What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-09 compared with 2020-11-06 · 144 added, 139 removed, 344 unchanged (45% of the section changed)

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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.

Our products are currently designed for console gaming systems, such as Sony's PlayStation®4 ("PS4") and PlayStation 5 ("PS5"), Microsoft's Xbox One® ("Xbox One") and Xbox Series X ("Xbox Series X"), and Nintendo's Switch™ ("Switch"), and personal computers ("PC"), including smartphones and tablets.

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

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Software titles published by our Rockstar Games label are primarily internally developed.

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.

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.

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 335 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 .

Our most recent installment, Grand Theft Auto V , which was released in 2013, has sold in over 140 million units worldwide and includes access to Grand Theft Auto Online .

On October 26, 2018, Rockstar Games launched Red Dead Redemption 2, which has been a critical and commercial success that set numerous entertainment industry records.

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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.

("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.

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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 29.6% of our net revenue for the six months ended September 30, 2020.

Sales of Grand Theft Auto products generated 28.9% of our net revenue for the nine months ended December 31, 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 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.

During 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.

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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 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.

Our five largest customers accounted for 77.4% and 70.0% of net revenue during the nine months ended December 31, 2020 and 2019, respectively.

As of December 31, 2020 and March 31, 2020, our five largest customers comprised 71.8% 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 59.1% and 48.8% of such balance at December 31, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 39.5% and 19.6%, respectively, of our gross accounts receivable as of December 31, 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.

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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 74.9% of our net revenue by product platform for the six months ended September 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 and PS5, Microsoft's Xbox One and Xbox Series X, and Nintendo's Switch, which comprised 75.4% of our net revenue by product platform for the nine months ended December 31, 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 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.

When new hardware platforms are introduced, such as those released 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 provide "backwards compatibility" (i.e.

the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline.

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 availability of these new consoles, which may also affect demand.

Further, the COVID-19 pandemic or other events may affect 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 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 86.0% of our net revenue for the six months ended September 30, 2020.

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 85.5% of our net revenue for the nine months ended December 31, 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 six months ended September 30, 2020:

We released the following key titles during the nine months ended December 31, 2020:

Title Publishing

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

Red Dead Online - Standalone Rockstar Games Internal PS4, Xbox One, PC, Steam, Epic Store December 1, 2020

Product Pipeline

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Development Platform(s) Expected Release Date

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

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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 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.

During the nine months ended December 31, 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.

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Net Bookings were as follows:

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

Three Months Ended December 31, Nine Months Ended December 31,

2020 2019 Increase/

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Net Bookings $ 814,282 $ 888,179 $ (73,897) (8.3) % $ 2,768,066 $ 2,260,935 $ 507,131 22.4 %

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.

For the three months ended December 31, 2020, Net Bookings decreased by $73.9 million as compared to the prior year period due primarily to a decrease in Net Bookings from The Outer Worlds, which released in October 2019, Red Dead Redemption 2, which released on PC in November 2019 , our WWE 2K franchise, which benefited from the release of WWE 2K20 in the prior year period, and Borderlands 3, which released in September 2019 , partially offset by an increase in Net Bookings from our NBA 2K franchise, Grand Theft Auto Online, and our Mafia franchise.

For the nine months ended December 31, 2020, Net Bookings increased by $507.1 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, our Mafia franchise, PGA TOUR 2K21, which released in August 2020, Dragon City, and Two Dots, which was part of our Playdots Inc.

acquisition completed in September 2020 , partially offset by a decrease in Net Bookings from Borderlands 3 , and The Outer Worlds, which released in October 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 September 30, Six Months Ended September 30,

Three Months Ended December 31, Nine Months Ended December 31,

(thousands of dollars) 2020 2019 2020 2019

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Interest and other, net 1,098 0.1 % 11,943 1.3 % 12,022 0.5 % 30,422 1.3 %

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

Gain on long-term investments, net 39,291 4.6 % — — % 38,636 1.5 % — — %

Income before income taxes 216,446 25.1 % 188,776 20.3 % 424,225 16.7 % 333,805 14.3 %

