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 2019 acquisition of a controlling interest in Napster and subsequent sale of our entire Napster interest inDecember 2020 , 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, and the availability of funding or other resources; •the effects ofU.S. and foreign 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 BusinessRealNetworks invented the streaming media category in 1995 and continues to build on its foundation of digital media expertise and innovation. In recent years, we have leveraged our technical expertise and access to proprietary data sources to develop a new generation of AI-based products and solutions. These products and solutions are designed to help customers be safer and smarter, and for their companies to be more efficient and more successful. The main two products and key investment initiatives in our AI portfolio are SAFR, our AI-based computer vision platform, and Kontxt, our natural language processing-based (NLP) message classification and analysis product. SAFR leverages the power of AI to enhance security and convenience for our customers around the globe with fast, accurate, low-biased face recognition and additional person- and object-based AI capabilities. Kontxt is based on AI NLP analysis, allowing our customers to analyze and classify multiple billions of messages monthly in real time in order to protect end consumers from spam and fraud. Our focus on AI-based products and our data science resources allows us to be agile, continuously evolving, and rapidly creating new solutions to solve customers' problems. In addition to our AI solutions, our consumer products also feature GameHouse Original Stories, a unique IP portfolio of free-to-play and subscription mobile games, used by millions of players. Our consumer products also include ringback tones, which we sell to consumers through mobile operators, and the renowned RealPlayer, which introduced streaming to the world in 1995 and today provides millions of people worldwide a powerful way to stream, download, store, organize, and experience the rapidly expanding universe of digital media content. We also create video compression and enhancement technology, which we primarily license to OEMs, including manufacturers of mobile devices, smart TVs, and set-top boxes. Our Segments We manage our business and report revenue and operating income (loss) in three segments: (1) Consumer Media (2) Mobile Services, and (3) Games. Within our Consumer Media segment, revenue is derived from the software licensing of our video compression and enhancement, or codec, technologies, including primarily from our prior-generation codec RealMedia Variable Bitrate, or RMVB, and to a lesser extent our newer codec 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 AI-based growth initiatives, SAFR and Kontxt. 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.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. COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of the 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 caused significant turmoil to the global economy and financial markets. Similar to other companies, from the onset of the pandemic, we implemented measures to support the health and well-being of our employees, customers, partners and communities, including working remotely and operating our businesses in a fundamentally different way. We reevaluated our operating plans, causing some significant pivots in our growth initiatives, while also reducing costs and reallocating resources. The COVID-19 pandemic and the resultant economic instability and financial market turmoil added complexity, uncertainty and risk to nearly all aspects of our business. We continue to assess our plans as the pandemic environment evolves 22 -------------------------------------------------------------------------------- and strive to operate our business as efficiently as possible. We are unable to fully predict the impacts that the COVID-19 pandemic, including the emergence of variants, such as the delta variant, will continue to have on our results from operations, financial condition, liquidity and cash flows for the remainder of fiscal year 2021 or beyond, due to the numerous uncertainties, including the duration and severity of the pandemic and ongoing containment measures. We will continue to monitor and evaluate the effects to our businesses and adjust our plans as needed. Financial Results As ofSeptember 30, 2021 , we had$29.0 million in unrestricted cash and cash equivalents, compared to$23.9 million as ofDecember 31, 2020 . The 2021 increase in cash and cash equivalents compared