What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-04 · 214 added, 111 removed, 269 unchanged (55% of the section changed)

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We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe.

We develop and publish products principally through Rockstar Games, 2K, Private Division, and Social Point.

We develop and publish products principally through Rockstar Games, 2K, Private Division, Social Point, and Playdots.

Our products are currently designed for console gaming systems, such as Sony's PlayStation®4 ("PS4"), Microsoft's Xbox One® ("Xbox One"), or Nintendo's Switch™ ("Switch"), and personal computers ("PC"), including smartphones and tablets.

In addition, we are currently developing games for the next-generation console systems, Sony's PlayStation 5 ("PS5") and Microsoft's Xbox Series X ("Xbox Series X"), that are expected to launch in November 2020.

We deliver our products through physical retail, digital download, online platforms, and cloud streaming services.

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We expect Rockstar Games, our wholly-owned publisher of the Grand Theft Auto , Max Payne , Midnight Club , Red Dead Redemption , and other popular franchises, to continue to be a leader in the action/adventure product category and to create groundbreaking entertainment.

believe that Rockstar Games has established a uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 325 million units.

We believe that Rockstar Games has established a uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 330 million units.

The latest installment, Grand Theft Auto V , has sold in over 135 million units worldwide and includes access to Grand Theft Auto Online .

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The Humankind Odyssey , during fiscal year 2020, and Disintegration during fiscal year 2021, based on new IP from renowned industry creative talent.

Private Division has announced that Kerbal Space Program 2 is planned for release in fiscal year 2022.

Kerbal Space Program 2 is planned for release in fiscal year 2023.

Social Point develops and publishes popular free-to-play mobile games that deliver high-quality, deeply engaging entertainment experiences, including its two most successful games, Dragon City and Monster Legends .

In addition, Social Point has a robust development pipeline with a number of exciting games planned for launch in the coming years.

On September 4, 2020, we acquired privately held Playdots, Inc.

("Playdots") for consideration having an acquisition date fair value of $195.5 million, consisting of $97.8 million in cash and the issuance of 0.6 million shares of our common stock (See Note 16 of our Condensed Consolidated Financial Statements.).

Founded in 2013 and based in New York City, Playdots builds mobile games with unique and thoughtful designs.

They are best known for Two Dots , which has been downloaded over 80 million times since its launch six years ago and continues to deeply engage audiences throughout the world.

We are continuing to execute on our growth initiatives in Asia, where our strategy is to broaden the distribution of our existing products and expand our online gaming presence, especially in China and South Korea.

2K has secured a multi-year license from the NBA to develop an online version of the NBA simulation game in China, Taiwan, South Korea, and Southeast Asia.

NBA 2K Online , our free-to-play NBA simulation game that is based on the console edition of NBA 2K, which was co-developed by 2K and Tencent, is the top online PC sports game in China with nearly 50 million registered users.

We have released two iterations of NBA 2K Online and continue to enhance the title with new features.

We have expanded our relationship with the NBA through the creation of the NBA 2K League.

Launched in May 2018, this groundbreaking competitive gaming league is jointly owned by us and the NBA and consists of teams operated by actual NBA franchises.

We have expanded our relationship with the NBA through the NBA 2K League.

This groundbreaking competitive gaming league is jointly owned by us and the NBA and consists of teams operated by actual NBA franchises.

The NBA 2K League follows a professional sports league format:

head-to-head competition throughout a regular season, followed by a bracketed playoff system and a finals match-up that was held in August of each of the NBA 2K League's first two seasons.

head-to-head competition throughout a regular season, followed by a bracketed playoff system and a finals match-up that was held in August of each of the NBA 2K League's first three seasons.

The NBA 2K League's fourth season is set to take place in calendar year 2021.

Trends and Factors Affecting our Business

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Our Grand Theft Auto products in particular have historically accounted for a significant portion of our revenue.

Sales of Grand Theft Auto products generated 31.6% of our net revenue for the three months ended June 30, 2020.

Sales of Grand Theft Auto products generated 29.6% of our net revenue for the six months ended September 30, 2020.

The timing of our Grand Theft Auto product releases may affect our financial performance on a quarterly and annual basis.

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The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time.

In the first quarter of fiscal year 2021, as in the final quarter of fiscal year 2020, we noted a positive impact to our results that we believe was partly due to increased consumer engagement with our products because of the COVID-19 pandemic related business closures and movement restrictions, such as "shelter in place" and "lockdown" orders, being implemented around the world, as well as the online accessibility and social nature of our products.

In the first two

quarters of fiscal year 2021, as in the final quarter of fiscal year 2020, we noted a positive impact to our results that we believe was partly due to increased consumer engagement with our products because of the COVID-19 pandemic related business closures and movement restrictions, such as "shelter in place" and "lockdown" orders, implemented around the world, as well as the online accessibility and social nature of our products.

However, we cannot be certain as to the duration of these effects and the potential offsetting impacts of deteriorating economic conditions and decreased consumer spending generally.

We have developed and continue to develop plans to help mitigate the negative impact of the pandemic on our business, such as our transition, based on our concern for the health and safety of our teams, to working from home for the vast majority of our teams, which to date has resulted in minimal disruption.

However, these efforts may not be effective, and a protracted economic

downturn may limit the effectiveness of our mitigation efforts.

We have developed and continue to develop plans to help mitigate the negative impact of the pandemic on our business, such as our transition to working from home, based on our concern for the health and safety of our teams, for the vast majority of our teams, which to date has resulted in minimal disruption.

However, these efforts may not be effective, and a protracted economic downturn may limit the effectiveness of our mitigation efforts.

Any of these considerations described above could cause or contribute to the risks described under the heading "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, and could materially adversely affect our business, financial condition, results of operations, or stock price.

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Additionally, our business is dependent upon a limited number of customers that account for a significant portion of our revenue.

Our five largest customers accounted for 81.6% and 71.5% of net revenue during the three months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020 and March 31, 2020, our five largest customers comprised 76.0% and 58.1% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 67.0% and 48.8% of such balance at June 30, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 47.2% and 19.8%, respectively, of our gross accounts receivable as of June 30, 2020 and two customers who accounted for 29.4% and 19.4%, respectively, of our gross accounts receivable as of March 31, 2020.

