
|
$
|
36,432
|
|
|
$
|
(29,842
|
)
|
|
$
|
99,280
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.46
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.97
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.46
|
)
|
|
$
|
0.39
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
Fiscal Year Ended March 31, 2016
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenue
|
|
$
|
275,297
|
|
|
$
|
346,974
|
|
|
$
|
414,221
|
|
|
$
|
377,206
|
|
Gross profit (loss)
|
|
72,682
|
|
|
203,034
|
|
|
156,360
|
|
|
167,749
|
|
(Loss) income from operations
|
|
(62,637
|
)
|
|
66,431
|
|
|
(59,197
|
)
|
|
44,575
|
|
Net (loss) income
|
|
$
|
(67,023
|
)
|
|
$
|
54,735
|
|
|
$
|
(42,413
|
)
|
|
$
|
46,399
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.81
|
)
|
|
$
|
0.63
|
|
|
$
|
(0.51
|
)
|
|
$
|
0.54
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.81
|
)
|
|
$
|
0.55
|
|
|
$
|
(0.51
|
)
|
|
$
|
0.48
|
|
Basic and diluted (loss) earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted (loss) earnings per share information may not equal annual basic and diluted earnings per share.
23. ACQUISITIONS
On
January 31, 2017
, we completed the acquisition of privately-held Social Point, S.L. (“Social Point”), a Spanish free-to-play mobile game developer, for consideration of
$175,000
in cash and the issuance of
1,480,168
shares of the Company's common stock, plus contingent earn-out consideration of up to an aggregate of
$25,900
in cash and shares of the Company's common stock. The cash portion was funded from our cash on hand. Certain of the shares that were issued to continuing employees are subject to transferability restrictions and forfeiture provisions requiring their continued employment subject to certain exceptions over the
three
-year period following the closing and are therefore considered share-based compensation over the service period.
We acquired Social Point to leverage its strong portfolio of technology, assembled workforce, and existing free-to-play mobile games in order to expand and enhance our game offerings, particularly on mobile platforms.
The acquisition-date fair value of the consideration transferred totaled
$238,736
, which consisted of the following:
|
|
|
|
|
|
Fair value of
purchase
consideration
|
Cash
|
$
|
175,000
|
|
Common stock (1,071,739 shares)
|
57,327
|
|
Contingent earn-out
|
6,409
|
|
Total
|
$
|
238,736
|
|
The fair value of the of the purchase consideration attributed to the common shares issued was calculated by using the Take-Two's closing share price on January 30, 2017, as the shares were transferred prior to the opening of the market on
January 31, 2017
.
The contingent earn-out consideration arrangement requires us to pay up to an aggregate of
$25,900
in cash and shares of the Take-Two common stock, if Social Point achieves certain performance measures over the
12
and
24
month periods following the closing. The fair value of the contingent consideration arrangement at the acquisition date was
$6,409
. We estimated the fair value of the contingent 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 3.) As of March 31, 2017, there were no significant changes in the range of outcomes for the contingent consideration recognized as a result of the acquisition of Social Point, although the recognized amount increased to
$6,465
as a result of minor changes in estimates, the passage of time (reduced impact of discounting), and currency exchange rate fluctuations.
The following table summarizes the preliminary acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Social Point.
|
|
|
|
|
|
|
Preliminary
estimated
fair value
|
Preliminary
estimated
weighted
average
useful life
|
Tangible net assets (liabilities) assumed
|
$
|
(16,380
|
)
|
N/A
|
Intangible Assets
|
|
|
|
Developed game technology
|
53,950
|
|
4 years
|
In-process R&D
|
14,700
|
|
N/A
|
Analytics technology
|
29,700
|
|
5 years
|
User base
|
9,000
|
|
1 year
|
Branding and trade names
|
4,200
|
|
9 years
|
Goodwill
|
143,566
|
|
N/A
|
Total
|
$
|
238,736
|
|
|
Goodwill, which is not deductible for U.S. income tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition. The preliminary fair values of net tangible and intangible assets are management’s estimates based on the information available at the acquisition date.
The Company recognized
$1,915
of acquisition related costs that were expensed in the current period. These costs are included in our Consolidated Statement of Operations within General and Administrative expenses.
The amounts of revenue and earnings of Social Point included in our Consolidated Statement of Operations from the acquisition date to the period ending March 31, 2017 are as follows:
|
|
|
|
|
|
February 1, 2017 to March 31, 2017
|
Net revenue
|
$
|
2,903
|
|
Net loss
|
$
|
(8,789
|
)
|
The following represents the pro forma consolidated information (unaudited) as if Social Point had been included in our consolidated results for the entire years ending March 31, 2017 and 2016, and due to different fiscal period ends, combines the historical results of the Company for the year ended March 31, 2017 and 2016 and the historical results of Social Point for the years ended December 31, 2016 and 2015, respectively:
|
|
|
|
|
|
|
|
|
12 months ended
March 31,
|
|
2017
|
|
2016
|
Net revenue
|
$
|
1,815,233
|
|
|
1,429,634
|
|
Net income (loss)
|
$
|
30,161
|
|
|
(61,805
|
)
|
These amounts have been calculated after applying our accounting policies and adjusting the results of Social Point to reflect recognition of revenue over an estimated service period as compared to upfront recognition; the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on April 1, 2015; stock-based compensation expense associated with the
408,429
shares of the Company's common stock granted in the acquisition which vest over
three years
subject to continued employment; together with the consequential tax effects as though the acquisition occurred as of the beginning of the periods presented. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved based on these assumptions.