to the prior year end amount was primarily due to the receipt of$20.1 million in net proceeds from theApril 2021 underwritten public offering of 8,250,000 shares of our common stock, partially offset by ongoing cash flows used in operating activities, which totaled$11.4 million for the first nine months of 2021. We also used$2.5 million of cash and transferred 47.8 million ordinary shares ofNapster Group , valued at theDecember 2020 Napster sale closing date, to settle our contingent consideration liability for ourJanuary 2019 purchase of Napster. OnJune 19, 2021 , the Company received notice from our participating bank that our request for forgiveness of the principal and interest on the Paycheck Protection Program (PPP) loan was approved, and we recognized a non-cash gain of$2.9 million within Other income (expense) on the condensed consolidated statement of operations in the second quarter of 2021. OnJune 30, 2021 ,RealNetworks, Inc. deconsolidatedScener Inc. , previously a consolidated subsidiary ofRealNetworks , and recognized a non-cash gain of$2.0 million within Other income (expense), net on the condensed consolidated statement of operations in the second quarter of 2021. The following discussion reflectsRealNetworks' results from continuing operations. Condensed consolidated results were as follows (in thousands): Quarter Ended September 30, Nine Months Ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Total revenue$ 14,332 $ 16,554 $ (2,222) (13) %$ 44,781 $ 50,461 $ (5,680) (11) % Cost of revenue 3,119 4,062 (943) (23) % 10,370 12,429 (2,059) (17) % Gross profit 11,213 12,492 (1,279) (10) % 34,411 38,032 (3,621) (10) % Gross margin 78 % 75 % 77 % 75 % Operating expenses 17,672 15,342 2,330 15 % 52,759 48,504 4,255 9 % Operating loss$ (6,459) $ (2,850) $ (3,609) (127) %$ (18,348) $ (10,472) $ (7,876) (75) % In the third quarter of 2021, our total consolidated revenue decreased$2.2 million as compared with the year-earlier period. The decrease was due to lower revenues in our Games and Mobile Services segments of$1.8 million and$0.6 million , respectively. Partially offsetting these decreases was increased revenue from our Consumer Media segment of$0.2 million as compared to the year-earlier period. Cost of revenue decreased by$0.9 million for the quarter endedSeptember 30, 2021 as compared with the year-earlier period, due to decreases in our Games, Mobile Services, and Consumer Media segments of$0.5 million ,$0.2 million , and$0.2 million , respectively. Operating expenses increased by$2.3 million in the quarter endedSeptember 30, 2021 as compared with the year-earlier period. The increase was primarily due to higher stock-based compensation and restructuring charges of$2.1 million and$0.7 million , respectively, partially offset by lower salaries and people related expenses of$0.6 million . For the nine months endedSeptember 30, 2021 , our total consolidated revenue decreased$5.7 million as compared with the year-earlier period. The decrease was due to lower revenues in our Games, Mobile Services, and Consumer Media segments of$3.2 million ,$1.4 million and$1.1 million , respectively. Cost of revenue decreased by$2.1 million for the nine months endedSeptember 30, 2021 as compared with the year-earlier period, due to decreases in our Games, Mobile Services, and Consumer Media segments of$1.1 million ,$0.7 million , and$0.3 million , respectively. Operating expenses increased by$4.3 million in the nine months endedSeptember 30, 2021 as compared with the year-earlier period. The increase was due primarily to higher restructuring charges of$3.8 million , higher stock-based compensation of$2.7 million , and higher professional fees of$1.0 million . Partially offsetting these increases were lower salaries and people related costs of$1.5 million , lower marketing expenses of$0.6 million , and a higher benefit related to the fair value adjustment of the contingent consideration liability$0.8 million . See Note 6. Fair Value Measurements for more information on the contingent consideration liability, which was settled in the second quarter of 2021. 