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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2020
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 1-37745
 RealNetworks, Inc.
(Exact name of registrant as specified in its charter)
Washington 91-1628146
(State of incorporation) 
(I.R.S. Employer
Identification Number)
1501 First Avenue South, Suite 600
Seattle, Washington
 98134
(Address of principal executive offices) (Zip Code)
(206) 674-2700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨  Accelerated filer¨
Non-accelerated filer ý  Smaller reporting companyý
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   ý
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, Par Value $0.001 per shareRNWKThe NASDAQ Stock Market
Preferred Share Purchase RightsRNWKThe NASDAQ Stock Market
The number of shares of the registrant’s Common Stock outstanding as of May 4, 2020 was 38,235,224.




TABLE OF CONTENTS
 
 Page

2


PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31,
2020
December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents$19,046  $16,805  
Trade accounts receivable, net of allowances of $650 and $59726,991  29,507  
Deferred costs, current portion865  823  
Prepaid expenses and other current assets8,873  7,445  
Total current assets55,775  54,580  
Equipment, software, and leasehold improvements, at cost:
Equipment and software30,419  32,167  
Leasehold improvements2,903  3,311  
Total equipment, software, and leasehold improvements, at cost33,322  35,478  
Less accumulated depreciation and amortization30,801  32,657  
Net equipment, software, and leasehold improvements2,521  2,821  
Operating lease assets10,961  11,592  
Restricted cash equivalents 5,374  5,374  
Other assets1,150  1,891  
Deferred costs, non-current portion1,156  1,021  
Deferred tax assets, net752  761  
Other intangible assets, net of accumulated amortization of $66,431 and $67,86318,016  19,286  
Goodwill62,202  62,428  
Total assets$157,907  $159,754  
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable$4,996  $4,927  
Accrued royalties, fulfillment and other current liabilities77,127  77,303  
Deferred revenue, current portion6,437  6,620  
Notes payable4,797  7,331  
Total current liabilities93,357  96,181  
Deferred revenue, non-current portion287  96  
Deferred tax liabilities, net1,116  1,172  
Long-term lease liabilities7,770  8,466  
Long-term debt3,900  3,900  
Other long-term liabilities8,420  11,666  
Total liabilities114,850  121,481  
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.001 par value:
Series A: authorized 200 shares    
Series B: authorized 8,100 shares; issued and outstanding 8,065 shares in 2020 and 0 shares in 20198    
Undesignated series: authorized 51,700 shares    
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 38,231 shares in 2020 and 38,227 shares in 201938  38  
Additional paid-in capital654,442  644,070  
Accumulated other comprehensive loss(62,230) (61,323) 
Retained deficit(548,652) (544,010) 
Total shareholders’ equity43,606  38,775  
Noncontrolling interests(549) (502) 
Total equity43,057  38,273  
Total liabilities and equity$157,907  $159,754  
See accompanying notes to unaudited condensed consolidated financial statements.
3


REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 Quarter Ended
March 31,
 20202019
Net revenue$43,145  $39,472  
Cost of revenue24,176  24,870  
Gross profit18,969  14,602  
Operating expenses:
Research and development8,618  8,833  
Sales and marketing8,117  8,142  
General and administrative7,113  8,364  
Restructuring and other charges209  167  
Total operating expenses24,057  25,506  
Operating loss(5,088) (10,904) 
Other income (expenses):
Interest expense(262) (166) 
Interest income5  77  
Gain (loss) on equity investment, net  12,338  
Other income (expenses), net795  127  
Total other income (expenses), net538  12,376  
Income (loss) before income taxes(4,550) 1,472  
Income tax expense 139  258  
Net income (loss) including noncontrolling interests(4,689) 1,214  
Net income (loss) attributable to noncontrolling interests(47) (319) 
Net income (loss) attributable to RealNetworks$(4,642) $1,533  
Net income (loss) per share attributable to RealNetworks- Basic$(0.12) $0.04  
Net income (loss) per share attributable to RealNetworks- Diluted$(0.12) $0.04  
Shares used to compute basic net income (loss) per share38,229  37,820  
Shares used to compute diluted net income (loss) per share38,229  37,912  
Comprehensive income (loss):
Foreign currency translation adjustments, net of reclassification adjustments$(907) $(87) 
Total other comprehensive income (loss) (907) (87) 
Net income (loss) including noncontrolling interests(4,689) 1,214  
Comprehensive income (loss) including noncontrolling interests(5,596) 1,127  
Comprehensive income (loss) attributable to noncontrolling interests(47) (319) 
Comprehensive income (loss) attributable to RealNetworks$(5,549) $1,446  
See accompanying notes to unaudited condensed consolidated financial statements.
4


REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Three Months Ended
March 31,
 20202019
Cash flows from operating activities:
Net income (loss) including noncontrolling interests$(4,689) $1,214  
Adjustments to reconcile net income (loss) including noncontrolling interests to net cash used in operating activities:
Depreciation and amortization1,436  1,482  
Stock-based compensation380  1,384  
(Gain) loss on equity investment, net  (12,338) 
Foreign currency (gain) loss(767) (151) 
Fair value adjustments to contingent consideration liability(300)   
Net change in certain operating assets and liabilities:
Trade accounts receivable2,256  (143) 
Prepaid expenses, operating lease and other assets(535) (1,063) 
Accounts payable149  (259) 
Accrued, lease and other liabilities(2,554) 555  
Net cash used in operating activities(4,624) (9,319) 
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements(94) (482) 
Proceeds from sales and maturities of short-term investments  24  
Acquisition, net of cash acquired  12,260  
Net cash (used in) provided by investing activities(94) 11,802  
Cash flows from financing activities:
Proceeds from issuance of preferred stock10,000    
Tax payments from shares withheld upon vesting of restricted stock  (271) 
Proceeds from notes payable and revolving credit facility8,768  9,733  
Repayments of notes payable and revolving credit facility(11,172) (8,437) 
Other financing activities  450  
Net cash provided by financing activities7,596  1,475  
Effect of exchange rate changes on cash, cash equivalents and restricted cash(637) (207) 
Net increase in cash, cash equivalents and restricted cash2,241  3,751  
Cash, cash equivalents and restricted cash, beginning of period22,179  37,191  
Cash, cash equivalents, and restricted cash end of period$24,420  $40,942  
See accompanying notes to unaudited condensed consolidated financial statements.
5


REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
 Common Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Deficit)
Total
Shareholders’
Equity
Non-controlling InterestsTotal Equity
SharesAmount
 
Balances, January 1, 201937,728  $37  $641,930  $(61,118) $(524,009) $56,840  $  $56,840  
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock190  —  (271) —  —  (271) —  (271) 
Napster acquisition—  —  (1,346) —  —  (1,346) 570  (776) 
Stock-based compensation—  —  1,384  —  —  1,384  —  1,384  
Foreign currency translation adjustments—  —  —  (87) —  (87) —  (87) 
Net income (loss)—  —  —  —  1,533  1,533  (319) 1,214  
Other equity transactions—  —  362  —  —  362  88  450  
Balances, March 31, 201937,918  $37  $642,059  $(61,205) $(522,476) $58,415  $339  $58,754  


 Preferred StockCommon Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Deficit)
Total
Shareholders’
Equity
Non-controlling InterestsTotal Equity
SharesAmountSharesAmount
 
Balances, January 1, 2020  $  38,227  $38  $644,070  $(61,323) $(544,010) $38,775  $(502) $38,273  
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock—  —  4  —    —  —    —    
Stock-based compensation—  —  —  —  380  —  —  380  —  380  
Foreign currency translation adjustments—  —  —  —  —  (907) —  (907) —  (907) 
Net income (loss)—  —  —  —  —  —  (4,642) (4,642) (47) (4,689) 
Issuance of Preferred B Stock8,065  8  —  —  9,992  —  —  10,000  —  10,000  
Balances, March 31, 20208,065  $8  38,231  $38  $654,442  $(62,230) $(548,652) $43,606  $(549) $43,057  

See accompanying notes to unaudited condensed consolidated financial statements.
6



