REALNETWORKS, INC. This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections aboutRealNetworks' industry, products, management's beliefs, and certain assumptions made by management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to: •the expected benefits and other consequences of our growth plans, strategic initiatives, and restructurings; •our expected introduction, and related monetization, of new and enhanced products, services and technologies across our businesses; •future revenues, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations; •the effects of our past acquisitions, including ourJanuary 18, 2019 acquisition of a controlling interest in Napster, and expectations for future acquisitions and divestitures; •plans, strategies and expected opportunities for future growth, increased profitability and innovation; •our expected financial position, including liquidity, cash usage and conservation, the availability of funding or other resources, and the potential for forgiveness of certain loans; •the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses; •the continuation and expected nature of certain customer relationships; •impacts of competition and certain customer relationships on the future financial performance and growth of our businesses; •our involvement in potential claims, legal proceedings and government investigations, and the potential outcomes and effects of such potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations; •the effects ofU.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and •the effect of economic and market conditions, including global pandemics and financial crises, on our business, prospects, financial condition or results of operations. These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in Item 1A entitled "Risk Factors."RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed byRealNetworks from time to time with theSecurities and Exchange Commission , particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. 21 --------------------------------------------------------------------------------
Overview
Our SegmentsRealNetworks invented the streaming media category in 1995 and continues to build on its foundation of digital media expertise and innovation, creating a new generation of products and services to enhance and secure our daily lives. We manage our business and report revenue and operating income (loss) in four segments: (1) Consumer Media (2) Mobile Services, (3) Games, and (4) Napster. Within our Consumer Media segment, revenue is primarily derived from the software licensing of our video compression, or codec, technology, principally our prior-generation codec RealMedia Variable Bitrate, or RMVB, but also including some early revenue from sales of our latest technology,RealMedia High Definition, or RMHD. We also generate revenue from the sale of our PC-based RealPlayer products, including RealPlayer Plus and related products. These products and services are delivered directly to consumers and through partners, such as OEMs and mobile device manufacturers. Our Mobile Services business generates revenue primarily from the sale of subscription services, which include our intercarrier messaging service and ringback tones, as well as through software licenses for the integration of our RealTimes platform and certain system implementations. We generate a significant portion of our revenue from sales within our Mobile Services business to a few mobile carriers. Our Mobile Services segment also includes our computer vision platform, SAFR, which includes facial recognition technology that leverages artificial intelligence-based machine learning. To date, our SAFR business has not generated a significant level of revenue. Our Games business generates revenue primarily through the development, publishing, and distribution of casual games under the GameHouse and Zylom brands. Games are offered via mobile devices, digital downloads, and subscription play. We derive revenue from player purchases of in-game virtual goods within our free-to-play games and from advertising on games sites. In addition, we derive revenue from the sale of individual games and subscription offerings. As described in Note 5 Acquisitions,RealNetworks acquired an additional 42% interest in Napster onJanuary 18, 2019 bringing our ownership of Napster's outstanding stock to 84%, thus having a majority voting interest. 