23 -------------------------------------------------------------------------------- Segment Operating Results Consumer Media Consumer Media segment results of operations were as follows (in thousands): Quarter Ended September 30, Nine Months Ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Revenue$ 2,763 $ 2,543 $ 220 9 %$ 8,133 $ 9,197 $ (1,064) (12) % Cost of revenue 418 593 (175) (30) % 1,393 1,723 (330) (19) % Gross profit 2,345 1,950 395 20 % 6,740 7,474 (734) (10) % Gross margin 85 % 77 % 83 % 81 % Operating expenses 1,495 2,092 (597) (29) % 6,028 6,754 (726) (11) % Operating income (loss)$ 850 $ (142) $ 992 NM$ 712 $ 720 $ (8) (1) % Total Consumer Media revenue for the quarter endedSeptember 30, 2021 increased$0.2 million as compared to the same quarter in 2020. The increase was primarily due to higher software license and product sales revenues, partially offset by lower advertising and other revenues and lower subscription services revenue. Advertising and other revenue in the quarter endedSeptember 30, 2020 included the non-recurring recognition of previously deferred third-party software product distribution revenue in the amount of$0.6 million . Software License In the quarter endedSeptember 30, 2021 , the increase in software license revenue of$0.9 million was due primarily to the timing of contract renewals and shipments to existing customers. Subscription Services For our subscription services revenues, the$0.1 million decrease was primarily due to declines in our long-standing subscription products, which we expect to continue. Product Sales The increase in product sales of$0.1 million was primarily due to higher RealPlayer Plus sales during the third quarter of 2021. Cost of revenue for the three months endedSeptember 30, 2021 decreased$0.2 million compared with the year-earlier period. This was primarily due to reductions in salaries and people related expenses due to lower headcount. Operating expenses decreased$0.6 million as compared with the year-earlier period, primarily due to Scener costs incurred in the year-earlier period. Scener was deconsolidated fromRealNetworks, Inc. as ofJune 30, 2021 . Total Consumer Media revenue for the nine months endedSeptember 30, 2021 decreased$1.1 million as compared to the prior year due primarily to lower advertising and Other revenues and lower subscription services revenue. This was partially offset by higher product sales. Advertising and other revenue in the nine months endedSeptember 30, 2020 included the non-recurring recognition of previously deferred third-party software product distribution revenue in the amount of$0.6 million . Software License For the nine months endedSeptember 30, 2021 , the decrease in software license revenue of$0.1 million was due primarily to lower contract renewals as compared with the year-earlier period, partially offset by higher shipments to existing customers of approximately$0.5 million . Subscription Services For our subscription services revenue, the$0.3 million decrease was primarily due to declines in our long-standing subscription products, which we expect to continue. Product Sales The increase in product sales of$0.4 million was primarily due to higher RealPlayer Plus sales during the first nine months of 2021. Cost of revenue for the nine months endedSeptember 30, 2021 decreased$0.3 million compared with the year-earlier period. This was primarily due to reductions in salaries and people related expenses due to lower headcount. Operating expenses decreased$0.7 million as compared with the year-earlier period, primarily due to reductions in salaries and people related expenses from headcount reductions and lower professional service fees. 24 -------------------------------------------------------------------------------- Mobile Services Mobile Services segment results of operations were as follows (in thousands): Quarter Ended September 30, Nine Months Ended September 30, 2021 2020 $ Change % Change 2021 2020 $
Change % Change Revenue$ 5,772 $ 6,400 $ (628) (10) %$ 18,108 $ 19,551 $ (1,443) (7) % Cost of revenue 1,282 1,511 (229) (15) % 4,291 4,989 (698) (14) % Gross profit 4,490 4,889 (399) (8) % 13,817 14,562 (745) (5) % Gross margin 78 % 76 % 76 % 74 % Operating expenses 5,890 5,577 313 6 % 18,367 18,847 (480) (3) % Operating loss$ (1,400) $ (688) $ (712) (103) %$ (4,550) $ (4,285) $ (265) (6) % Total Mobile Services revenue decreased by$0.6 million in the quarter endedSeptember 30, 2021 compared with the prior-year period. The revenue decrease was primarily due to lower subscription services revenues of$1.1 million , partially offset by an increase in software license revenues of$0.5 million . Software License For our software license revenue, the increase in revenue for the quarter endedSeptember 30, 2021 as compared to the prior-year period was due primarily to higher sales of our SAFR product of$0.5 million . Subscription Services The decline in our subscription service revenue of$1.1 million in the quarter endedSeptember 30, 2021 as compared to the prior-year period is due primarily to lower revenues from our ringback tones business of$1.3 million , resulting from terminated contracts and lower subscribers. Partially offsetting