TAKE TWO INTERACTIVE SOFTWARE INC

11. COMMITMENTS AND CONTINGENCIES

We have entered into various agreements in the ordinary course of business that require substantial cash commitments over the next several years. Other than agreements entered into in the ordinary course of business and in addition to the agreements requiring known cash commitments as reported in Note 14 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, we did not have any significant changes to our commitments since March 31, 2023.

Legal and Other Proceedings

We are, or may become, subject to demands and claims (including intellectual property and employment related claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial condition or results of operations. We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material.

12. INCOME TAXES

The benefit from income taxes for the three months ended December 31, 2023 is based on our projected annual effective tax rate for fiscal year 2024, adjusted for specific items that are required to be recognized in the period in which they are incurred. The benefit from income taxes was $60.7 for the three months ended December 31, 2023, as compared to the benefit from income taxes of $46.7 for the prior year period.

When compared to the statutory rate of 21%, the effective tax rate of 39.9% for the three months ended December 31, 2023 was due primarily to tax benefits of $40.0 related to the changes in unrecognized tax benefits from a lapse in statute, tax benefits of $4.5 from tax credits, offset by tax expense of $6.8 related to geographic mix of earnings and tax expense of $4.9 related to an increase in the U.S. valuation allowance.

The benefit from income taxes for the nine months ended December 31, 2023 is based on our projected annual effective tax rate for fiscal year 2024, adjusted for specific items that are required to be recognized in the period in which they are incurred. The benefit from income taxes was $117.0 for the nine months ended December 31, 2023, as compared to the benefit from income taxes of $93.1 for the prior year period.

When compared to the statutory rate of 21%, the effective tax rate of 12.2% for the nine months ended December 31, 2023 was due primarily to tax expense of $86.5 related to an increase in the U.S. valuation allowance, tax expense of $33.5 related to the impairment of nondeductible goodwill, tax expense of $7.0 related to geographic mix of earnings offset by tax benefits of $46.5 from tax credits and tax benefits of $40.0 related to the changes in unrecognized tax benefits from a lapse in statute.

The Tax Cuts and Jobs Act of 2017 (“TCJA”) requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code ("IRC") Section 174. The requirement was effective for the Company beginning April

1, 2022. Congress is considering legislation that would repeal or otherwise modify the domestic capitalization and amortization under Section 174 of the TCJA.

The Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) includes a new corporate alternative minimum tax (CAMT) of 15% on the adjusted financial statement income (AFSI) of corporations with an average AFSI exceeding $1.0 billion over a consecutive three-year period. The CAMT is effective for taxable year ending March 31, 2024. It is possible that the CAMT could result in an additional tax liability over the regular federal corporate tax liability in a particular year based on differences between book and taxable income. We estimate no tax liability relating to CAMT for the current fiscal year. We will continue to evaluate the potential impact the Inflation Reduction Act may have on our operations and Consolidated Financial Statements in future periods.

We are regularly examined by domestic and foreign taxing authorities. Examinations may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits or the expiration of the statute of limitations may have an impact on our effective tax rate in future periods.

13. ACQUISITIONS

Zynga Acquisition

On May 23, 2022, we completed the Zynga Acquisition. Under the terms and conditions of the merger agreement, each Zynga stockholder received $3.50 in cash and 0.0406 shares of our common stock and cash in lieu of fractional shares for each share of Zynga common stock outstanding at closing. Our consideration consisted of an aggregate of $3,992.4 in cash,46.3 shares of our common stock, and $151.7 of replacement equity awards attributable to the pre-acquisition service period. In connection with the transaction, on April 14, 2022, we completed our offering and sale of $2,700.0 aggregate principal amount of our Senior Notes (refer to Note 9 - Debt). The cash portion of the merger consideration was funded from our cash on hand, including the proceeds from our senior notes offering.

We acquired Zynga as part of our ongoing strategy to expand selectively our portfolio of owned intellectual property and to diversify and strengthen further our mobile offerings.