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. In connection with the acquisition, we recorded goodwill and definite-lived intangible assets, which we assess for impairment each quarter and which would be negatively impacted if Napster's business were to continue to decline or if it were to suffer significant financial distress. The Napster segment provides music products and services that enable consumers to access digital music content from a variety of devices. The Napster subscription service offers unlimited access to a catalog of tens of millions of music tracks by way of on-demand streaming and conditional downloads. Napster currently offers music services and generates revenue primarily through subscriptions sold directly to consumers, through distribution partners, or through various music platform services primarily under co-branded arrangements. Napster generates a significant portion of revenue from sales to a few partners.RealNetworks allocates to its Consumer Media, Mobile Services, and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, IT, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items may also include restructuring charges and stock compensation expense. As stated in Note 5 Acquisitions, Napster operates as an independent company and, therefore,RealNetworks allocates no corporate expenses to the Napster segment. COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus that causes COVID-19 to be a global pandemic. As the virus spread throughout theU.S. and the world, authorities implemented numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, business limitations, and shutdowns. In addition to the pandemic's widespread impact on public health and global society, reactions to the pandemic as well as measures taken to contain the virus have caused significant turmoil to the global economy and financial markets. Moreover, similar to other companies, we have taken steps to support the health and well-being of our employees, customers, partners and communities, which include working remotely and learning to operate our businesses in a fundamentally different way. Even as implications of the pandemic and containment measures generally evolved throughout the first quarter of 2020, the impact on our financial results for the first quarter of 2020 was relatively minor. We have, however, had to reevaluate our operating plans, resulting in some significant pivots for our growth initiatives. Moreover, as we continue to operate our businesses as efficiently as possible, we have taken steps to more aggressively reduce costs and reallocate resources. We are unable to predict the near-term and long-term impacts that the COVID-19 pandemic will have on our results from operations, financial condition, liquidity and cash flows for the remainder of fiscal 2020 due to numerous uncertainties, including the 22 -------------------------------------------------------------------------------- duration and severity of the pandemic and containment measures, but we will continue to monitor and evaluate the effects to our businesses and adjust our plans as needed. Financial Results As ofMarch 31, 2020 , we had$19.0 million in unrestricted cash and cash equivalents, compared to$16.8 million as ofDecember 31, 2019 . The 2020 increase in cash and cash equivalents compared to the prior year end amount was due to the$10.0 million in cash proceeds from our recent issuance of Series B Preferred Stock, partially offset by our ongoing cash flows used in operating activities, which totaled$4.6 million in the first three months of 2020, and Napster's net repayment of debt of$2.4 million under the NRP Agreement. InApril 2020 ,RealNetworks issued a promissory note in the principal amount of$2.9 million and inMay 2020 , Napster issued a promissory note in the principal amount of$1.7 million , both pursuant to the PPP of the CARES Act. Condensed consolidated results of operations were as follows (in thousands): Quarter Ended March 31, 2020 2019 $ Change % Change Total revenue$ 43,145 $ 39,472 $ 3,673 9 % Cost of revenue 24,176 24,870 (694) (3) % Gross profit 18,969 14,602 4,367 30 % Gross margin 44 % 37 % Operating expenses 24,057 25,506 (1,449) (6) % Operating loss$ (5,088) $ (10,904) $ 5,816 53 % In the first quarter of 2020, our total consolidated revenue increased$3.7 million as compared with the year-earlier period. For the first quarter of 2020 compared to the prior year period, Napster segment revenues increased by$2.0 million , primarily due to the inclusion of Napster for the three months endedMarch 31, 2020 , whereas the three months endedMarch 31, 2019 includes Napster from the acquisition date ofJanuary 18, 2019 through the end of the quarter. Our Consumer Media segment revenues increased by$1.0 million and our Games segment revenues increased by$0.9 million , partially offset by the revenue decline in our Mobile Services segment of$0.2 million . See below for further discussion of our segment results. Cost of revenue decreased by$0.7 million for the quarter endedMarch 31, 2020 as compared with the year-earlier period, primarily due to the savings of$0.4 million in our Mobile Services segment,$0.3 million in Napster segment and$0.2 million in our Consumer Media segment, partially offset by$0.1 million increase in our Games segment. Operating expenses decreased by$1.4 million in the quarter endedMarch 31, 2020 as compared with the year-earlier period, primarily due to the reductions of$1.8 million in salaries, benefits and infrastructure expenses. In the first quarter of 2020, we incurred expenses of$0.2 million for costs associated with our