Our five largest customers accounted for 77.7% and 74.8% of net revenue during the six months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020 and March 31, 2020, our five largest customers comprised 75.1% and 58.1% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 67.0% and 48.8% of such balance at September 30, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 47.3% and 19.7%, respectively, of our gross accounts receivable as of September 30, 2020 and two customers who accounted for 29.4% and 19.4%, respectively, of our gross accounts receivable as of March 31, 2020.

The economic environment has affected our customers in the past and may do so in the future, including as a result of the COVID-19 pandemic.

Bankruptcies or consolidations of our large retail customers could seriously hurt our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers.

Bankruptcies or consolidations of our large retail customers could adversely affect our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers.

The COVID-19 pandemic may lead to increased consolidation as larger, better capitalized competitors will be in a stronger position to withstand prolonged periods of economic downturn and sustain their business through the financial volatility.

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Hardware Platforms.

We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, such as Sony's PS4, Microsoft's Xbox One, and Nintendo's Switch, which comprised 73.6% of our net revenue by product platform for the three months ended June 30, 2020.

We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, such as Sony's PS4, Microsoft's Xbox One, and Nintendo's Switch, which comprised 74.9% of our net revenue by product platform for the six months ended September 30, 2020.

The success of our business is dependent upon the consumer acceptance of these platforms and the continued growth in their installed base.

When new hardware platforms are introduced, such as those slated for release in calendar 2020 by Sony and Microsoft, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles.

When new hardware platforms are introduced, such as those slated for release in November 2020 by Sony and Microsoft, demand for interactive entertainment playable on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles.

The new Sony and Microsoft consoles are expected to provide "backwards compatibility" (i.e.

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However, we cannot be certain how backwards compatibility will affect demand for our products.

Further, the COVID-19 pandemic or other events may impact the timing of release and availability of these new consoles, which may also affect demand.

Further, the COVID-19 pandemic or other events may impact the availability of these new consoles, which may also affect demand.

We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development.

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We provide a variety of online delivered products and offerings.

Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from websites we own and others owned by third parties) as well as a large selection of our catalog titles.

Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from digital storefronts we own and others owned by third parties) as well as a large selection of our catalog titles.

In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and in-game purchases.

We also publish an expanding variety of titles for tablets and smartphones, which are delivered to consumers through digital download.

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 87.4% of our net revenue for the three months ended June 30, 2020.

We expect online delivery of games and game offerings to continue to grow and to become the primary part of our business over the long-term.

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 86.0% of our net revenue for the six months ended September 30, 2020.

We expect online delivery of games and game offerings to continue to grow and to continue to be the primary part of our business over the long-term.

Product Releases

We released the following key titles during the three months ended June 30, 2020:

We released the following key titles during the six months ended September 30, 2020:

Title Publishing

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Development Platform(s) Date Released

Chimera Squad 2K Internal PC April 24, 2020

The Collection 2K Internal/External Switch May 29, 2020

Borderlands Legendary Collection 2K Internal/External Switch May 29, 2020

XCOM 2 Collection 2K External Switch May 29, 2020

The Outer Worlds Private Division External Switch June 5, 2020

Disintegration Private Division External PS4, Xbox One, PC June 16, 2020

PGA TOUR 2K21 2K External PS4, Xbox One, Switch, PC, Stadia August 21, 2020

NBA 2K21 2K Internal PS4, Xbox One, Switch, PC, Stadia September 4, 2020

WWE 2K Battlegrounds 2K External PS4, Xbox One, Switch, PC, Stadia September 18, 2020

Definitive Edition 2K External PS4, Xbox One, PC September 25, 2020

Product Pipeline

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Development Platform(s) Expected Release Date

PGA Tour 2K21 2K External PS4, Xbox One, Switch, PC, Stadia August 21, 2020

NBA 2K21 2K Internal PS4, Xbox One, Switch, PC, Stadia September 4, 2020

WWE 2K Battlegrounds 2K External PS4, Xbox One, Switch, PC, Stadia September 18, 2020

NBA 2K21 2K Internal PS5, Xbox Series X Holiday 2020

Borderlands 3 2K External Xbox Series X (digital only) November 10, 2020

NBA 2K21 2K Internal Xbox Series X November 10, 2020

Borderlands 3 2K External PS5 (digital only) November 12, 2020

NBA 2K21 2K Internal PS5 November 12, 2020

Grand Theft Auto V Rockstar Games Internal PS5, Xbox Series X Fiscal 2022

Kerbal Space Program 2 Private Division Internal PS4, Xbox One, PC Fall 2021

Kerbal Space Program 2 Private Division Internal PS4, Xbox One, PC Fiscal 2023

Critical Accounting Policies and Estimates

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In-depth descriptions of these can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

During the three months ended June 30, 2020 there were no significant changes to the above critical accounting policies and estimates, with the exception of our adoption of Topic 326, Financial Instruments - Credit Losses.

During the six months ended September 30, 2020 there were no significant changes to the above critical accounting policies and estimates, with the exception of our adoption of Topic 326, Financial Instruments - Credit Losses.

Refer to Note 1 - Basis of Presentation and Significant Accounting Policies for further discussion.

Recently Adopted and Recently Issued Accounting Pronouncements

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Net Bookings were as follows:

Three Months Ended June 30,

Three Months Ended September 30, Six Months Ended September 30,

2020 2019 Increase/

(decrease) % Increase/

(decrease) 2020 2019 Increase/

(decrease) % Increase/

Net Bookings $ 957,534 $ 950,516 $ 7,018 0.7 % $ 1,953,784 $ 1,372,756 $ 581,028 42.3 %

For the three months ended June 30, 2020, Net Bookings increased by $574.0 million as compared to the prior year period due primarily to Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, Borderlands 3, which released in September 2019, and Red Dead Redemption 2.

For the three months ended September 30, 2020, Net Bookings increased by $7.0 million as compared to the prior year period due primarily to increases from our NBA 2K franchise, PGA TOUR 2K21, which released in August 2020, our Mafia franchise, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds, which released in October 2019, our WWE 2K franchise, Dragon City , Civilization VI, Two Dots, a title from Playdots , which we acquired in September 2020 (refer to Note 16 to our Condensed Consolidated Financial Statements), and Monster Legends, partially offset by decreases from Borderlands 3, which released in September 2019, Grand Theft Auto V, and Grand Theft Auto Online.

