On January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc. (doing business as Napster) bringing our aggregate ownership to 84% of Napster's outstanding equity, thus giving RealNetworks a majority voting interest. Napster's music streaming service provides users with broad access to digital music, offering on-demand streaming and conditional downloads through unlimited access to a catalog of millions of music tracks. Napster offers music services worldwide and generates revenue primarily through subscriptions to its music services either directly to consumers or through distribution partners.

Initially formed in 2007 and branded then as Rhapsody, Napster began as a joint venture between RealNetworks and MTV Networks, a division of Viacom International, Inc. Prior to the acquisition of the additional 42% interest in Napster, we accounted for our investment using the equity method of accounting.

Following the January 2019 Napster Acquisition, RealNetworks has the right to nominate directors constituting a majority of the Napster board of directors, however, Napster will continue to operate as an independent business with its own board of directors, strategy and leadership team. We are consolidating Napster's financial results into our financial statements for fiscal periods following the closing of the acquisition, and Napster is reported as a separate segment in RealNetworks' consolidated financial statements. Napster, however, remains a distinct legal entity and RealNetworks assumes no ownership or control over the assets or liabilities of Napster.

We have recorded 100% of the estimated fair value of the assets acquired and liabilities assumed as of January 18, 2019 based on the results of an independent valuation. The 16% of Napster that we do not own is accounted for as a noncontrolling interest in our consolidated financial statements, and as part of this consolidation, the carrying value of our previous 42% equity method investment was remeasured to fair value on the acquisition date. The remeasurement to fair value of the historical 42% ownership interest resulted in the recognition of a $2.7 million gain at the time of acquisition, which is a component of the overall gain recognized as a part of this transaction. Our consolidated balance sheet reflects Napster's working capital deficit, which results in a consolidated working capital deficit. RealNetworks does not have any contractual or implied obligation to provide funding or other financial support to Napster, or to guarantee or provide other such support related to Napster's third party borrowing or Napster's other obligations on our consolidated balance sheet, except as discussed in Note 18. Commitments and Contingencies.

The terms of the transaction included initial cash consideration of $1.0 million and additional contingent consideration. Initial cash consideration of $0.2 million was paid at closing and the remainder of the initial cash consideration is included in accrued royalties, fulfillment and other current liabilities and will be paid when due with existing cash balances. With regards to contingent consideration, over the five years following the acquisition, RealNetworks will pay the lesser of the following:

In the event that RealNetworks sells such equity interest for consideration in excess of $15.0 million, RealNetworks will pay seller additional consideration, dependent on the sale price, which shall in no event exceed an additional $25.0 million. In order for seller to receive the full $40.0 million, the proceeds from the sale of Napster received by RealNetworks for the 42% equity interest acquired would have to exceed $60.0 million. These contingent consideration amounts were part of the total consideration at estimated fair value, as described in more detail below.


Consideration, at estimated fair value:
Cash	$	1,000
Contingent consideration	11,600
RealNetworks' preexisting 42% equity interest in Napster	2,700
Effective settlement of Napster debt and warrants, held by RealNetworks	6,408
Total consideration	$	21,708

Assets acquired and liabilities assumed, at estimated fair value:
Cash and cash equivalents	$	10,127
Accounts receivable	20,915
Prepaid expenses and other current assets	2,421
Restricted cash	2,322
Equipment, software and leasehold improvements	474
Operating lease assets	2,400
Other long-term assets	77
Deferred tax assets, net	5,932
Intangible assets	23,700
Goodwill	45,520
Total assets acquired	113,888

Accounts payable	786
Accrued royalties and fulfillment	59,036
Accrued and other current liabilities	7,032
Deferred revenue, current portion	3,526
Notes payable	12,211
Deferred tax liabilities, net	6,208
Long-term lease liabilities	1,190
Other long-term liabilities	1,621
Total liabilities assumed	91,610
Total net assets acquired	22,278
Noncontrolling interests	570
Net assets acquired	$	21,708

Under the acquisition method of accounting, the purchase price is allocated to the assets acquired and the liabilities assumed based on their estimated fair values. In the fourth quarter of 2019, we recorded purchase price allocation adjustments that reflect new information obtained during the measurement period about facts and circumstances that existed at the date of the acquisition. These adjustments did not have a material effect on current or prior period consolidated financial statements and are primarily associated with the estimated fair values of acquired prepaid royalties, accrued royalties, and accrued taxes, with a corresponding net reduction of $3.0 million to goodwill. Adjustments to acquired prepaid royalties and accrued royalties also include the matching and invoicing of music royalties owed as of the opening balance sheet, as discussed in Note 9. Accrued and Other Current Liabilities.