acquisition of Napster, compared with$0.8 million in the first quarter of 2019. Operating expenses within Corporate in the first quarter of 2020 also included the favorable change in fair value of the Napster contingent consideration liability of$0.3 million . These decreases were partially offset by$0.9 million increase in Napster segment primarily due to the inclusion of a full quarter of expenses in the first quarter of 2020 compared to the prior year. 23 -------------------------------------------------------------------------------- Segment Operating Results Consumer Media Consumer Media segment results of operations were as follows (in thousands): Quarter Ended March 31, 2020 2019 $ Change % Change Revenue$ 3,495 $ 2,486 $ 1,009 41 % Cost of revenue 611 833 (222) (27) % Gross profit 2,884 1,653 1,231 74 % Gross margin 83 % 66 % Operating expenses 2,458 3,119 (661) (21) % Operating income (loss)$ 426 $ (1,466) $ 1,892 NM Total Consumer Media revenue for the quarter endedMarch 31, 2020 increased$1.0 million as compared to the same quarter in 2019, due primarily to higher software license revenues of$1.3 million , partially offset by lower subscription services revenues of$0.2 million , described more fully below. The overall increase in revenues was also offset by lower product sales, advertising and other revenues of$0.1 million . Software License For our software license revenues, the$1.3 million increase was primarily due to the timing of contract renewals and shipments to existing customers. The bulk of these licenses for our codec technology are with companies based inChina and, in the near term, it is possible we may see continued pressure in pricing and renewals, and declines in sales. Subscription Services For our subscription services revenues, the$0.2 million decrease was primarily due to continuing declines in our legacy subscription products, which will continue to organically decline. Cost of revenue for the quarter endedMarch 31, 2020 decreased$0.2 million compared with the year-earlier period. This was primarily due to reductions in salaries and benefits. Operating expenses decreased$0.7 million as compared with the year-earlier period, primarily due to reductions in salaries and benefits from headcount reductions, and marketing expenses. Mobile Services Mobile Services segment results of operations were as follows (in thousands): Quarter Ended March 31, 2020 2019 $ Change % Change Revenue$ 6,690 $ 6,939 $ (249) (4) % Cost of revenue 1,696 2,048 (352) (17) % Gross profit 4,994 4,891 103 2 % Gross margin 75 % 70 % Operating expenses 7,588 7,561 27 - % Operating loss$ (2,594) $ (2,670) $ 76 3 % Total Mobile Services revenue decreased by$0.2 million in the quarter endedMarch 31, 2020 compared with the prior-year period. The revenue decrease was due to lower subscription services revenues of$0.4 million , partially offset by a$0.2 million increase in software license revenues, described more fully below. Software License For our software license revenues, the increase was primarily due to revenue from sales of our SAFR product. Subscription Services The decline in our subscription services revenue was due to lower revenue of$0.7 million in our ringback tones business, partially offset by an increase in our messaging platform business of$0.3 million . Cost of revenue decreased by$0.4 million in the quarter endedMarch 31, 2020 compared with the prior-year period, due primarily to reductions in salaries and benefits related to headcount reductions and lower third-party customer services fees. 24 -------------------------------------------------------------------------------- Operating expenses remained flat for the quarter endedMarch 31, 2020 compared with the year-earlier period. An increase in salaries and benefits of$0.5 million was offset by lower marketing and infrastructure expenses. Games Games segment results of operations were as follows (in thousands): Quarter Ended March 31, 2020 2019 $ Change % Change Revenue$ 6,637 $ 5,710 $ 927 16 % Cost of revenue 1,794 1,670 124 7 % Gross profit 4,843 4,040 803 20 % Gross margin 73 % 71 % Operating expenses 4,923 5,037 (114) (2) % Operating income (loss)$ (80) $ (997) $ 917
92 %
Total Games revenue increased$0.9 million for the quarter endedMarch 31, 2020 as compared with the year-earlier period due primarily to increases of$1.0 million in product sales revenues and$0.1 million in advertising and other revenues, partially offset by a$0.2 million decrease in our subscription services revenues, described more fully below. Our Games segment continues to shift its focus toward free-to-play games that offer in-game purchases of virtual goods, the revenue from which is included within product sales, and away from premium mobile games that require a one-time purchase. Subscription Services Our subscription sales decreased$0.2 million as a result of lower subscribers in the first quarter of 2020. Product Sales Our product sales increased$1.0 million as a result of higher in-game purchases of$1.6 million