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, 2024, we did not have any significant changes to our commitments since March 31, 2024.

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 provision for income taxes for the three months ended June 30, 2024 is based on our projected annual effective tax rate for fiscal year 2025, adjusted for specific items that are required to be recognized in the period in which they are incurred. The provision for income taxes was $49.8 for the three months ended June 30, 2024, as compared to the benefit from income taxes of $22.9 for the prior year period.

When compared to the statutory rate of 21%, the effective tax rate of (23.5)% for the three months ended June 30, 2024 was due primarily to tax expense of $96.8 related to an increase in valuation allowance, tax expense of $8.2 related to geographic mix of earnings offset by benefits of $17.7 from tax credits.

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.

The Organization for Economic Co-operation and Development ("OECD") has proposed a global minimum tax of 15% of reported profits, referred to as Pillar Two. Many countries have already implemented or are taking steps to implement Pillar Two. Although the model rules provide a framework for applying the minimum tax, countries may enact Pillar Two slightly differently that the model rules and on different timelines. Many aspects of Pillar Two are effective for the fiscal year ending March 31, 2025. Pillar Two could result in additional tax liability over the regular corporate tax liability in a particular jurisdiction to the extent tax expense is less than 15% minimum rate. The impact of Pillar Two was not material to the tax provision for the three months ended June 30, 2024. We will continue to evaluate the impact Pillar Two may have on our operations.

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

On June 11, 2024, we completed the purchase of 100% of the issued and outstanding capital stock of The Gearbox Entertainment Company, Inc. ("Gearbox"), from Embracer Group AB, for an initial consideration of 2.8 shares of our common stock.

We acquired Gearbox, a leading developer of console and PC games, as part of our ongoing strategy to strengthen our industry-leading creative talent and portfolio of owned intellectual property. The combination enhances the financial profile of our existing projects with Gearbox and unlocks the opportunities to drive increased long-term growth.

The acquisition-date fair value of the consideration totaled $440.7, which consisted of the following:

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. As we finalize our estimation of the fair value of the assets acquired and liabilities assumed, additional adjustments may be recorded during the measurement period (a period not to exceed 12 months from the acquisition date). The initial accounting is incomplete as of June 30, 2024 for the acquired assets and assumed liabilities. Additional intangible assets may be recognized as the valuation is complete. The following table summarizes the preliminary acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Gearbox:

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.

The amounts of revenue and earnings of Gearbox included in our Condensed Consolidated Statements of Operations from the acquisition date are as follows:

Supplemental pro-forma financial information has not been provided as the historical results of Gearbox were not material to us.

Transaction costs of $6.0 for the three months ended June 30, 2024 have been recorded within General and administrative expense in our Condensed Consolidated Statements of Operation.

14. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

The change in our goodwill balance is as follows:

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:

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

15. BUSINESS REORGANIZATION

We have implemented a cost reduction program to identify efficiencies across our business (the "2024 Plan"), which includes eliminating several projects in development and streamlining our organizational structure. The 2024 Plan is expected to be largely completed by December 31, 2024. We estimate that we will incur approximately $160.0 to $200.0 in total charges in connection with the 2024 Plan, which consists of approximately $120.0 to $140.0 related to title cancellations, $25.0 to $35.0 associated with employee severance and employee-related costs, and approximately $15.0 to $25.0 related to office space reductions.

We incurred business reorganization expenses of $49.5 and $7.2 during the three months ended June 30, 2024, and 2023, respectively. In connection with the 2024 Plan, during the three months ended June 30, 2024, $23.8 was for employee-related costs, $23.3 related to title cancellations (refer to Note 7 - Software Development Costs and Licenses), $1.8 related to impairment loss for a right-of-use asset due to office closures, and $0.6 consisted of professional fees.

During the three months ended June 30, 2024, we paid $34.1 related to these reorganization activities and $8.1 remained accrued for in Accrued expenses and other current liabilities.