For the six months ended September 30, 2020 Net Bookings increased by $581.0 million as compared to the prior year period due primarily to increases from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, PGA TOUR 2K21, which released in August 2020, our Mafia franchise, The Outer Worlds, our WWE 2K franchise, Civilization VI, Dragon City, and Monster Legends , partially offset by a decrease in Net Bookings from Borderlands 3, which released in September 2019.

Results of Operations

The following tables set forth, for the periods indicated, our Condensed Consolidated Statements of Operations, net revenue by geographic region, net revenue by platform, net revenue by distribution channel, and net revenue by content type:

Three Months Ended June 30,

Three Months Ended September 30, Six Months Ended September 30,

(thousands of dollars) 2020 2019 2020 2019

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Gross profit 408,637 48.6 % 389,593 45.4 % 763,258 45.6 % 688,583 49.2 %

General and administrative 102,173 12.3 % 74,833 13.8 %

Selling and marketing 113,691 13.5 % 149,566 17.4 % 198,470 11.9 % 241,387 17.3 %

General and administrative 91,433 10.9 % 76,659 8.9 % 193,606 11.6 % 151,492 10.8 %

Research and development 74,216 8.8 % 76,197 8.9 % 147,324 8.8 % 145,160 10.4 %

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Interest and other, net 2,706 0.3 % 8,054 0.9 % 10,924 0.7 % 18,479 1.3 %

Loss on long-term investments 655 0.1 % — — % 655 — % — — %

Income before income taxes 117,418 14.0 % 82,874 9.7 % 207,779 12.4 % 145,029 10.4 %

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Net income $ 99,321 11.8 % $ 71,815 8.4 % $ 187,826 11.2 % $ 118,095 8.4 %

Three Months Ended June 30,

Three Months Ended September 30, Six Months Ended September 30,

2020 2019 2020 2019

Net revenue by geographic region:

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Full game and other 345,418 41.1 % 539,373 62.9 % 697,323 58.3 % 633,326 45.3 %

Three Months Ended June 30, 2020 Compared to June 30, 2019

Three Months Ended September 30, 2020 Compared to September 30, 2019

(thousands of dollars) 2020 % 2019 % Increase/

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(1) Includes $19,396 and $27,832 of stock-based compensation expense in 2020 and 2019, respectively, in software development costs and royalties.

For the three months ended June 30, 2020, net revenue increased by $290.9 million as compared to the prior year period.

The increase was due to an increase in net revenue of (i) $108.7 million from Grand Theft Auto Online and Grand Theft Auto V, (ii) $63.4 million from our NBA 2K franchise, (iii) $28.5 million from Borderlands 3, which released in September 2019, (iv) $18.0 million from Civilization VI , and (v) $15.8 million from Red Dead Redemption Online .

Net revenue from console games increased by $176.9 million and accounted for 73.6% of our total net revenue for the three months ended June 30, 2020, as compared to 80.5% for the prior year period.

The increase was due to an increase in net revenue from Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, Borderlands 3, which released in September 2019, and Red Dead Online, partially offset by a decrease in net revenue from Red Dead Redemption 2.

Net revenue from PC and other increased by $114.0 million and accounted for 26.4% of our total net revenue for the three months ended June 30, 2020, as compared to 19.5% for the prior year period.

The increase was due to net revenue from Borderlands 3 , Red Dead Redemption 2, which released on PC in November 2019, Grand Theft Auto V, and Civilization VI .

Net revenue from digital online channels increased by $298.4 million and accounted for 87.4% of our total net revenue for the three months ended June 30, 2020, as compared to 79.2% for the prior year period.

The increase was due to an increase in net revenue from Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, Borderlands 3, Red Dead Redemption 2 , and Civilization V.

Net revenue from physical retail and other channels decreased by $7.6 million and accounted for 12.6% of our total net revenue for the three months ended June 30, 2020, as compared to 20.8% for the same period in the prior year period.

The decrease in net revenue from physical retail and other channels was due to a decrease in net revenue from Red Dead Redemption 2 and Grand Theft Auto Online, partially offset by an increase in net revenue from Borderlands 3 , our NBA 2K franchise, our BioShock franchise, Grand Theft Auto V , The Outer Worlds , which released in October 2019, Dragon City , and our WWE 2K franchise .

For the three months ended September 30, 2020, net revenue decreased by $16.7 million as compared to the prior year period.

The decrease was due to a decrease in net revenue of (i) $211.5 million from Borderlands 3, which released in September 2019, (ii) $32.8 million from Red Dead Redemption 2 , and (iii) $13.0 million from Ancestors:

The Humankind Odyssey.

These decreases were offset by an increase in net revenue of (i) $65.5 million from our NBA 2K franchise, (ii) $65.5 million from Grand Theft Auto Online and Grand Theft Auto V , (iii) $35.6 million from PGA TOUR 2K21, which released in August 2020, (iv) $33.6 million from our Mafia franchise, (v) $12.9 million from our WWE 2K franchise, (vi) $9.4 million from Civilization VI, (vii) $6.0 million from Dragon City, and (viii) $5.8 million from Red Dead Online .

Net revenue from console games decreased by $10.5 million and accounted for 76.2% of our total net revenue for the three months ended September 30, 2020, as compared to 76.0% for the prior year period.

The decrease was due to a decrease in net revenue from Borderlands 3, and Red Dead Redemption 2, partially offset by an increase in net revenue from Grand Theft Auto V and Grand Theft Auto Online, our NBA 2K franchise, PGA TOUR 2K21, our Mafia franchise, and our WWE 2K franchise .

Net revenue from PC and other decreased by $6.2 million and accounted for 23.8% of our total net revenue for the three months ended September 30, 2020, as compared to 24.0% for the prior year period.

The decrease was due to a decrease in net revenue from Borderlands 3 , Ancestors:

The Humankind Odyssey, partially offset by an increase in net revenue from Red Dead Redemption 2, which released on PC in November 2019, our NBA 2K franchise, Grand Theft Auto V and Grand Theft Auto Online, our Mafia franchise, Civilization VI, Dragon City, PGA TOUR 2K21, our WWE franchise, Monster Legends, and Word Life .