compared to the prior-year period, partially offset by lower sales of games of$0.6 million as we continue to shift toward free-to-play games that offer in-game purchases of virtual goods and away from premium mobile games that require a one-time purchase. Advertising and Other Our advertising and other revenues increased$0.1 million as compared to the prior-year period primarily as a result of offering more in-game advertising within our free-to-play games. Cost of revenue increased$0.1 million in the quarter endedMarch 31, 2020 when compared with the prior-year period due to higher app store fees of$0.3 million , partially offset by lower publisher license and service royalties of$0.2 million . Operating expenses decreased$0.1 million in the quarter endedMarch 31, 2020 when compared with the prior-year period, due to lower professional services fees of$0.3 million and salaries and benefits of$0.3 million , partially offset by higher marketing expenses of$0.5 million . Napster Napster segment results of operations were as follows (in thousands): Quarter Ended March 31, 2020 2019 $ Change % Change Revenue$ 26,323 $ 24,337 $ 1,986 8 % Cost of revenue 20,072 20,396 (324) (2) % Gross profit 6,251 3,941 2,310 59 % Gross margin 24 % 16 % Operating expenses 6,461 5,532 929 17 % Operating loss$ (210) $ (1,591) $ 1,381 87 % As described in Note 5 Acquisitions, we acquired control and began consolidating Napster effectiveJanuary 18, 2019 . Our consolidated results include Napster from the acquisition date forward. Subscription Services Napster's subscription revenues for the quarter endedMarch 31, 2020 increased$2.0 million compared to the same quarter of 2019 due to a$1.3 million increase in direct to consumer revenues and a$0.7 million increase in sales through 25 -------------------------------------------------------------------------------- distribution partners. The increase was primarily due to the inclusion of a full quarter of revenues and an early termination fee from a platform partner in the first quarter of 2020, offset in part by lower subscribers. Direct to consumer revenue was reduced in the first quarter of 2019 by$0.6 million due to a fair value reduction in deferred revenue at the time of acquisition. Cost of revenues primarily consist of content royalties related to music label and publishing rights for the domestic and international music streaming services. These costs can vary materially from period to period due to the significant judgments, assumptions, and estimates of the amounts to be paid. Napster's cost of revenues for the quarter endedMarch 31, 2020 decreased$0.3 million primarily due to lower royalties, partially offset by the inclusion of a full quarter of cost of revenues in the first quarter of 2020 compared to the prior year period. Operating expenses increased by$0.9 million in the quarter endedMarch 31, 2020 primarily due to the inclusion of a full quarter of expenses in the first quarter of 2020 compared to the prior year period. Corporate Corporate results of operations were as follows (in thousands): Quarter Ended March 31, 2020 2019 $ Change % Change Cost of revenue$ 3 $ (77) $ 80 NM
Operating expenses 2,627 4,257 (1,630) (38) %
Operating loss
37 %
Operating expenses decreased by $1.6 million in the quarter ended March 31, 2020
compared with the year-earlier period, primarily due to a reduction in salaries
and benefits in the first quarter of 2020. The overall change was also impacted
by lower Napster acquisition costs of $0.4 million and a favorable change in the
fair value of the Napster contingent consideration liability of $0.3 million , as
further discussed in Note 6 Fair Value Measurements.
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Consolidated Operating Expenses
Our operating expenses consist primarily of salaries and related personnel costs
including stock-based compensation, consulting fees associated with product
development, sales commissions, amortization of certain intangible assets
capitalized in our acquisitions, professional service fees, advertising costs
and restructuring charges. Operating expenses were as follows (in thousands):
Quarter Ended March 31,
2020 2019 $ Change % Change
Research and development $ 8,618 $ 8,833 $ (215) (2) %
Sales and marketing 8,117 8,142 (25) - %
General and administrative 7,113 8,364 (1,251) (15) %
Restructuring and other charges 209 167 42 25 %
Total consolidated operating expenses
(6) %
Research and development expenses decreased by $0.2 million in the quarter ended
March 31, 2020 as compared with the year-earlier period, primarily due to lower
infrastructure expenses of $0.3 million .
Sales and marketing expenses remained flat in the quarter ended March 31, 2020
as compared with the year-earlier period In the first quarter of 2020, a $0.7
million reduction in salaries and benefits was partially offset by a $0.4
million increase in marketing expenses, primarily due to increased efforts
towards free-to-play games, and $0.2 million increase in professional services
fees.