this decline was higher revenue from our messaging platform business of$0.2 million . Cost of revenue decreased by$0.2 million in the quarter endedSeptember 30, 2021 compared with the prior-year period, due primarily to reductions in salaries and people related expenses due to lower headcount. Operating expenses increased by$0.3 million for the quarter endedSeptember 30, 2021 compared with the year-earlier period due to higher professional fees of$0.6 million , driven by AI-based growth initiatives, partially offset by lower salaries and people related expenses due to lower headcount of$0.4 million . Total Mobile Services revenue decreased by$1.4 million in the nine months endedSeptember 30, 2021 compared with the prior-year period. The revenue decrease was primarily due to lower subscription services revenue of$3.5 million , partially offset by an increase in software license revenues of$2.1 million . Software License For our software license revenue, the increase in revenue for the nine months endedSeptember 30, 2021 as compared to the prior-year period was due primarily to higher sales of our SAFR product of$2.1 million . Subscription Services The decline in our subscription service revenue of$3.5 million in the nine months endedSeptember 30, 2021 as compared to the prior-year period is due primarily to lower revenues from our ringback tones business of$3.3 million and messaging platform business of$0.2 million , resulting from terminated contracts and lower subscribers. Cost of revenue decreased by$0.7 million in the nine months endedSeptember 30, 2021 compared with the prior-year period, due primarily to lower amortization of deferred costs and lower people related expenses due to lower headcount. Operating expenses decreased$0.5 million for the nine months endedSeptember 30, 2021 compared with the year-earlier period due to reductions in salaries and people related expenses of$1.5 million and lower infrastructure costs of$0.4 million . These decreases were partially offset by higher professional fees of$1.5 million , primarily from AI-based growth initiatives. 25 --------------------------------------------------------------------------------
Games
Games segment results of operations were as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Revenue $ 5,797 $ 7,611 $ (1,814) (24) % $ 18,540 $ 21,713 $ (3,173) (15) %
Cost of revenue 1,414 1,955 (541) (28) % 4,671 5,707 (1,036) (18) %
Gross profit 4,383 5,656 (1,273) (23) % 13,869 16,006 (2,137) (13) %
Gross margin 76 % 74 % 75 % 74 %
Operating expenses 4,844 5,152 (308) (6) % 14,791 15,051 (260) (2) %
Operating income (loss) $ (461) $ 504 $ (965) NM $ (922) $ 955 $ (1,877) NM
Total Games revenue decreased by $1.8 million for the quarter ended September
30, 2021 as compared with the year-earlier period due primarily to a decrease of
$1.3 million in product sales revenue, lower subscription service revenue of
$0.3 million and lower advertising revenues.
Subscription Services
Our subscription sales decreased $0.3 million as a result of fewer subscribers
in the third quarter of 2021.
Product Sales
Our product sales decreased $1.3 million as a result of lower in-game purchases
of $1.2 million and sales of games of $0.1 million compared to the prior-year
period.
Cost of revenue decreased $0.5 million in the quarter ended September 30, 2021
when compared to the prior-year period due to lower app store fees and publisher
license and service royalties.
Operating expenses decreased $0.3 million in the quarter ended September 30,
2021 when compared with the prior-year period due primarily to lower marketing
expenses.
Total Games revenue decreased $3.2 million for the nine months ended
September 30, 2021 as compared with the year-earlier period due to lower product
sales revenue of $2.0 million , a decrease of $0.9 million in subscription
services revenue, and lower advertising revenue.
Subscription Services
Our subscription sales decreased $0.9 million as a result of fewer subscribers
during the nine months ended September 30, 2021 .
Product Sales
Our product sales decreased $2.0 million as a result of lower in-game purchases
of $1.4 million and lower sales of games of $0.6 million compared to the
prior-year period.
Cost of revenue decreased $1.0 million in the nine months ended September 30,
2021 when compared to the prior year period due to lower app store fees and
publisher license and service royalties.
Operating expenses decreased $0.3 million in the nine months ended September 30,
2021 when compared with the prior-year period due primarily to lower marketing
expenses of $0.6 million , partially offset by higher professional fees of $0.3
million .
