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.

On May 2, 2022, IBM filed suit against Zynga, our wholly-owned subsidiary, in the United States District Court for the District of Delaware. The suit alleged, in relevant part, that Zynga infringed its U.S. Patent Nos. 7,072,849 and 7,702,719. Starting on September 9, 2024, the case was tried before a jury, which, on September 13, 2024, returned a verdict finding that certain of Zynga’s games infringed each of the patents and awarding damages to IBM in the amount of $44.9. The patents at issue have expired and Zynga will not have to modify or stop operating any of the games at issue. During the three months ended December 31, 2024, we entered into a Settlement Agreement and Patent License Agreement with IBM which, in relevant part, resolved all claims, damages, liabilities, and causes of action related to the matter.

12. INCOME TAXES

The benefit from income taxes for the three months ended December 31, 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 benefit from income taxes was $27.7 for the three months ended December 31, 2024, as compared to the benefit from income taxes of $60.7 for the prior year period.

When compared to the statutory rate of 21%, the effective tax rate of 18.1% for the three months ended December 31, 2024 was due primarily to tax benefits of $18.2 related to divestitures, tax benefits of $6.4 from employee stock-based compensation, tax benefits of $3.9 from tax credits, offset by tax expense of $18.7 related to an increase in the U.S. and international valuation allowances and tax expense of $7.1 related to geographic mix of earnings.

The provision for income taxes for the nine months ended December 31, 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 $63.3 for the nine months ended December 31, 2024, as compared to the benefit from income taxes of $117.0 for the prior year period.

When compared to the statutory rate of 21%, the effective tax rate of (9.2)% for the nine months ended December 31, 2024 was due primarily to tax expense of $220.5 related to an increase in the U.S. and international valuation allowances, tax expense of $25.2 related to geographic mix of earnings, offset by tax benefits of $18.2 related to divestitures and tax benefits of $38.8 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 do not estimate any 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 than 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 a 15% minimum rate. The impact of Pillar Two was not material to the tax provision for the three and nine months ended December 31, 2024. We will continue to evaluate the impact Pillar Two and any additional guidance 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 $435.0, 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 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 $0.2 and $5.3 for thethree and nine months ended December 31, 2024, respectively, 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:

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 decay rate, and discount rate.

Indefinite-lived intangibles

Other intangibles, net, as of December 31, 2024, included in-process research and development ("IPR&D") assets of $36.0 acquired as part of the Gearbox acquisition (refer to Note 13 - Acquisitions), which are indefinite-lived intangibles and therefore not subject to amortization until the related games are released or development is abandoned.

Definite-lived 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.

During the three and nine months ended December 31, 2024, we divested $6.8, net of Advertising Technology assets, $15.3, net of Customer Relationships assets, and $4.1, net of Branding and Trade Names assets.

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 was largely completed as of December 31, 2024 but additional costs will be incurred into fiscal year 2026. We estimated 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. During the fiscal year ended March 31, 2024, we incurred business reorganization expenses of $93.3 in connection with the 2024 Plan, of which $88.2 related to title cancellations, $3.2 was for employee-related costs, and the remaining $1.9 consisted of professional fees.

We incurred business reorganization expenses of $23.1 and $0.7 during the three months ended December 31, 2024 and 2023, respectively, and $89.4 and $11.3 during the nine months ended December 31, 2024 and 2023, respectively.

In connection with the 2024 Plan, we incurred the following expenses:

(1) Refer to Note 7 - Software Development Costs and Licenses

During the three and nine months ended December 31, 2024 we paid $11.3 and $53.2, respectively, related to these reorganization activities and $9.0 remained accrued for in Accrued expenses and other current liabilities.