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Net income $ 182,248 21.2 % $ 163,642 17.6 % $ 370,074 14.6 % $ 281,737 12.1 %

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

Three Months Ended December 31, Nine Months Ended December 31,

2020 2019 2020 2019

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Full game and other 327,414 38.0 % 589,633 63.4 % 1,024,737 40.5 % 973,822 41.8 %

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

Three Months Ended December 31, 2020 Compared to December 31, 2019

(thousands of dollars) 2020 % 2019 % Increase/

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(1) Includes $13,100 and $33,048 of stock-based compensation expense in 2020 and 2019, respectively, in software development costs and royalties.

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.

For the three months ended December 31, 2020, net revenue decreased by $69.2 million as compared to the prior year period.

The decrease was due to a decrease in net revenue of (i) $138.0 million from The Outer Worlds, which released in October 2019, (ii) $106.3 million from Red Dead Redemption 2 , which released on PC in November 2019, (iii) $39.4 million from Borderlands 3, which released in September 2019, and (iv) $27.7 million from our WWE 2K franchise, which benefited from the release of WWE 2K20 in the prior year period.

These decreases were partially offset by an increase in net revenue of (i) $130.0 million from our NBA 2K franchise, (ii) $58.1 million from Grand Theft Auto Online , (iii) $27.6 million from our Mafia franchise, and (iv) $16.8 million from PGA TOUR 2K21, which released in August 2020.

Net revenue from console games decreased by $23.7 million and accounted for 76.2% of our total net revenue for the three months ended December 31, 2020, as compared to 73.1% for the prior year period.

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

Net revenue from PC and other decreased by $45.5 million and accounted for 23.8% of our total net revenue for the three months ended December 31, 2020, as compared to 26.9% for the prior year period.

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

Net revenue from digital online channels increased by $28.2 million and accounted for 84.6% of our total net revenue for the three months ended December 31, 2020, as compared to 75.3% for the prior year period.

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

Net revenue from physical retail and other channels decreased by $97.4 million and accounted for 15.4% of our total net revenue for the three months ended December 31, 2020, as compared to 24.7% 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 Red Dead Redemption 2, The Outer Worlds, and our WWE 2K franchise.

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 $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.

Net revenue from recurrent consumer spending increased by $193.0 million and accounted for 62.0% of net revenue for the three months ended December 31, 2020, as compared to 36.6% 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 and Grand Theft Auto V, Dragon City, and Two Dots, partially offset by a decrease in net revenue from Red Dead Redemption 2 .

Net revenue from full game and other decreased by $262.2 million and accounted for 38.0% of net revenue for the three months ended December 31, 2020 as compared to 63.4% 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 The Outer Worlds, Red Dead Redemption 2, Borderlands 3, and our WWE 2K franchise, partially offset by an increase in net revenue from our Mafia franchise.

Gross profit as a percentage of net revenue for the three months ended December 31, 2020 was 59.8% as compared to 53.0% for the prior year period.

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

Net revenue earned outside of the United States decreased by $60.7 million and accounted for 38.6% of our total net revenue for the three months ended December 31, 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 Red Dead Redemption 2 and The Outer Worlds, partially offset by an increase in net revenue from Grand Theft Auto Online and our NBA 2K franchise.

Changes in foreign currency exchange rates increased net revenue by $4.1 million and increased gross profit by $3.0 million for the three months ended December 31, 2020 as compared to the prior year period.

Operating Expenses

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

General and administrative $ 13,830 $ 13,576

Selling and marketing $ 4,131 $ 4,113

General and administrative 15,538 14,911

Research and development 8,347 11,327

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.

Changes in foreign currency exchange rates increased total operating expenses by $3.6 million for the three months ended December 31, 2020, as compared to the prior year period.

Selling and marketing

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.