General and administrative expenses decreased by $1.3 million in the quarter
ended March 31, 2020 as compared with the year-earlier period. In the first
quarter of 2020, we incurred expenses of $0.2 million for costs associated with
our acquisition of Napster, compared with $0.8 million in the first quarter of
2019. The overall decrease was also impacted by lower salaries and benefits of
$0.5 million and a favorable change in the fair value of the Napster contingent
consideration liability of $0.3 million , as further discussed in Note 6 Fair
Value Measurements.
Restructuring and other charges consist of costs associated with the ongoing
reorganization of our business operations and expense re-alignment efforts. For
additional details on these charges, see Note 9 Restructuring Charges.
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Other Income (Expense)
Other income (expense), net was as follows (in thousands):
Quarter Ended March 31,
2020 2019 $ Change
Interest expense $ (262) $ (166) $ (96)
Interest income 5 77 (72)Gain (loss) on equity investment, net - 12,338 (12,338) Other income (expense), net
795 127 668
Total other income (expense), net
Interest expense relates toRealNetworks and Napster's notes payable and long-term debt, described in detail in Note 8 Notes Payable and Long-term debt. Gain (loss) on equity investment, net, for the quarter endedMarch 31, 2019 , included a$12.3 million gain related toRealNetworks' consolidation of Napster, as described in more detail in Note 5 Acquisitions. Other income increased$0.7 million primarily due to foreign exchange gains. 28 -------------------------------------------------------------------------------- Income Taxes We recognized income tax expense of$0.1 million and$0.3 million during the quarters endedMarch 31, 2020 and 2019, respectively, related toU.S. and foreign income taxes. As ofMarch 31, 2020 ,RealNetworks has$5.0 million in uncertain tax positions. We currently anticipate the expiration of the statute of limitations within the next twelve months that may decrease the Company's total unrecognized tax benefit by an amount up to$1.3 million . The majority of our tax expense is due to income in our foreign jurisdictions. In addition, we have not benefited from losses in theU.S. and certain foreign jurisdictions in the first quarter of 2020. We generate income in a number of foreign jurisdictions, some of which have higher or lower tax rates relative to theU.S. federal statutory rate. Our tax expense could fluctuate significantly on a quarterly basis to the extent income is less than anticipated in countries with lower statutory tax rates and more than anticipated in countries with higher statutory tax rates. For the quarter endedMarch 31, 2020 , decreases in tax expense from income generated in foreign jurisdictions with lower tax rates in comparison to theU.S. federal statutory rate was offset by increases in tax expense from income generated in foreign jurisdictions having comparable, or higher tax rates in comparison to theU.S. federal statutory rate. The effect of differences in foreign tax rates on the Company's tax expense for the first quarter of 2020 was minimal. We file numerous consolidated and separate income tax returns in theU.S. , including federal, state and local returns, as well as in foreign jurisdictions. With few exceptions, we are no longer subject toUnited States federal income tax examinations for tax years prior to 2013 or state, local or foreign income tax examinations for years prior to 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993. New Accounting Pronouncements See Note 2 Recent Accounting Pronouncements, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q. Liquidity and Capital Resources The following summarizes working capital, cash and cash equivalents, and restricted cash (in thousands): March 31, 2020 December 31, 2019 Working capital$ (37,582) $ (41,601) Cash and cash equivalents 19,046 16,805 Restricted cash equivalents 5,374 5,374 Cash and cash equivalents increased fromDecember 31, 2019 due to the$10.0 million in cash proceeds from the issuance of Series B Preferred Stock, partially offset by our ongoing cash flows used in operating activities, which totaled$4.6 million in the first three months of 2020, and Napster's net repayment of debt of$2.4 million . The following summarizes cash flow activity (in thousands):
Three Months Ended
2020 2019
Cash used in operating activities $ (4,624) $ (9,319)
Cash (used in) provided by investing activities (94) 11,802
Cash provided by financing activities 7,596 1,475
Cash used in operating activities consisted of net income (loss) including
noncontrolling interests adjusted for certain non-cash items such as
depreciation and amortization, stock-based compensation, gain on equity
investment, fair value adjustments to contingent consideration liability and the
effect of changes in certain operating assets and liabilities.
