STOCK-BASED COMPENSATION

Stock Incentive Plan

In September 2017, our stockholders approved our 2017 Stock Incentive Plan (the "2017 Plan"). The aggregate number of shares issuable under the 2017 Plan is 7,596, subject to adjustment as set forth in the 2017 Plan, and, as of March 31, 2018, there were approximately 6,329 shares available for issuance. The 2017 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, including to ZelnickMedia in connection with their contract to provide executive management service to us. 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 stock-based awards, employees have the option to have the Company withhold shares to satisfy the employee's federal and state tax withholding requirements.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense included in our Consolidated Statements of Operations:



	Fiscal Year Ended March 31,
	2018		2017		2016
Cost of goods sold	$	24,610	$	21,056	$	15,323
Selling and marketing	13,258		9,963		9,425
General and administrative	58,037		42,908		40,322
Research and development	18,020		7,952		4,926
Business reorganization	2,424		—		—
Stock-based compensation expense	$	116,349	$	81,879	$	69,996
Capitalized stock-based compensation expense	$	90,914	$	74,717	$	30,367

Restricted Stock Units

Employee Awards

Time-based restricted stock units granted to employees under our stock-based compensation plans generally vest either annually or quarterly over 3 years from the date of grant. Certain restricted stock units granted to key officers, senior-level employees, or key employees vest based on market conditions, primarily related to the performance of the price of our common stock. Certain restricted stock units granted to key officers, senior-level employees, or key employees vest based on performance conditions, primarily related to performance metrics around certain of our titles.

ZelnickMedia Non-Employee Awards

In connection with the 2014 Management Agreement, we granted restricted stock units to ZelnickMedia (see Note 2 - Management Agreement) as follows:



	Fiscal Year Ended March 31,
	2018	2017
Time-based	66	108
Market-based⁽¹⁾	122	199
Performance-based⁽¹⁾
New IP	21	33
Major IP	20	33
Total-Performance-based	41	66
Total Restricted Stock Units	229	373


(1)	Represents the maximum number of shares eligible to vest.

Time-based restricted stock units granted in fiscal 2018 are eligible to vest on April 4, 2019, provided that the 2017 Management Agreement has not been terminated prior to such vesting date, and those granted in fiscal 2017 vested on April 2, 2018.

Market-based restricted stock units granted in fiscal 2018 are eligible to vest on April 4, 2019, provided that the 2017 Management Agreement has not been terminated prior to such vesting date, and those granted in fiscal 2017 vested on April 2, 2018. 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 in fiscal 2018 are eligible to vest on April 4, 2019, provided that the 2017 Management Agreement has not been terminated prior to such vesting date, and those granted in fiscal 2017 vested on April 2, 2018. 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, 2018 for the "New IP" and "Major IP" performance-based restricted stock units granted in 2017 and 2016.

The unvested portion of time-based, market-based and performance-based restricted stock units granted pursuant to the 2014 Management Agreement as of March 31, 2018 and 2017 was 602 and 899, respectively. During the fiscal year ended March 31, 2018, 479 restricted stock units previously granted to ZelnickMedia vested and 47 restricted stock units were forfeited by ZelnickMedia.

Fair Value of Stock-Based Awards

Time-Based Awards

The estimated value, based on the closing price of our stock on the grant date, of time-based restricted stock units granted to employees during the fiscal years ended March 31, 2018, 2017 and 2016 was $106.28, $49.43 and $33.74 per share, respectively.

For the fiscal years ended March 31, 2018, 2017 and 2016, the estimated value, based on the closing price of our stock on the grant date, of time-based restricted stock awards granted to ZelnickMedia was $78.53, $36.37 and $27.65 per share, respectively.

Market-Based Awards

The following table summarizes the weighted-average assumptions used in the Monte Carlo Simulation to estimate the fair value of market-based awards:



	Fiscal Year Ended March 31,
	2018				2017				2016
	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	1.4	%	2.1	%	0.9	%	0.7	%	0.6	%	0.4	%
Expected stock price volatility	28.4	%	35.5	%	31.2	%	30.1	%	33.9	%	32.2	%
Expected service period (years)	1.5		1.0		1.5		1.0		1.9		1.1
Dividends	None		None		None		None		None		None

The estimated value of market-based restricted stock awards granted to employees during the fiscal years ended March 31, 2018, 2017 and 2016 was $141.78, $63.60 and $43.66 per share, respectively. For the fiscal years ended March 31, 2018, 2017 and 2016, the estimated value of the market-based restricted stock awards granted to ZelnickMedia was $185.66, $51.92 and $58.45 per share, respectively.

Performance-Based Awards

The estimated value of performance-based restricted stock awards granted to employees during the fiscal year ended March 31, 2018 was $102.57. None were granted during the fiscal years ended March 31, 2017 and 2016. For the fiscal years ended March 31, 2018, 2017 and 2016, the estimated value of the performance-based restricted stock awards granted to ZelnickMedia was $97.78, $59.27 and $37.67 per share, respectively.

Summary of Activity

The following table summarizes the activity in non-vested restricted stock units 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, 2017	4,259		$	32.93
Granted	8,039		101.72
Vested	(3,272	)	28.67
Forfeited	(1,629	)	107.05
Non-vested restricted stock at March 31, 2018	7,397		$	90.70

During the fiscal year ended March 31, 2018, we reclassified 5,550 of time and performance based restricted stock units as equity award grants. These awards were granted in prior periods and historically accounted for as liability awards as they previously could be settled only in cash and based on a contractually stipulated cash settlement value. However, in September 2017, we received stockholder approval to increase the number of shares of Common Stock for which awards may be granted and therefore now have the ability and intent to settle these awards in stock. As a result, we reclassified $74,707 from Other long-term liabilities to Additional paid-in capital within Stockholders' equity. Additionally, we recognized incremental cost of $112,789 to reflect the difference between the share price at the time of the share authorization and the contractually stipulated cash settlement value. Of these incremental costs, $84,176 was capitalized within Software development costs and licenses, net of current portion; $23,251 was recorded within Software development costs and royalties (a component of cost of goods sold); and $5,361 was recorded within Research and development costs.

The maximum number of restricted stock awards that could vest is 512 for performance-based and market-based restricted stock awards granted during the current year. As of March 31, 2018, the maximum number of shares that could vest is 1,399 for performance-based and market-based restricted stock units outstanding. For the fiscal years ended March 31, 2018, 2017 and 2016, the fair values of restricted stock units that vested were $268,570, $137,130 and $123,854, respectively.

During the fiscal year ended March 31, 2018, the forfeiture of awards resulted in the reversal of expense of $17,069 and amounts capitalized as software development costs of $53,779.

As of March 31, 2018, the total future unrecognized compensation cost related to outstanding unvested restricted stock was $640,672 and will be either recognized as compensation expense over a weighted-average period of approximately 3.0 years or capitalized as software development costs.