Selling and marketing expenses increased by $2.8 million for the three months ended December 31, 2020, as compared to the prior year period, due primarily to increases in (i) personnel expenses due to increased headcount and higher incentive compensation, (ii) IT expenses for cloud-based services, and (iii) customer service expenses.

The increase was partially offset by lower overall marketing expense due to lower marketing expenses for Red Dead Redemption 2, The Outer Worlds, our WWE 2K franchise, Borderlands 3, and Civilization VI, partially offset by higher marketing expenses for Grand Theft Auto Online, our NBA 2K franchise, Two Dots, Word Life, Dragon City, Red Dead Online, and our Mafia franchise.

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.

General and administrative expenses increased by $14.1 million for the three months ended December 31, 2020, as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount and higher incentive compensation, (ii) professional fees related to consulting, including for our offer to acquire Codemasters Group Holdings PLC, a UK-based game publisher and developer, and (iii) IT expenses for cloud-based services.

General and administrative expenses for the three months ended December 31, 2020 and 2019 included occupancy expense (primarily rent, utilities and office expenses) of $6.8 million and $6.6 million, respectively, related to our development studios.

Research and development

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.

Research and development expenses increased by $3.9 million for the three months ended December 31, 2020, as compared to the prior year period, due primarily to increases in (i) personnel expenses for higher incentive compensation and (ii) IT expenses for cloud-based services.

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 the prior year, and (iii) lower travel expenses due to restrictions as a result of the COVID-19 pandemic.

Depreciation and Amortization

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.

Depreciation and amortization expenses increased by $1.7 million for the three months ended December 31, 2020 as compared to the prior year period, due primarily to IT infrastructure and leasehold improvements for new office locations.

Business reorganization

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.

For the three months ended December 31, 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 $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.

Interest and other, net was income of $1.1 million for the three months ended December 31, 2020, as compared to $11.9 million for the prior year period.

The change was due primarily to lower interest income due to lower interest rates.

Gain on long-term investments, net

Gain on long-term investments, net for the three months ended December 31, 2020 was $39.3 million and was due primarily to the sale of a portion of one of our investments and the resulting change in value based on the observable price change of the remaining portion of that investment.

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 provision for income taxes for the three months ended December 31, 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 $34.2 million for the three months ended December 31, 2020 as compared to $25.1 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 15.8% for the three months ended December 31, 2020 was due primarily to a tax benefit of $7.1 million from tax credits and excess tax benefits of $3.4 million from employee stock-based compensation 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 December 31, 2019 was due primarily to a tax benefit of $9.1 million as a result of tax credits anticipated to be utilized and $2.6 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 expense related to the geographic mix of earnings and decreased tax credits, partially offset by increased excess tax benefits from employee stock-based compensation in the current period.

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.

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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.

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.

An additional economic stimulus package, the Consolidated Appropriations Act, 2021, was approved on December 27, 2020.

We do not expect that these measures 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.

For the three months ended December 31, 2020, net income was $182.2 million, as compared to $163.6 million in the prior year period.

Diluted earnings per share for the three months ended December 31, 2020 was $1.57, as compared to diluted earnings per share of $1.43 in the prior year period.

Diluted weighted average shares of 116.1 million were 1.9 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

Nine Months Ended December 31, 2020 Compared to December 31, 2019

(thousands of dollars) 2020 % 2019 % Increase/

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(1) Includes $61,529 and $91,678 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 .

For the nine months ended December 31, 2020, net revenue increased by $204.9 million as compared to the prior year period.

The increase was due primarily to an increase in net revenue of (i) $258.9 million from our NBA 2K franchise , (ii) $227.0 million from Grand Theft Auto Online and Grand Theft Auto V, (iii) $68.6 million from our Mafia franchise, (iv) $52.4 million from PGA TOUR 2K21, which released in August 2020 , and (vi) $24.7 million from Red Dead Online.

These increases were offset by a decrease in net revenue of (i) $193.6 million from Borderlands 3, which released in September 2019, (ii) $134.3 million from Red Dead Redemption 2, which released on PC in November 2019, and (iii) $126.3 million from The Outer Worlds, which released in October 2019.