Cash used in operating activities was $4.7 million lower in the three months
ended March 31, 2020 as compared to the same period in 2019. This improvement
was due to our lower operating loss recorded for the three months ended March
31, 2020 compared to the prior year period.
For the three months ended March 31, 2020 , cash used by investing activities
consisted of fixed asset purchases of $0.1 million .
For the three months ended March 31, 2019 , cash provided by investing activities
of $11.8 million was primarily due to our acquisition of Napster on January 18,
2019 . Our initial cash consideration paid at closing of $0.2 million was offset
by the cash, cash equivalents and restricted cash on Napster's balance sheet at
that date. The increase was offset in part by fixed asset purchases of $0.5
million .
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Cash provided by financing activities for the three months ended March 31, 2020
was $7.6 million . This cash inflow was primarily due to the $10.0 million in
cash proceeds from the issuance of Series B Preferred Stock, offset by Napster's
net repayment of debt of $2.4 million . See Note 8 Notes Payable and Long-term
debt and Note 13 Related Party Transactions for additional details.
Cash provided by financing activities for the three months ended March 31, 2019
was $1.5 million . This cash inflow was primarily due to net proceeds from
Napster's borrowing activities of $1.3 million . See Note 8 Notes Payable and
Long-term debt for additional details.
Three customers accounted for more than 10% of trade accounts receivable as of
March 31, 2020 , with the customers accounting for 19%, 13% and 13% each. Three
customers individually comprised more than 10% of trade accounts receivable at
December 31, 2019 , with the customers accounting for 31%, 11% and 10% each. One
customer in our Napster segment accounted for 12% of consolidated revenue, or
$5.4 million , during the three months ended March 31, 2020 . Two customers in our
Napster segment accounted for 14% of consolidated revenue, or $5.5 million , and
12%, or $4.5 million , respectively, during the three months ended March 31,
2019 .
While we currently have no planned significant capital expenditures for the
remainder of 2020 other than those in the ordinary course of business, we do
have contractual commitments for future payments related to office leases.
As discussed in Note 5 Acquisitions, we acquired a controlling interest in
Napster on January 18, 2019 . We paid initial cash consideration of $0.2 million
in the first quarter of 2019 and the remaining $0.8 million of initial cash
consideration is accrued as a current liability. We also have recognized a
liability for the estimated fair value of the contingent consideration related
to the acquisition. As discussed in Note 5 Acquisitions, this fair value amount
was estimated using multiple scenarios for each tranche of contingent
consideration, probability weighting each scenario, and discounting to arrive at
an estimated fair value. This fair value calculation is directly impacted by the
total estimated enterprise value of Napster. The contingent consideration will
be adjusted quarterly to fair value through earnings, and as of March 31, 2020 ,
the estimated fair value of the contingent consideration was $12.3 million , with
$5.4 million recognized as a current liability and $6.9 million as a long-term
liability. Any future amounts RealNetworks pays for contingent consideration
could vary materially from the estimated amounts we have accrued as of March 31,
2020 .
In August 2019 , RealNetworks and Napster entered into the Loan Agreement with a
third-party financial institution. Under the terms of the Agreement, which are
further described in Note 8 Notes Payable and Long-term debt, the bank extended
a two-year revolving line of credit not to exceed $10.0 million in the
aggregate. As of March 31, 2020 , $3.9 million had been drawn on the revolving
line of credit, and any further advances will be used for working capital and
general corporate purposes.
In April 2020 , RealNetworks issued a promissory note in the principal amount of
$2.9 million pursuant to the Paycheck Protection Program of the CARES Act. In
May 2020 , Napster issued its own promissory note in the principal amount of $1.7
million pursuant to the program. Each note, as further described in Note 14
Subsequent Events, has a maturity of 2 years, an interest rate of 1.0%, and is
eligible for forgiveness pursuant to the terms of the program. We cannot provide
assurance, however, that all or any portion of the principal and interest on
these loans will be forgiven.