Intangible category

Estimated fair value

Method used to calculate fair value

Estimated remaining useful life

Trade name and trademarks

6,800

Relief-from-royalty

15 years

Developed technology

5,900

Excess earnings

4 years

Customer relationships

5,900

Cost-to-replace

3 years

Partner relationships

5,100

Distributor method

8 years

Total

23,700

The fair value of the trade name and trademarks intangible asset was estimated using the income approach, utilizing the relief from royalty method, which values the assets by estimating the savings achieved by ownership of trade name and trademarks when compared with the cost of licensing them from an independent owner.

The fair value of developed technology was estimated using the income approach, utilizing the excess earnings method. Under this method, cash flows attributable to the asset are estimated by deducting economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated by the asset.

The fair value of partner relationships was estimated using the income approach, which uses market-based distributor data to value underlying distributor relationships. Revenue, earnings, and cash flow estimates associated with these underlying distributor relationships are key estimates in determining the fair value of the partner relationships intangibles.

The fair value of our preexisting 42% equity method investment was remeasured to an estimated fair value of $2.7 million, which resulted in a pretax gain of $2.7 million, as our existing carrying value was zero. This gain, as well as the settlement of preexisting relationships and other purchase accounting adjustments discussed below, comprise the total gain of $12.3 million recognized in Other income (expenses) in the Consolidated statement of operations in 2019.

The fair value of our preexisting equity method investment was calculated using an average of the income and market approach to arrive at estimated total enterprise value. The income approach fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, as well as the selection of an appropriate discount rate. Estimates of revenue growth and operating expenses were based on internal projections and considered the historical performance of Napster's business. The discount rate applied was based on Napster's weighted-average cost of capital and included a small-company risk premium. The market approach fair value measurement was based on a market comparable methodology. At the time of acquisition, we used a group of comparable companies and selected an appropriate EBITDA multiple to apply to Napster's projected 2020 and 2021 EBITDA. Assumptions in both the income and market approaches were significant to the overall valuation of Napster and changes to these assumptions could have materially impacted the fair values of assets acquired and liabilities assumed, noncontrolling interests, total consideration, and gain on consolidation.

The fair value of the contingent consideration was estimated using multiple scenarios for each tranche of contingent consideration and then probability weighting each scenario and discounting them to estimated fair value of $11.6 million at the time of acquisition. This fair value calculation was directly impacted by the estimated total enterprise value described above. The contingent consideration will be adjusted quarterly to fair value through earnings. Of the total amount of $11.6 million, we accrued $2.6 million and $9.0 million in Accrued royalties, fulfillment and other current liabilities, and Other long-term liabilities, respectively, as of March 31, 2019. See Note 5. Fair Value Measurements for details on the adjustment to this liability.

The effective settlement of Napster's debt and warrants totaling $6.4 million represents the estimated fair value of debt and warrants held between RealNetworks and Napster as of the acquisition date. The estimated fair value was derived from the estimated total enterprise value described above. The resulting net gain of $5.5 million was included in Other income (expenses) in the Consolidated statement of operations in 2019.

As discussed in Note 18. Commitments and Contingencies, the preexisting $2.8 million guarantee related to Napster's outstanding indebtedness on their revolving credit facility was eliminated upon the consolidation of Napster. This resulted in RealNetworks recording a gain of $2.8 million at the time of acquisition, which was included in Other income (expenses) in the Consolidated statement of operations in 2019. RealNetworks has not been required to pay any portion of this commitment, and, as discussed in Note 10. Notes Payable and Long-term Debt, Napster fully repaid this loan balance on April 30, 2019, thus releasing RealNetworks' previous guaranty.

Prior to our acquisition of Napster, we accounted for our investment under the equity method of accounting and recorded Napster 's foreign currency translation adjustments in our equity. As part of the acquisition method of accounting, we released these amounts and recorded a gain of $1.3 million at the time of acquisition, which is included in Other income (expenses) in the Consolidated statement of operations in 2019.

We also recorded goodwill of $45.5 million, representing the intangible assets that do not qualify for separate recognition for accounting purposes, including the expected growth in Napster's business to business model and the assembled workforce. The goodwill is reported in the Napster segment and is not deductible for income tax purposes. Future performance of the Napster business will factor into our goodwill impairment analysis.

We began consolidating Napster's results of operations and cash flows into our consolidated financial statements after January 18, 2019. For the year ended December 31, 2019, Napster's revenue and net loss including noncontrolling interests in our consolidated statements of operations was $106.3 million and $6.4 million, respectively.

⁽¹⁾The pro forma net earnings attributable to RealNetworks for the year ended December 31, 2018 include the acquisition related gain of $12.3 million and $1.5 million of transaction costs. The amounts in the supplemental pro forma earnings for the periods presented above fully eliminate intercompany transactions and conform Napster's accounting policies to RealNetworks'. These pro forma results also reflect amortization of acquisition-related intangibles and fair value adjustments to deferred revenue and contingent consideration.