Net revenue from console games increased by $142.6 million and accounted for 75.4% of our total net revenue for the nine months ended December 31, 2020, as compared to 75.9% for the prior year period.

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

Net revenue from PC and other increased by $62.3 million and accounted for 24.6% of our total net revenue for the nine months ended December 31, 2020, as compared to 24.1% 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, Civilization VI, Dragon City, our Mafia franchise, and Red Dead Online and Red Dead Redemption 2, which released on PC in November 2019, partially offset by a decrease in net revenue from Borderlands 3 and The Outer Worlds .

Net revenue from digital online channels increased by $422.2 million and accounted for 85.5% of our total net revenue for the nine months ended December 31, 2020, as compared to 74.9% 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, our Mafia franchise , and PGA TOUR 2K21, partially offset by a decrease in net revenue from Borderlands 3 and The Outer Worlds .

Net revenue from physical retail and other channels decreased by $217.2 million and accounted for 14.5% of our total net revenue for the nine months ended December 31, 2020, as compared to 25.1% for the prior year period.

The decrease was due to a decrease in net revenue from Red Dead Redemption 2, Borderlands 3, and The Outer Worlds, partially offset by an increase in net revenue from our Mafia franchise.

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.

Net revenue from recurrent consumer spending increased by $534.8 million and accounted for 59.5% of net revenue for the nine months ended December 31, 2020, as compared to 41.8% 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 and Grand Theft Auto V , Red Dead Online, Civilization VI, and Dragon City.

Net revenue from full game and other decreased by $329.9 million and accounted for 40.5% of net revenue for the nine months ended December 31, 2020 as compared to 58.2% 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, and The Outer Worlds, partially offset by an increase in net revenue from our Mafia franchise, and PGA TOUR 2K21 .

Gross profit as a percentage of net revenue for the nine months ended December 31, 2020 was 50.4% as compared to 50.7% 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.

Net revenue earned outside of the United States increased by $64.5 million, and accounted for 40.7% of our total net revenue for the nine months ended December 31, 2020, as compared to 41.5% 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, PGA TOUR 2K21, and Dragon City, partially offset by a decrease in net revenue from Red Dead Redemption 2, Borderlands 3, and The Outer Worlds .

Changes in foreign currency exchange rates increased net revenue by $6.4 million and increased gross profit by $4.7 million for the nine months ended December 31, 2020 as compared to the prior year period.

Operating Expenses

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Total operating expenses (1)

$ 904,336 35.7 % $ 878,236 37.7 % $ 26,100 3.0 %

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

General and administrative $ 27,030 $ 27,143

Selling and marketing 13,298 14,333

General and administrative $ 42,568 $ 42,054

Research and development 22,440 28,633

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.

Changes in foreign currency exchange rates increased total operating expenses by $4.3 million for the nine months ended December 31, 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 .

Selling and marketing expenses decreased by $40.1 million for the nine months ended December 31, 2020, as compared to the prior year period, due primarily to lower overall marketing expenses due to lower marketing expenses for Borderlands 3 , Red Dead Redemption 2 , The Outer Worlds , and our WWE 2K franchise, partially offset by higher marketing expenses for Dragon City, Word Life, and Two Dots .

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.

General and administrative expenses increased by $56.2 million for the nine months ended December 31, 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, and (iii) professional fees related to consulting, including for our acquisition of Playdots and our offer to acquire Codemasters Group Holdings PLC.

General and administrative expenses for the nine months ended December 31, 2020 and 2019 included occupancy expense (primarily rent, utilities and office expenses) of $20.5 million and $18.9 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.

Research and development expenses increased by $6.1 million for the nine months ended December 31, 2020, as compared to the prior year period, due primarily to increases in (i) personnel expenses for higher headcount and higher incentive compensation, (ii) IT expenses for cloud-based services, (iii) online support costs, and (iv) professional fees.