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2020 and 2019
Note 1Description of Business and Summary of Significant Accounting Policies
Description of Business. RealNetworks provides digital media software and services to consumers, mobile carriers, device manufacturers, system integrators, and other businesses. Consumers use our digital media products and services to store, organize, play, manage and enjoy their digital media content, either directly from us or through our distribution partners. As of January 18, 2019, we hold an 84% interest in the Napster music business, which offers a comprehensive set of digital music products and services designed to provide consumers with broad access to digital music.
Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services and the ability to generate related revenue and cash flow.
In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc., together with its subsidiaries, is referred to as "RealNetworks," the "Company," "we," "us," or "our." "RealPlayer," "RMHD," "RealMedia," "GameHouse," "Kontxt," "SAFR" and other trademarks of ours appearing in this report are our property.
Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries in which it has a more than 50% voting interest. Noncontrolling interests primarily represent third-party ownership in the equity of Napster and are reflected separately in the Company's financial statements. Intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter ended March 31, 2020 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2020. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
Liquidity and Capital Resources. Our unrestricted cash and cash equivalents balance at March 31, 2020 was $19.0 million and our operating loss for the quarter ended March 31, 2020 was $5.1 million. We have evaluated our current liquidity position in light of our history of declining revenue and operating losses as well as our near-term expectations of net negative cash flows from operating activities. While we currently believe existing unrestricted cash balances along with current availability on our revolving line of credit will be sufficient to allow us to meet our obligations for the next 12 months, our assessment is subject to inherent risks and uncertainties. Moreover, our operating forecast is partly dependent on factors that are outside of our control. Compounding these risks, uncertainties, and other factors are the potential effects of the recent coronavirus pandemic and related impacts on global commerce and financial markets. These conditions, when evaluated within the guidance of ASC 205-40, raise substantial doubt about our ability to meet our obligations over the 12 months from the date of this filing and, therefore, to continue as a going concern. Our financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
We have active plans to mitigate these conditions. Specifically, we plan to reduce negative cash flow through operating expense reductions, as well as through the deferral of certain obligations where we believe that we have the legal basis to do so. In addition, we are evaluating various strategic opportunities, which may include selling certain businesses or product lines, soliciting external investment into certain of our businesses, or seeking other strategic partnerships. Our plans are subject to inherent risks and uncertainties, which become significantly magnified when the effects of the current pandemic and related financial crisis are included in the assessment. Accordingly, there can be no assurance that our plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the 10-K).
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
7



Note 2Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds the reporting unit's fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2022, with early adoption permitted. We do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued new guidance amending existing guidance for the accounting of credit losses on financial instruments. Under the new guidance, the valuation allowance for credit losses is expected to be incurred over the financial asset’s contractual term. We reviewed the new credit loss standard and determined that it applies to our accounts receivable, which are typically of short duration and for which we have not historically experienced significant credit losses. This guidance is effective for us in fiscal years beginning after December 15, 2022 with a cumulative effect of adoption recorded as an adjustment to retained earnings. We are in the process of evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures.

Note 3Revenue Recognition
We generate all of our revenue through contracts with customers. Revenue is either recognized over time as the service is provided, or at a point in time when the product is transferred to the customer, depending on the contract type. Our performance obligations typically have an original duration of one year or less.
Disaggregation of Revenue
The following table presents our disaggregated revenue by source and segment (in thousands):
Quarter Ended March 31, 2020
Consumer MediaMobile ServicesGamesNapster
Business Line
Software License$2,020  $831  $  $  
Subscription Services  929  5,859  2,770  26,323  
Product Sales222    2,978    
Advertising and Other  324    889    
Total$3,495  $6,690  $6,637  $26,323  
Quarter Ended March 31, 2019
Consumer MediaMobile ServicesGamesNapster
Business Line
Software License$735  $599  $  $  
Subscription Services  1,088  6,340  2,985  24,337  
Product Sales219    1,988    
Advertising and Other  444    737    
Total$2,486  $6,939  $5,710  $24,337  
8


The following table presents our disaggregated revenue by sales channel (in thousands):
Quarter Ended March 31, 2020
Consumer MediaMobile ServicesGamesNapster
Sales Channel
Business to Business$2,343  $6,584  $1,095  $12,851  
Direct to Consumer1,152  106  5,542  13,472  
Total$3,495  $6,690  $6,637  $26,323  
Quarter Ended March 31, 2019
Consumer MediaMobile ServicesGamesNapster
Sales Channel
Business to Business$1,178  $6,817  $1,036  $12,095  
Direct to Consumer1,308  122  4,674  12,242  
Total$2,486  $6,939  $5,710  $24,337  
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to our customers. We record accounts receivable when the right to consideration becomes unconditional, except for the passage of time. For certain contracts, payment schedules may exceed one year; for those contracts we recognize a long-term receivable. As of March 31, 2020 and December 31, 2019, our balance of long-term accounts receivable was $0.5 million and $0.3 million, respectively, and is included in other long-term assets on our condensed consolidated balance sheets. The increase in this balance from December 31, 2019 to March 31, 2020 is primarily due to a contract renewal in the first quarter of 2020. During the quarter ended March 31, 2020, we recorded no impairments to our contract assets.
We record deferred revenue when cash payments are received in advance of our completion of the underlying performance obligation. As of March 31, 2020 and December 31, 2019, we had a deferred revenue balance of $6.7 million, primarily due to deferred revenue associated with monthly subscriptions.
Practical Expedients
For those contracts for which we recognize revenue at the amount to which we have the right to invoice for service performed, we do not disclose the value of any unsatisfied performance obligations. We also do not disclose the remaining unsatisfied performance obligations which have an original duration of one year or less. Additionally, we immediately expense sales commissions when incurred as the amortization period would have been less than one year. These costs are recorded within sales and marketing expense.