Net revenue from digital online channels increased by $95.5 million and accounted for 84.6% of our total net revenue for the three months ended September 30, 2020, as compared to 71.8% for the prior year period.

The increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V, PGA TOUR 2K21 , our Mafia franchise, Red Dead Redemption 2 and Red Dead Online , and Civilization VI, partially offset by a decrease in net revenue from Borderlands 3 and Ancestors:

The Humankind Odyssey.

Net revenue from physical retail and other channels decreased by $112.2 million and accounted for 15.4% of our total net revenue for the three months ended September 30, 2020, as compared to 28.2% for the same period in the prior year period.

The decrease in net revenue from physical retail and other channels was due primarily to a decrease in net revenue from Borderlands 3 and Red Dead Redemption 2, partially offset by an increase in net revenue from our Mafia franchise and PGA TOUR 2K21.

Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases.

Net revenue from recurrent consumer spending increased by $164.5 million and accounted for 57.7% of net revenue for the three months ended June 30, 2020, as compared to 58.3% of net revenue for the

prior year period.

The increase in net revenue from recurrent consumer spending is due primarily to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online, Borderlands 3 , and Red Dead Online .

Net revenue from full game and other increased by $126.3 million and accounted for 42.3% of net revenue for the three months ended June 30, 2020 as compared to 41.7% of net revenue for the prior year period.

The increase in net revenue from full game and other was due to an increase in net revenue from Grand Theft Auto V, Borderlands 3, our NBA 2K franchise, The Outer Worlds, and our Mafia franchise.

Gross profit as a percentage of net revenue for the three months ended June 30, 2020 was 42.7% as compared to 55.3% for the prior year period.

The decrease in gross profit as a percentage of net revenue was due to higher royalties as a percentage of net revenue due primarily to the timing of when royalties are earned, partially offset by lower amortization of capitalized software costs as a percentage of net revenue due primarily to the timing of releases.

Net revenue earned outside of the United States increased by $150.8 million and accounted for 43.4% of our total net revenue for the three months ended June 30, 2020, as compared to 38.9% in the prior year period.

The increase in net revenue outside of the United States was due to an increase in net revenue from Grand Theft Auto V and Grand Theft Auto Online, Borderlands 3, our NBA 2K franchise, and Red Dead Redemption 2 and Red Dead Online.

Changes in foreign currency exchange rates decreased net revenue by $1.1 million and decreased gross profit by $0.3 million for the three months ended June 30, 2020 as compared to the prior year period.

Net revenue from recurrent consumer spending increased by $177.3 million and accounted for 58.9% of net revenue for the three months ended September 30, 2020, as compared to 37.1% of net revenue for the prior year period.

The increase in net revenue from recurrent consumer spending is due primarily to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online, Dragon City, Monster Legends, and Word Life .

Net revenue from full game and other decreased by $194.0 million and accounted for 41.1% of net revenue for the three months ended September 30, 2020 as compared to 62.9% of net revenue for the prior year period.

The decrease in net revenue from full game and other was due to a decrease in net revenue from Borderlands 3, and Red Dead Redemption 2, partially offset by an increase in net revenue from PGA TOUR 2K21 and our Mafia franchise.

Gross profit as a percentage of net revenue for the three months ended September 30, 2020 was 48.6% as compared to 45.4% for the prior year period.

The increase in gross profit as a percentage of net revenue was due to lower development royalties as a percentage of net revenue due primarily to the timing of releases, partially offset by higher license royalties due to the timing of when royalties are earned.

Net revenue earned outside of the United States decreased by $25.6 million and accounted for 40.1% of our total net revenue for the three months ended September 30, 2020, as compared to 42.3% in the prior year period.

The decrease in net revenue outside of the United States was due to a decrease in net revenue from Borderlands 3, Red Dead Redemption 2, and Ancestors:

The Humankind Odyssey, partially offset by an increase in net revenue from Grand Theft Auto Online and Grand Theft Auto V, our Mafia franchise, our NBA 2K franchise, and PGA TOUR 2K21 .

Changes in foreign currency exchange rates increased net revenue by $3.5 million and increased gross profit by $1.5 million for the three months ended September 30, 2020 as compared to the prior year period.

Operating Expenses

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(decrease) % Increase/

General and administrative $ 102,173 12.3 % $ 74,833 13.8 % $ 27,340 36.5 %

Selling and marketing $ 113,691 13.5 % $ 149,566 17.4 % $ (35,875) (24.0) %

General and administrative 91,433 10.9 % 76,659 8.9 % 14,774 19.3 %

Research and development 74,216 8.8 % 76,197 8.9 % (1,981) (2.6) %

8 unchanged sentences

Research and development 7,643 10,615

Changes in foreign currency exchange rates decreased total operating expenses by $2.0 million for the three months ended June 30, 2020, as compared to the prior year period.

General and administrative

General and administrative expenses increased by $27.3 million for the three months ended June 30, 2020, as compared to the prior year period, due to increases in charitable contributions made in connection with our COVID-19 pandemic response and relief efforts, personnel expenses for additional headcount and higher incentive compensation, and bad debt expense.

General and administrative expenses for the three months ended June 30, 2020 and 2019 included occupancy expense (primarily rent, utilities and office expenses) of $7.3 million and $6.1 million, respectively, related to our development studios.

Changes in foreign currency exchange rates increased total operating expenses by $2.7 million for the three months ended September 30, 2020, as compared to the prior year period.

Selling and marketing

Selling and marketing expenses decreased by $7.0 million for the three months ended June 30, 2020, as compared to the prior year period, due primarily to lower marketing expenses for Borderlands 3 and Red Dead Online, partially offset by higher marketing expenses for Grand Theft Auto Online, and lower trade show and travel expenses due to restrictions as a result of the COVID-19 pandemic .

Selling and marketing expenses decreased by $35.9 million for the three months ended September 30, 2020, as compared to the prior year period, due primarily to lower marketing expenses for Borderlands 3 and Grand Theft Auto Online, and lower trade show and travel expenses due to restrictions as a result of the COVID-19 pandemic .

The decrease was partially offset by higher personnel expenses due to increased headcount and higher incentive compensation.

General and administrative

General and administrative expenses increased by $14.8 million for the three months ended September 30, 2020, as compared to the prior year period, due to increases in (i) personnel expenses for additional headcount and higher incentive compensation, (ii) professional fees related to our acquisition of Playdots, and (iii) rent expense.