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 the 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.

Depreciation and amortization expenses for the nine months ended December 31, 2020 increased by $4.5 million, as compared to the prior year period, due primarily to leasehold improvements for new office locations and 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.

During the nine months ended December 31, 2020, as compared to the prior year period, business reorganization expense decreased $0.6 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.

Interest and other, net was income of $12.0 million for the nine months ended December 31, 2020, as compared to $30.4 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.

Gain on long-term investments, net

Gain on long-term investments, net for the nine months ended December 31, 2020 was $38.6 million and was due primarily to the sale of a portion of one of our investments and the resulting change in value based on the observable price change of the remaining portion of that investment.

Provision for Income Taxes

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.

The provision for income taxes for the nine months ended December 31, 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 $54.2 million for the nine months ended December 31, 2020 as compared to a provision for income taxes of $52.1 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 12.8% for the nine months ended December 31, 2020 was due primarily to a benefit of $17.8 million as a result of tax credits anticipated to be utilized and excess tax benefits of $13.6 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 15.6% for the nine months ended December 31, 2019 was due primarily to a benefit of $15.1 million as a result of tax credits anticipated to be utilized, a tax benefit of $11.6 million from changes in unrecognized tax benefits due to audit settlements, and a benefit of $5.8 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.

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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 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.

During the nine months ended December 31, 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 in the case 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.

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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.

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.

An additional economic stimulus package, the Consolidated Appropriations Act, 2021, was approved on December 27, 2020.

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

Net income and earnings per share

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.

For the nine months ended December 31, 2020, net income was $370.1 million, as compared to $281.7 million in the prior year period.

For the nine months ended December 31, 2020, diluted earnings per share was $3.20 as compared to diluted earnings per share of $2.47 in the prior year period.

Diluted weighted average shares of 115.6 million were 1.6 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 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.

As of December 31, 2020, we had $772.7 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 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.

As of December 31, 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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On February 8, 2019, we entered into an unsecured Credit Agreement (the “Credit Agreement”) that runs through February 8, 2024.

The Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $200 million, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $25 million and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $25 million.

amount of up to $25 million.

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 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.

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 December 31, 2020) or (b) 1.125% to 1.750% above LIBOR (approximately 1.44% at December 31, 2020), which rates are determined by reference to our consolidated total net leverage ratio.

As of December 31, 2020, there was $197.9 million available to borrow under the Credit Agreement, and we had $2.1 million of letters of credit outstanding.

At December 31, 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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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 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.

Our five largest customers accounted for 77.4% and 70.0% of net revenue during the nine months ended December 31, 2020 and 2019, respectively.

As of December 31, 2020 and March 31, 2020, five customers accounted for 71.8% and 58.1% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 59.1% and 48.8% of such balances at December 31, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 39.5% and 19.6% of our gross accounts receivable as of December 31, 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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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.

Included in our Restricted cash as of December 31, 2020, was the cash portion of our offer to acquire Codemasters Group Holdings PLC, a UK-based game publisher and developer.

As of January 13, 2021, the offer lapsed, and the cash was no longer restricted.

As of December 31, 2020, the amount of cash and cash equivalents held outside of the U.S.

by our foreign subsidiaries was $845.3 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 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.

During the nine months ended December 31, 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 December 31, 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:

Six Months Ended

September 30,

Nine Months Ended

(thousands of dollars) 2020 2019

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Net change in cash, cash equivalents, and restricted cash and cash equivalents $ 519,397 $ 350,448

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.

At December 31, 2020, we had $2,512.8 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 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.

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, our purchase of Playdots, as well as purchases of fixed assets 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 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 of December 31, 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 September 30, 2020 and 2019, 40.1% and 42.3%, respectively, of our net revenue was earned outside of the United States.

For the three months ended December 31, 2020 and 2019, 38.6% 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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sequels or enhancements of existing titles;

projected and actual changes in platforms;

projected and actual

changes in platforms;

the timing and success of title introductions by our competitors;

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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