Note 4Stock-Based Compensation
Total stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations and comprehensive income (loss) includes amounts related to stock options, restricted stock, and employee stock purchase plans and was as follows (in thousands):
 Quarter Ended
March 31,
 20202019
Total stock-based compensation expense$380  $1,384  
The fair value of RealNetworks options granted determined using the Black-Scholes model used the following weighted-average assumptions:
 Quarter Ended
March 31,
 20202019
Expected dividend yield0 %0 %
Risk-free interest rate0.90 %2.51 %
Expected life (years)4.03.8
Volatility45 %41 %
9


The total stock-based compensation amounts for 2020 and 2019 disclosed above are recorded in their respective line items within operating expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Included in the expense for the three months ended March 31, 2019 was stock compensation expense recorded in the first quarter of 2019 related to our 2018 incentive bonuses paid in fully vested restricted stock units, which were authorized and granted in the first quarter of 2019. Our 2019 incentive bonuses were paid fully in cash, reducing stock compensation expense in the three months ended March 31, 2020 when compared to the three months ended March 31, 2019.
As of March 31, 2020, $1.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 2.8 years.

Note 5Acquisitions
Napster
On January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc. (doing business as Napster) which brought our aggregate ownership to 84% of Napster's outstanding equity, thus giving RealNetworks a majority voting interest.
Napster continues to operate as an independent business with its own board of directors, strategy and leadership team.For fiscal periods following the closing of the acquisition, we consolidate Napster's financial results into our financial statements, where Napster is reported as a separate segment. Napster, however, remains a distinct legal entity and RealNetworks assumes no ownership or control over the assets or liabilities of Napster.
The 16% of Napster that we do not own is accounted for as a noncontrolling interest in our consolidated financial statements. As part of the transaction, we recorded a gain of $12.3 million recognized in Other income (expenses) in the Consolidated statement of operations in the first quarter of 2019.
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 with existing cash balances. With regards to contingent consideration, over the five years following the acquisition, RealNetworks will pay the lesser of the following:
(a) an additional $14.0 million to seller, or
(b) if RealNetworks sells the interest to a third party for less than $15.0 million, the actual amount received by RealNetworks, minus the $1.0 million initial payment.
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.
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 an estimated fair value of $11.6 million at the time of acquisition. The contingent consideration is adjusted quarterly to fair value through earnings. See Note 6 Fair Value Measurements for details on the adjustment to this liability.
We recorded intangible assets of $23.7 million, consisting of trade name and trademarks, developed technology, customer relationships, and partner relationships.
We 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. Future performance of the Napster business will factor into our intangibles and goodwill impairment analysis.
10



Note 6Fair Value Measurements
Items Measured at Fair Value on a Recurring Basis
The following tables present information about our financial assets that have been measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, and indicates the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands):
Fair Value Measurements as ofAmortized Cost as of
 March 31, 2020March 31, 2020
 Level 1Level 2Level 3Total
Assets:
Cash and cash equivalents:
Cash$18,460  $  $  $18,460  $18,460  
Money market funds586      586  586  
Total cash and cash equivalents19,046      19,046  19,046  
Restricted cash equivalents3,500  1,874    5,374  5,374  
Total assets$22,546  $1,874  $  $24,420  $24,420  
Liabilities:
Accrued royalties, fulfillment and other current liabilities
Napster acquisition contingent consideration$  $  $5,396  $5,396  N/A  
Other long-term liabilities
Napster acquisition contingent consideration    6,904  6,904  N/A  
Total liabilities$  $  $12,300  $12,300  N/A  

Fair Value Measurements as ofAmortized Cost as of
 December 31, 2019December 31, 2019
 Level 1Level 2Level 3Total
Assets:
Cash and cash equivalents:
Cash$14,887  $  $  $14,887  $14,887  
Money market funds