General and administrative expenses for the three months ended September 30, 2020 and 2019 included occupancy expense (primarily rent, utilities and office expenses) of $7.1 million and $6.1 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $4.1 million for the three months ended June 30, 2020, as compared to the prior year period, due primarily to increases in personnel expenses for additional headcount and IT expenses for cloud-based services.

These increases were partially offset by lower production and development expenses primarily due to additional

capitalization of costs for development on titles having established technological feasibility compared to prior year and lower travel expenses due to restrictions as a result of the COVID-19 pandemic.

Research and development expenses decreased by $2.0 million for the three months ended September 30, 2020, as compared to the prior year period, due primarily to (i) lower production and development expenses primarily due to additional capitalization of costs for development on titles having established technological feasibility compared to prior year and (ii) lower travel expenses due to restrictions as a result of the COVID-19 pandemic.

These decreases were partially offset by (i) increases in IT expenses for cloud-based services, (ii) increases in personnel expenses for higher incentive compensation, and (iii) increases in professional fees.

Depreciation and Amortization

Depreciation and amortization expenses increased by $1.2 million for the three months ended June 30, 2020 as compared to the prior year period, due primarily to IT infrastructure and leasehold improvements for new office locations.

Depreciation and amortization expenses increased by $1.7 million for the three months ended September 30, 2020 as compared to the prior year period, due primarily to IT infrastructure and leasehold improvements for new office locations.

Business reorganization

During the three months ended June 30, 2020, business reorganization expense decreased $0.4 million due to expense in the prior year related to updating estimates for our 2018 Plan with no corresponding expense in the current year.

For the three months ended September 30, 2020, business reorganization expense decreased by $0.1 million as compared to the prior year period and was not material.

Interest and other, net

Interest and other, net was income of $8.2 million for the three months ended June 30, 2020, as compared to $10.4 million for the prior year period.

Interest and other, net was income of $2.7 million for the three months ended September 30, 2020, as compared to $8.1 million for the prior year period.

The change was due primarily to lower interest income due to lower interest rates, partially offset by foreign currency gains.

Provision for Income Taxes

The provision for income taxes for the three months ended September 30, 2020 is based on our projected annual effective tax rate for fiscal year 2021, adjusted for specific items that are required to be recognized in the period in which they are incurred.

The provision for income taxes was $18.1 million for the three months ended September 30, 2020 as compared to $11.1 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 15.4% for the three months ended September 30, 2020 was due primarily to a tax benefit of $5.7 million from tax credits, excess tax benefits of $2.3 million from employee stock-based compensation, and offset by the geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 13.3% for the three months ended September 30, 2019 was due primarily to a tax benefit of $3.2 million as a result of tax credits anticipated to be utilized and $1.4 million due to a geographic mix of earnings.

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased excess tax benefits from employee stock-based compensation and tax credits in the current period, offset by increased expense related to the geographic mix of earnings.

The accounting for share-based compensation will increase or decrease our effective tax rate based on the difference between our share-based compensation expense and the deductions taken on our tax return, which depends on the stock price at the time of the employee award vesting.

Since we recognize excess tax benefits on a discrete basis, we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price in each period.

We anticipate that additional excess tax benefits or shortfalls from employee stock compensation, tax credits, and changes in our geographic mix of earnings could have a significant impact on our effective tax rate in the future.

In addition, 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 and/or the expiration of the statute of limitations could have an impact on our effective tax rate in future periods.

On May 19, 2019, a public referendum held in Switzerland approved the Federal Act on Tax Reform and AVH (Old-Age and Survivors Insurance) Financing ("TRAF"), which was effective for us on January 1, 2020.

The TRAF abolished preferential tax regimes at the cantonal level.

The cantons established transition rules which provided us a step-up in tax basis for which a deferred tax asset of $45.3 million and valuation allowance of $33.4 million were established.

It is possible that realization of deferred tax assets relating to the Swiss cantonal basis step-up may change due to changes in forecasted future earnings in Switzerland.

On March 27, 2020, the U.S.

enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which provides numerous tax and other stimulus measures.

We do not expect that it will have a material impact to our Consolidated Financial Statements.

Net income and earnings per share

For the three months ended September 30, 2020, net income was $99.3 million, as compared to $71.8 million in the prior year period.

Diluted earnings per share for the three months ended September 30, 2020 was $0.86, as compared to diluted earnings per share of $0.63 in the prior year period.

Diluted weighted average shares of 115.4 million were 1.3 million shares higher as compared to the prior year period, due primarily to normal stock compensation activity, including vests as well as grants and forfeitures in the prior year being fully outstanding in the current year period.

See Note 11 to our Condensed Consolidated Financial Statements for additional information regarding earnings per share.

Six Months Ended September 30, 2020 Compared to September 30, 2019

(thousands of dollars) 2020 % 2019 % Increase/

(decrease) % Increase/

Net revenue $ 1,672,452 100.0 % $ 1,398,300 100.0 % $ 274,152 19.6 %

Software development costs and royalties (1) 290,818 17.4 % 320,437 22.9 % (29,619) (9.2) %

Internal royalties 341,867 20.4 % 172,880 12.4 % 168,987 97.7 %

Product costs 127,546 7.6 % 134,203 9.6 % (6,657) (5.0) %

Licenses 148,963 8.9 % 82,197 5.9 % 66,766 81.2 %

Cost of goods sold 909,194 54.4 % 709,717 50.8 % 199,477 28.1 %

Gross profit $ 763,258 45.6 % $ 688,583 49.2 % $ 74,675 10.8 %

(1) Includes $48,429 and $58,630 of stock-based compensation expense in 2020 and 2019, respectively, in software development costs and royalties.

For the six months ended September 30, 2020, net revenue increased by $274.2 million as compared to the prior year period.

The increase was due primarily to an increase in net revenue of (i) $174.2 million from Grand Theft Auto Online and Grand Theft Auto V, (ii) $128.9 million from our NBA 2K franchise , (iii) $41.1 million from our Mafia franchise, (iv) $35.6 million from PGA TOUR 2K21, which released in August 2020 , (vi) $27.4 million from Civilization VI, (vi) $21.6 million from Red Dead Online, and (vii) $21.6 million from our WWE 2K franchise.