The acquisition-date fair value of the consideration totaled $9,521.8, which consisted of the following:

We used the acquisition method of accounting and recognized assets acquired and liabilities assumed at their fair value as of the date of acquisition, with the excess recorded to goodwill. The following table summarizes the acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Zynga:

Popcore Acquisition

On November 16, 2022, we completed the acquisition of 100% of Popcore, a privately-held Germany-based free-to-play mobile game developer, for initial consideration of $116.9 in cash,0.6 shares of our common stock, and a contingent earn-out consideration arrangement that requires us to pay up to an aggregate of $105.0 in cash if Popcore achieves certain performance measures over each of thethree calendar years following the closing. The cash portion was funded from our cash on hand.

We acquired Popcore as part of our ongoing strategy to expand selectively our portfolio of owned intellectual property and to diversify and strengthen further our mobile offerings.

The acquisition-date fair value of the consideration totaled $198.0, which consisted of the following:

The fair value of the contingent earn-out consideration arrangement at the acquisition date was $23.3. We estimated the fair value of the contingent earn-out consideration using a Monte Carlo simulation model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. (Refer to Note 4 - Fair Value Measurements).

We used the acquisition method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition, with the excess recorded to goodwill. The following table summarizes the acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Popcore:

Goodwill, which is not deductible for tax purposes, is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.

14. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

The change in our goodwill balance is as follows:

During the nine months ended December 31, 2023, we recognized a goodwill impairment charge of $165.4, representing a partial impairment related to one of our reporting units. We identified various qualitative factors that, collectively, indicated that the fair value of one of our reporting units was more likely than not less than its carrying amount, including a reduction in the forecasted performance of the reporting unit due to industry conditions and changes in our strategies for games within the reporting unit in response to those conditions. As a result of this qualitative analysis, we performed a valuation of the reporting unit using discounted cash flow and guideline public company methodologies. Key assumptions and estimates used in deriving the fair value are forecasted revenue, EBITDA margins, long-term growth rate, and discount rate. There were no goodwill impairment charges for the three and nine months ended December 31, 2022.

Intangibles

The following table sets forth the intangible assets that are subject to amortization:

Amortization of intangible assets is included in our Condensed Consolidated Statements of Operations as follows:

During the three and nine months ended December 31, 2023, we recorded impairment charges of $53.4 and $273.1, respectively, for acquisition-related Developed Game Technology intangible assets within Cost of revenue as a result of a reduction in the forecasted performance of certain games due to industry conditions and changes in our strategies for certain games in response to those conditions. The fair value of those intangible assets was measured using the multi-period excess earnings method, consistent with the approach used at acquisition. Key assumptions and estimates used in deriving the fair value are forecasted revenue, EBITDA margins, long-term decay rate, and discount rate. There were no impairment charges for intangible assets for the three and nine months ended December 31, 2022.

Estimated future amortization of intangible assets that will be recorded in Cost of revenue and operating expenses are as follows:

15. SUBSEQUENT EVENTS

On January 8, 2024, we completed our add-on offering and sale of $350.0 aggregate principal amount of our senior notes, consisting of $50.0 principal amount of 5.000% Senior Notes due 2026 (the "2026 Notes") and $300.0 principal amount of 4.950% Senior Notes due 2028 (the "2028 Notes"). The additional 2026 Notes and 2028 Notes (the “New Notes”) were issued as additional notes under the existing Indenture (refer to Note 9 - Debt) pursuant to which we previously issued $500.0 aggregate principal amount of the 5.000% Senior Notes due 2026 and $500.0 aggregate principal amount of the 4.950% Senior Notes due 2028 (the “Existing Notes” and, together with the New Notes, the “Notes”), all of which remain outstanding. The New Notes have the same terms as the respective series of Existing Notes other than the date of issuance and the initial offering price, are treated as a single series of securities with the respective series of Existing Notes under the Indenture, are fungible with the respective series of Existing Notes for U.S. federal income tax purposes and have the same respective CUSIP numbers as the Existing Notes.