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. 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. However, 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 ensuing 12 months and, therefore, 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 are accentuated by the effects of the current pandemic and
related financial crisis. Accordingly, there can be no assurance that our plans
can be effectively implemented and, therefore, that the conditions can be
effectively mitigated.
Napster will also require outside funding in order to meet its anticipated cash
needs over the next 12 months. RealNetworks has no contractual or implied legal
obligation to provide funding or other financial support to Napster, and any
funding to Napster under the Loan Agreement must be effectuated by RealNetworks .
Significant financial distress at Napster could have negative implications in
our assessment of goodwill and long-lived assets on RealNetworks' balance sheet.
In the future, we may seek to raise additional funds through public or private
equity financing or through other sources. Such sources of funding may or may
not be available to us on commercially reasonable terms. The sale of additional
equity
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securities could result in dilution to our shareholders. In addition, in the
future, we may enter into cash or stock acquisition transactions or other
strategic transactions that could reduce cash available to fund our operations
or result in dilution to shareholders.
Our cash equivalents consist of money market funds.
We conduct our operations primarily in four functional currencies: the U.S.
dollar, Brazilian real, the euro and the Chinese yuan. We currently do not
actively hedge our foreign currency exposures and are therefore subject to the
risk of exchange rate fluctuations. We are exposed to foreign exchange rate
fluctuations as the financial results of foreign subsidiaries are translated
into U.S. dollars in consolidation. Our exposure to foreign exchange rate
fluctuations also arises from intercompany payables and receivables to and from
our foreign subsidiaries.
As of March 31, 2020 , approximately $11.5 million of the $19.0 million of cash
and cash equivalents was held by our foreign subsidiaries outside the U.S.
Off-Balance Sheet Arrangements
We do not maintain accruals associated with certain guarantees, as discussed in
Note 19 Guarantees, to the consolidated financial statements included in Item 8
of Part II of our 2019 10-K. Thus, these guarantee obligations constitute
off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Our critical accounting estimates are discussed in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of our annual report on Form 10-K for the year ended
December 31, 2019 .
Due to the coronavirus pandemic, there has been uncertainty and disruption in
the global economy and financial markets. We are not aware of any specific event
or circumstance that would require updates to our estimates or judgments or
require us to revise the carrying value of our assets or liabilities. These
estimates may change as new events occur and additional information is obtained.
Actual results could differ materially from these estimates under different
assumptions or conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk involves forward-looking
statements. All statements that do not relate to matters of historical fact
should be considered forward-looking statements. Actual results could differ
materially from those projected in any forward-looking statements.
Interest Rate Risk. Our exposure to interest rate risk from changes in market
interest rates relates primarily to RealNetworks and Napster's notes payable and
long-term debt. RealNetworks and Napster's borrowing arrangements have floating
rate interest payments and thus have a degree of interest rate risk, if interest
rates increase. Based on the outstanding notes payable and long-term debt as of
March 31, 2020 , a hypothetical 10% increase/decrease in interest rates would not
increase/decrease our annual interest expense or cash flows by more than a
nominal amount.
Foreign Currency Risk. We conduct business internationally in several currencies
and thus are exposed to adverse movements in foreign currency exchange rates.
Our exposure to foreign exchange rate fluctuations arise in part from:
(1) translation of the financial results of foreign subsidiaries into U.S.
dollars in consolidation; (2) the remeasurement of non-functional currency
assets, liabilities and intercompany balances into U.S. dollars for financial
reporting purposes; and (3) non-U.S. dollar denominated sales to foreign
customers.
Our foreign currency risk management program reduces, but does not entirely
eliminate, the impact of currency exchange rate movements.
We have cash balances denominated in foreign currencies which are subject to
foreign currency fluctuation risk. The majority of our foreign currency
denominated cash is held in euro, Chinese yuan and Japanese yen. A hypothetical
10% increase or decrease in those currencies relative to the U.S. dollar as of
March 31, 2020 would not result in a material impact on our financial position,
results of operations or cash flows.
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