These increases were offset by a decrease in net revenue of (i) $154.2 million from Borderlands 3, which released in September 2019, and (ii) $28.0 million from Red Dead Redemption 2.

Net revenue from console games increased by $166.3 million and accounted for 74.9% of our total net revenue for the six months ended September 30, 2020, as compared to 77.7% for the prior year period.

The increase was due to an increase in net revenue from Grand Theft Auto V and Grand Theft Auto Online, our NBA 2K franchise, our Mafia franchise, PGA TOUR 2K21, our WWE 2K franchise, and Red Dead Online, partially offset by a decrease in net revenue from Borderlands 3, and Red Dead Redemption 2.

Net revenue from PC and other increased by $107.8 million and accounted for 25.1% of our total net revenue for the six months ended September 30, 2020, as compared to 22.3% for the prior year period.

The increase was due an increase in net revenue from Red Dead Redemption 2, which released on PC in November 2019, Grand Theft Auto V and Grand Theft Auto Online, our NBA 2K franchise, Civilization VI, Dragon City , and our Mafia franchise, partially offset by a decrease in net revenue from Borderlands 3 and Ancestors:

The Humankind Odyssey .

Net revenue from digital online channels increased by $394.0 million and accounted for 86.0% of our total net revenue for the six months ended September 30, 2020, as compared to 74.6% for the prior year period.

The increase was due to an increase in net revenue from Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, Red Dead Redemption 2 and Red Dead Online, our Mafia franchise , Civilization VI, and PGA TOUR 2K21 partially offset by a decrease in net revenue from Borderlands 3 .

Net revenue from physical retail and other channels decreased by $119.8 million and accounted for 14.0% of our total net revenue for the six months ended September 30, 2020, as compared to 25.4% for the same period in the prior year period.

The decrease was due to a decrease in net revenue from Borderlands 3, Red Dead Redemption 2, and our NBA 2K franchise, partially offset by an increase in net revenue from our Mafia franchise and PGA TOUR 2K21 .

Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases.

Net revenue from recurrent consumer spending increased by $341.8 million and accounted for 58.3% of net revenue for the six months ended September 30, 2020, as compared to 45.3% of net revenue for the prior year period.

The increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online , Red Dead Online, Borderlands 3, and Civilization VI.

Net revenue from full game and other decreased by $67.7 million and accounted for 41.7% of net revenue for the six months ended September 30, 2020 as compared to 54.7% of net revenue for the prior year period.

The decrease was due to a decrease in net revenue from Borderlands 3, Red Dead Redemption 2, partially offset by an increase in net revenue from Grand Theft Auto V, our Mafia franchise, PGA TOUR 2K21, and our WWE 2K franchise.

Gross profit as a percentage of net revenue for the six months ended September 30, 2020 was 45.6% as compared to 49.2% for the prior year period.

The decrease in gross profit as a percentage of net revenue was due to higher internal royalties and license royalties due primarily to the timing of when royalties are earned, partially offset by lower development royalties, capitalized software amortization, and product costs based on the timing of releases.

Net revenue earned outside of the United States increased by $125.2 million, and accounted for 41.8% of our total net revenue for the six months ended September 30, 2020, as compared to 41.0% in the prior year period.

The increase in net

revenue outside of the United States was due to an increase in net revenue from Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, our Mafia franchise, Civilization VI, PGA TOUR 2K21, and Red Dead Online, partially offset by a decrease in net revenue from Borderlands 3 .

Changes in foreign currency exchange rates increased net revenue by $2.3 million and increased gross profit by $1.7 million for the six months ended September 30, 2020 as compared to the prior year period.

Operating Expenses

(thousands of dollars) 2020 % of net revenue 2019 % of net revenue Increase/

(decrease) % Increase/

Selling and marketing $ 198,470 11.9 % $ 241,387 17.3 % $ (42,917) (17.8) %

General and administrative 193,606 11.6 % 151,492 10.8 % 42,114 27.8 %

Research and development 147,324 8.8 % 145,160 10.4 % 2,164 1.5 %

Depreciation and amortization 26,109 1.6 % 23,281 1.7 % 2,828 12.1 %

Business reorganization 239 — % 713 0.1 % (474) (66.5) %

Total operating expenses (1) $ 565,748 33.8 % $ 562,033 40.2 % $ 3,715 0.7 %

(1) Includes stock-based compensation expense, which was allocated as follows (in thousands):

General and administrative $ 27,030 $ 27,143

Selling and marketing 9,167 10,220

Research and development 14,093 17,206

Changes in foreign currency exchange rates increased total operating expenses by $0.7 million for the six months ended September 30, 2020, as compared to the prior year period.

Selling and marketing

Selling and marketing expenses decreased by $42.9 million for the six months ended September 30, 2020, as compared to the prior year period, due primarily to lower marketing expenses for Borderlands 3 , Red Dead Online , Grand Theft Auto Online , and Red Dead Redemption 2 , partially offset by higher marketing expenses for Dragon City and Word Life .

This decrease was partially offset by higher personnel expenses due to increased headcount and higher incentive compensation

General and administrative

General and administrative expenses increased by $42.1 million for the six months ended September 30, 2020, as compared to the prior year period, due to increases in (i) charitable contributions made in connection with our COVID-19 pandemic response and relief efforts, (ii) personnel expenses for additional headcount and higher incentive compensation, (iii) rent expense, (iv) professional fees related to our acquisition of Playdots, and (v) IT related expenses for cloud-based service and IT infrastructure.

General and administrative expenses for the six months ended September 30, 2020 and 2019 included occupancy expense (primarily rent, utilities and office expenses) of $13.7 million and $12.4 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $2.2 million for the six months ended September 30, 2020, as compared to the prior year period, due primarily to (i) increases in IT expenses for cloud-based services, (ii) increases in personnel expenses for higher incentive compensation, (iii) increases in professional fees, and (iv) higher online support costs.

These increases were partially offset by (i) lower production and development expenses primarily due to additional capitalization of costs for development on titles having established technological feasibility compared to prior year and (ii) lower travel expenses due to restrictions as a result of the COVID-19 pandemic.

Depreciation and Amortization

Depreciation and amortization expenses for the six months ended September 30, 2020 increased by $2.8 million, as compared to the prior year period, due primarily to IT infrastructure.