Corporate
Corporate results of operations were as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Cost of revenue $ 5 $ 3 $ 2 67 % $ 15 $ 10 $ 5 50 %
Operating expenses 5,443 2,521 2,922 116 % 13,573 7,852 5,721 73 %
Operating loss $ (5,448) $ (2,524) $ (2,924) (116) % $ (13,588) $ (7,862) $ (5,726) (73) %
Operating expenses increased by $2.9 million in the quarter ended September 30,
2021 compared with the year-earlier period, primarily due to higher stock-based
compensation and restructuring costs of $2.1 and $0.7 million , respectively.
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Operating expenses increased by $5.7 million for the nine months ended
September 30, 2021 compared with the year-earlier period primarily due to higher
restructuring charges of $3.8 million , higher stock-based compensation of $2.7
million , and higher salaries and people related costs of $0.7 million . These
increases were partially offset by a $0.8 million higher benefit in 2021 related
to the fair value adjustment of the contingent consideration liability, as
further discussed in Note 6. Fair Value Measurements, and lower professional
fees of $0.5 million .
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, professional service fees, advertising costs,
changes in the fair value of the contingent consideration liability, and
restructuring charges. Operating expenses were as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Research and development $ 5,250 $ 5,781 $ (531) (9) % $ 17,818 $ 18,375 $ (557) (3) %
Sales and marketing 7,177 5,130 2,047 40 % 17,573 15,969 1,604 10 %
General and administrative 4,228 4,124 104 3 % 13,502 13,263 239 2 %
Fair value adjustments to
contingent consideration liability - - - - % (1,040) (200) (840) 420 %
Restructuring and other charges 1,017 307 710 231 % 4,906 1,097 3,809 347 %
Total consolidated operating
expenses $ 17,672 $ 15,342 $ 2,330 15 % $ 52,759 $ 48,504 $ 4,255 9 %
Research and development expenses decreased by $0.5 million in the quarter ended
September 30, 2021 as compared with the year-earlier period, primarily due to a
reduction in salaries and people related costs.
Research and development expenses decreased by $0.6 million for the nine months
ended September 30, 2021 as compared with the year-earlier period due to a
reduction in salaries and people related costs of $1.5 million , partially offset
by higher professional service fees of $0.6 million and higher infrastructure
costs of $0.3 million .
Sales and marketing expenses increased by $2.0 million in the quarter ended
September 30, 2021 as compared with the year-earlier period, primarily due to
higher stock-based compensation.
Sales and marketing expenses increased $1.6 million for the nine months ended
September 30, 2021 as compared with the year-earlier period due to higher
stock-based compensation of $2.2 million and an increase in professional service
fees of $0.8 million . Partially offsetting these increases were lower marketing
expenses of $0.6 million , lower infrastructure and other expenses of $0.4
million , and a $0.4 million reduction in salaries and people related costs.
General and administrative expenses increased by $0.1 million in the quarter
ended September 30, 2021 as compared with the year-earlier period, primarily due
to higher salaries and people related costs.
General and administrative expenses increased by $0.2 million for the nine
months ended September 30, 2021 as compared with the year-earlier period,
primarily due to higher stock-based compensation and salaries and people related
costs of $0.5 million and $0.4 million , respectively, partially offset by lower
professional services expenses of $0.4 million and lower infrastructure costs of
$0.4 million .
The fair value adjustments to the contingent consideration liability changed by
$0.8 million for the nine months ended September 30, 2021 as compared with the
same period in 2020. This liability was settled in the second quarter of 2021.
See Note 6. Fair Value Measurements for additional information.
Restructuring and other charges consist of costs associated with the ongoing
reorganization of our business operations and expense re-alignment efforts and
the $2.5 million of lease impairment charges incurred in the first quarter of
2021 for office space previously vacated. For additional details on these
charges, see Note 10. Restructuring Charges.
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Other Income (Expense)
Other income (expense), net was as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2021 2020 $ Change 2021 2020 $ Change
Interest expense $ (27) $ (7) $ (20) $ (146) $ (12) $ (134)
Interest income 7 6 1 27 31 (4)
Loss on equity and other investments, net (1,229) (37) (1,192) (6,070) (90) (5,980)
Gain on forgiveness of Paycheck Protection Program loan - - - 2,897 - 2,897 Other income (expense), net 46 (104) 150 2,066 63 2,003 Total other expense, net$ (1,203) $ (142) $ (1,061) $ (1,226) $ (8) $ (1,218) For the quarter and nine months endedSeptember 30, 2021 , the Loss on equity and other investments, net, of$1.2 million and$6.1 million , respectively, primarily reflects unrealized losses on equity securities. We acquired these shares from the sale of Napster inDecember 2020 , as further discussed in Note 5. Dispositions. During the second quarter of 2021, the Company received notice from our participating bank that our request for forgiveness of the principal and interest on our PPP loan was approved, and we recognized a non-cash gain of$2.9 million within Other income (expense) on the condensed consolidated statement of operations. OnJune 30, 2021 ,RealNetworks, Inc. deconsolidatedScener Inc. , previously a consolidated subsidiary ofRealNetworks , and recognized a non-cash gain of$2.0 million within Other income (expense) on the condensed consolidated statement of operations. The remaining fluctuations in Other income (expense), net primarily relate to foreign exchange gains and losses. Income Taxes We recognized income tax expense of$0.1 million during the nine months endedSeptember 30, 2021 related toU.S. and foreign income taxes. For the quarter and nine months endedSeptember 30, 2020 , income tax expense was$0.3 million and$0.6 million , respectively. As ofSeptember 30, 2021 ,RealNetworks has$0.7 million in uncertain tax positions. 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 as of the third quarter of 2021. 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 and nine months endedSeptember 30, 2021 , 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 third quarter and nine months endedSeptember 30, 2021 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): September 30, 2021 December 31, 2020 Working capital, excluding cash and cash equivalents $ 289 $ 1,148 Cash and cash equivalents 28,990 23,940 Restricted cash equivalents 1,630 1,630 Cash and cash equivalents increased fromDecember 31, 2020 due primarily to the$20.1 million of net proceeds from theApril 2021 equity offering. Partially offsetting the increase was cash used in operating activities, which totaled 28 --------------------------------------------------------------------------------$11.4 million in the first nine months of 2021, and the$2.5 million cash payment for settlement of the contingent consideration liability. As ofSeptember 30, 2021 , approximately$6.9 million of the$29.0 million of cash and cash equivalents was held by our foreign subsidiaries outside theU.S. The following summarizes cash flow activity from continuing operations (in thousands): Nine Months Ended September 30, 2021 2020 Cash used in operating activities$ (11,416) $ (10,033) Cash used in investing activities (1,116)
(261)
Cash provided by financing activities 17,962
14,970
Cash used in operating activities consisted of net loss from continuing operations adjusted for certain non-cash items such as depreciation and amortization, stock-based compensation, loss on equity and other investments, fair value adjustments to contingent consideration liability, loss on impairment of operating lease assets, foreign currency gains, and the effect of changes in certain operating assets and liabilities. Cash used in operating activities from continuing operations was$1.4 million higher in the nine months endedSeptember 30, 2021 as compared to the same period in 2020, primarily due to our higher operating loss recorded for the nine months endedSeptember 30, 2021 compared to the prior year period. In each of the nine months endedSeptember 30, 2021 and 2020, cash used by investing activities consisted of fixed asset purchases of$0.3 million . Also, for the nine months endedSeptember 30, 2021 , cash used by investing activities included the impact of the deconsolidation of Scener. Cash provided by financing activities for the nine months endedSeptember 30, 2021 was$18.0 million . This cash inflow was due to the net proceeds from the equity offering of$20.1 million and$0.4 million issuance of common stock related to exercising of stock options, net of tax payments for shares withheld upon vesting of restricted stock, partially offset by the$2.5 million cash payment for settlement of the contingent consideration liability. Cash provided by financing activities for the nine months endedSeptember 30, 2020 was$15.0 million . This cash inflow was due to the$10.0 million in cash proceeds from the first quarter 2020 issuance of Series B Preferred Stock and$2.9 million in proceeds from the PPP loan. As discussed in Note 8. Debt, we received forgiveness of our obligations for the PPP loan in the second quarter of 2021. Additionally, Scener, a subsidiary ofRealNetworks , received$2.1 million in funds in the third quarter of 2020 from the issuance of SAFE Notes. See Note 6. Fair Value Measurements for more information on the SAFE Notes. Two customers accounted for more than 10% of trade accounts receivable as ofSeptember 30, 2021 , with the customers accounting for 24% and 13% each. Two customers accounted for more than 10% of trade accounts receivable atDecember 31, 2020 , with the customers accounting for 19% and 10% each. Two customers accounted for 30% of consolidated revenue, or$13.5 million , during the nine months endedSeptember 30, 2021 . Two customers accounted for 26% of consolidated revenue, or$13.3 million , during the nine months endedSeptember 30, 2020 . While we currently have no planned significant capital expenditures for the remainder of 2021 other than those in the ordinary course of business, we do have contractual commitments for future payments related to office leases. During the second quarter of 2021, we settled the contingent consideration associated with the Napster interests acquired byRealNetworks inJanuary 2019 . The payment included cash of$2.5 million and the transfer of 47.8 million ordinary shares ofNapster Group , valued at theDecember 2020 Napster sale closing date.RealNetworks is a party to a Loan Agreement with a third-party financial institution for a revolving line of credit, as discussed in Note 8. Debt. Under the Agreement, as amended, borrowings may not exceed$6.5 million and are reduced by a$1.0 million standby letter of credit entered into with the bank in connection with certain lease agreements. The borrowing base for the Revolver is comprised of eligible accounts receivable and direct to consumer deposits forRealNetworks only. AtSeptember 30, 2021 , we had no outstanding draws on the revolving line of credit. InApril 2021 , we completed an underwritten public offering of 8,250,000 shares of our common stock at a price to the public of$2.70 per share. The aggregate gross proceeds from the offering were$22.3 million . Of these proceeds, we received$20.1 million , after deducting underwriting discounts, commissions, and legal and other fees. The proceeds are expected to be used for general corporate purposes and working capital. In the near term, we expect to see continued net negative cash flow from operating activities. We believe that our unrestricted current cash and cash equivalents and unused capacity on our revolving line of credit will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Notwithstanding this 29 -------------------------------------------------------------------------------- availability of cash and access to additional funding, management has considered and will continue to evaluate implementation of a variety of cash conservation measures. 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 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. Off-Balance Sheet Arrangements We do not maintain accruals associated with certain guarantees, as discussed in Note 17 Guarantees, to the consolidated financial statements included in Item 8 of Part II of our 2020 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 endedDecember 31, 2020 . 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 toRealNetworks' revolving line of credit.RealNetworks' borrowing arrangement has floating rate interest payments and thus has a degree of interest rate risk, if interest rates increase. Based on the available balance, 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. Investment Risk. As ofSeptember 30, 2021 , we had an equity investment in common shares of a foreign publicly traded technology company. These common shares were acquired as a portion of the proceeds received in the sale of Napster. The equity investment is subject to fluctuation in the market price as well as being exposed to changes in foreign currency exchange rates. A hypothetical 10% increase/decrease in the common share price and foreign currency exchange rate would result in an increase/decrease of the value of the equity investment of approximately$0.6 million . 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 intoU.S. dollars in consolidation; (2) the remeasurement of non-functional currency assets, liabilities and intercompany balances intoU.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. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the euro. We currently do not actively hedge our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations. A hypothetical 10% increase or decrease in those currencies relative to theU.S. dollar as ofSeptember 30, 2021 would not result in a material impact on our financial position, results of operations or cash flows. 30
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