Business reorganization

During the six months ended September 30, 2020, as compared to the prior year period, business reorganization expense decreased $0.5 million and was not material.

Interest and other, net

Interest and other, net was income of $10.9 million for the six months ended September 30, 2020, as compared to $18.5 million for the prior year period.

The change was due primarily to lower interest income due to lower interest rates, partially offset by foreign currency gains, including a $3.1 million reclassification from Accumulated other comprehensive loss as a result of discontinuing our cash flow hedge related to our cross-currency swap.

Provision for Income Taxes

The provision for income taxes for the three months ended June 30, 2020 is based on our projected annual effective tax rate for fiscal year 2021, adjusted for specific items that are required to be recognized in the period in which they are incurred.

The provision for income taxes was $1.9 million for the three months ended June 30, 2020 as compared to $15.9 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 2.1% for the three months ended June 30, 2020 was due primarily to excess tax benefits of $7.9 million from employee stock-based compensation, tax benefits of $4.9 million from tax credits and geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 25.5% for the three months ended June 30, 2019 was due primarily to a tax expense of $19.8 million from the reversal of deferred tax benefits relating to the Altera case, discussed below, partially offset by a tax benefit of $11.6 million from changes in unrecognized tax benefits due to audit settlements.

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased excess tax benefits from employee stock-based compensation in the current period, offset by decreased tax expense related to the Altera case, discussed below, and decreased tax benefits related to the changes in unrecognized tax benefits due to audit settlements.

The provision for income taxes for the six months ended September 30, 2020 is based on our projected annual effective tax rate for fiscal year 2020, adjusted for specific items that are required to be recognized in the period in which they are incurred.

The provision for income taxes was $20.0 million for the six months ended September 30, 2020 as compared to a provision for income taxes of $26.9 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 9.6% for the six months ended September 30, 2020 was due primarily to a benefit of $10.7 million as a result of tax credits anticipated to be utilized and excess tax benefits of $10.2 million from employee stock-based compensation.

In the prior year period, when compared to our blended statutory rate of 21%, the effective tax rate of 18.6% for the six months ended September 30, 2019 was due primarily to a tax benefit of $11.7 million from changes in unrecognized tax benefits due to audit settlements, a benefit of $6.0 million as a result of tax credits anticipated to be utilized, and a benefit of $3.2 million from our geographic mix of earnings.

To a lesser extent, the rate was also affected by excess tax benefits from employee stock-based compensation.

These benefits were partially offset by a tax expense of $19.8 million from the reversal of net deferred tax benefits relating to the Altera case, discussed below.

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased benefits related to excess tax benefits from employee stock-based compensation and to tax credits offset by decreased tax expense relating to the Altera case, discussed below, and decreased tax benefits related to the changes in unrecognized tax benefits due to audit settlements.

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In February 2016, the U.S.

Internal Revenue Service appealed the decision to the U.S Court of Appeals for the Ninth Circuit.

Internal Revenue Service appealed the decision to the U.S.

Court of Appeals for the Ninth Circuit.

On June 7, 2019, the Ninth Circuit reversed the 2015 decision of the U.S.

As a result of this decision, we are no longer reflecting a net tax benefit within our financial statements related to the removal of stock-based compensation from our intercompany cost-sharing arrangement.

During the three months ended June 30, 2019, we removed the deferred tax asset and a deferred tax liability associated with this matter from our financial statements, resulting in a cumulative net discrete income tax expense of $19.8 million.

The taxpayer in the Altera case requested a rehearing before the full Ninth Circuit which was denied on November 12, 2019.

During the six months ended September 30, 2020, we removed the deferred tax asset and a deferred tax liability associated with this matter, resulting in a cumulative net discrete income tax expense of $19.8 million.

The taxpayer requested a rehearing before the full Ninth Circuit which was denied on November 12, 2019.

In February 2020, the taxpayer appealed to the U.S.

Supreme Court, which denied certiorari on June 22, 2020.

On June 21, 2018, the U.S.

Supreme Court issued its decision in South Dakota v.

Wayfair, which overturned previous case law that precluded states from requiring retailers to collect and remit sales tax on sales made to in-state customers unless the retailer had physical presence in the state.

Although this case is limited to sales tax collection obligations, we continue to monitor the potential impact of this decision on our state income tax footprint.

The TRAF abolished preferential tax regimes at the cantonal level.

The cantons established transition rules which provided the Company a step-up in tax basis for which a deferred tax asset of $45.3 million and valuation allowance of $33.4 million were established.

It is possible that realization of deferred tax assets relating to the Swiss cantonal basis step-up may change due to changes in forecasted future earnings in Switzerland.

The cantons established transition rules which provided us a step-up in tax basis for which a deferred tax asset of $45.3 million and valuation allowance of $33.4 million were established.

It is possible that

realization of deferred tax assets relating to the Swiss cantonal basis step-up may change due to changes in forecasted future earnings in Switzerland.

On March 27, 2020, the U.S.

enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which provides numerous tax and other stimulus measures.

Although we are currently reviewing the potential implications of the CARES Act, we do not expect that it will have a material impact to our Consolidated Financial Statements.

We do not expect that it will have a material impact to our Consolidated Financial Statements.

Net income and earnings per share

For the three months ended June 30, 2020, net income was $88.5 million, as compared to $46.3 million in the prior year period.

Diluted earnings per share for the three months ended June 30, 2020 was $0.77, as compared to diluted earnings per share of $0.41 in the prior year period.

For the six months ended September 30, 2020, net income was $187.8 million, as compared to $118.1 million in the prior year period.

For the six months ended September 30, 2020, diluted earnings per share was $1.63 as compared to diluted earnings per share of $1.04 in the prior year period.

Diluted weighted average shares of 115.2 million were 1.3 million shares higher as compared to the prior year period, due primarily to normal stock compensation activity, including vests as well as grants and forfeitures in the prior year being fully outstanding in the current year period.

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Short-term Investments

As of June 30, 2020, we had $880.8 million of short-term investments, which are highly liquid in nature and represent an investment of cash that is available for current operations.

As of September 30, 2020, we had $1,040.8 million of short-term investments, which are highly liquid in nature and represent an investment of cash that is available for current operations.

From time to time, we may purchase additional short-term investments depending on future market conditions and liquidity needs.

As of June 30, 2020, based on the composition of our investment portfolio and relatively lower interest rates as a result of the recent actions by central banks around the world, including the interest rate cuts by the U.S.

As of September 30, 2020, based on the composition of our investment portfolio and relatively lower interest rates as a result of the recent actions by central banks around the world, including the interest rate cuts by the U.S.

Federal Reserve, in response to the COVID-19 pandemic and related adverse economic conditions, we anticipate investment yields may remain low, which would lower our future interest income.

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In addition, the Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional $250 million in term loans or revolving credit facilities.

Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to 0.750% above a certain base rate (3.25% at June 30, 2020) or (b) 1.125% to 1.750% above LIBOR (approximately 1.63% at June 30, 2020), which rates are determined by reference to our consolidated total net leverage ratio.

As of June 30, 2020, there was $198.3 million available to borrow under the Credit Agreement, and we had $1.7 million of letters of credit outstanding.

At June 30, 2020, we had no outstanding borrowings under the Credit Agreement.

Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to 0.750% above a certain base rate (3.25% at September 30, 2020) or (b) 1.125% to 1.750% above LIBOR (approximately 1.48% at September 30, 2020), which rates are determined by reference to our consolidated total net leverage ratio.

As of September 30, 2020, there was $198.3 million available to borrow under the Credit Agreement, and we had $1.7 million of letters of credit outstanding.

At September 30, 2020, we had no outstanding borrowings under the Credit Agreement.

The Credit Agreement also includes, among other terms and conditions, maximum leverage ratio, minimum cash reserves and, in certain circumstances, minimum interest coverage ratio financial covenants, as well as limitations on the Company’s and each of its subsidiaries’ ability to:

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acquire, merge or consolidate with or into another person or entity;

create, incur or allow any lien on any of

its property;

create, incur or allow any lien on any of its property;

make investments;

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A majority of our trade receivables are derived from sales to major retailers, including digital storefronts and platform partners, and distributors.

Our five largest customers accounted for 81.6% and 71.5% of net revenue during the three months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020 and March 31, 2020, five customers accounted for 76.0% and 58.1% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 67% and 48.8% of such balances at June 30, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 47.2% and 19.8% of our gross accounts receivable as of June 30, 2020, respectively, and two customers who accounted for 29.4% and 19.4% of our gross accounts receivable as of March 31, 2020, respectively.

Our five largest customers accounted for 77.7% and 74.8% of net revenue during the six months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020 and March 31, 2020, five customers accounted for 75.1% and 58.1% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 67.0% and 48.8% of such balances at September 30, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 47.3% and 19.7% of our gross accounts receivable as of September 30, 2020, respectively, and two customers who accounted for 29.4% and 19.4% of our gross accounts receivable as of March 31, 2020, respectively.

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, although we actively monitor each customer's credit worthiness and economic conditions that may affect our customers' business and access to capital.

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We believe our current cash and cash equivalents, short-term investments and projected cash flows from operations, along with availability under our Credit Agreement, will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures, and commitments on both a short-term and long-term basis.

Our liquidity and capital resources were not materially affected by the COVID-19 pandemic and related volatility and slowdown in the global financial markets during the first quarter of fiscal year 2021.

As of June 30, 2020, the amount of cash and cash equivalents held outside of the U.S.

Our liquidity and capital resources were not materially affected by the COVID-19 pandemic and related volatility and slowdown in the global financial markets during the first two quarters of fiscal year 2021.

As of September 30, 2020, the amount of cash and cash equivalents held outside of the U.S.

by our foreign subsidiaries was $544.1 million.

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The program does not require us to repurchase shares and may be suspended or discontinued at any time for any reason.

During the three months ended June 30, 2020, we did not make any repurchases of our common stock in the open market.

We have repurchased a total of 10.4 million shares of our common stock under the program, and as of June 30, 2020, 3.8 million shares of our common stock remained available for repurchase under the share repurchase program.

During the six months ended September 30, 2020, we did not make any repurchases of our common stock in the open market.

We have repurchased a total of 10.4 million shares of our common stock under the program, and as of September 30, 2020, 3.8 million shares of our common stock remained available for repurchase under the share repurchase program.

Our changes in cash flows were as follows:

Three Months Ended

Six Months Ended

September 30,

(thousands of dollars) 2020 2019

Net cash provided by operating activities $ 626,745 $ 144,158

Net cash (used in) provided by investing activities (247,465) 166,793

Net cash used in investing activities (502,624) (36,200)

Net cash used in financing activities (41,699) (61,478)

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Net change in cash, cash equivalents, and restricted cash and cash equivalents $ 91,388 $ 38,417

At June 30, 2020, we had $2,161.3 million of cash and cash equivalents and restricted cash and cash equivalents, compared to $1,993.4 million at March 31, 2020.

At September 30, 2020, we had $2,084.8 million of cash and cash equivalents and restricted cash and cash equivalents, compared to $1,993.4 million at March 31, 2020.

The increase was due to Net cash provided by operating activities from sales of our products, partially offset by the timing of payments.

This net increase was partially offset by (1) Net cash used in investing activities primarily related to changes in bank time deposits and net purchases of available for sale securities and (2) Net cash used in financing activities, which was primarily for tax payments related to net share settlements of our restricted stock awards.

This net increase was partially offset by (1) Net cash used in investing activities primarily related to changes in bank time deposits and net purchases of available for sale securities as well

as our purchase of Playdots and (2) Net cash used in financing activities, which was primarily for tax payments related to net share settlements of our restricted stock awards.

Contractual Obligations and Commitments

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Off-Balance Sheet Arrangements

As of June 30, 2020 and March 31, 2020, we did not have any material relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of September 30, 2020 and March 31, 2020, we did not have any material relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As such, we are not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.

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Net revenue earned outside of the United States is principally generated by our operations in Europe, Asia, Australia, Canada, and Latin America.

For the three months ended June 30, 2020 and 2019, 43.4% and 38.9%, respectively, of our net revenue was earned outside of the United States.

For the three months ended September 30, 2020 and 2019, 40.1% and 42.3%, respectively, of our net revenue was earned outside of the United States.

We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, shipping delays, and international political, regulatory and economic developments, all of which can have a significant effect on our operating results.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis