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MarketScreener Homepage  >  Equities  >  Nasdaq  >  RealNetworks, Inc.    RNWK

REALNETWORKS, INC.

(RNWK)
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REALNETWORKS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/06/2020 | 08:57am EST
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 about RealNetworks' 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 our January 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 of U.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 by RealNetworks from
time to time with the Securities and Exchange Commission, particularly the
Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
                                       21
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Overview

Our Segments
RealNetworks 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
generated a modest 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 on January 18, 2019 bringing our ownership of Napster's
outstanding stock to 84%, thus giving us 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
In March 2020, the World Health Organization declared the outbreak of the novel
coronavirus that causes COVID-19 to be a global pandemic. As the virus spread
throughout the U.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.
As the pandemic and containment measures generally evolved throughout the first
half of 2020, we have 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,
                                       22
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including the 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.
Recent Developments
In the second quarter of 2020, we regained compliance with the Nasdaq minimum
bid price requirement of $1.00 per share, after receiving notice of
non-compliance in April 2020.
Financial Results
As of June 30, 2020, we had $19.7 million in unrestricted cash and cash
equivalents, compared to $16.8 million as of December 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 first quarter of 2020
issuance of Series B Preferred Stock and the proceeds from promissory notes
issued in the second quarter of 2020 pursuant to the PPP of the CARES Act, with
RealNetworks and Napster receiving $2.9 million and $1.7 million, respectively.
These increases were partially offset by our ongoing cash flows used in
operating activities, which totaled $8.6 million in the first six months of
2020, and Napster's net repayment of debt of $2.8 million under their
Non-Recourse Purchase of Eligible Receivables Agreement (NRP Agreement).
Condensed consolidated results of operations were as follows (in thousands):
                                                Quarter Ended June 30,                                                                                        Six months ended June 30,
                            2020              2019            $ Change            % Change             2020               2019            $ Change            % Change
Total revenue            $ 40,424$ 44,248$ (3,824)                  (9) %       $ 83,569$  83,720$   (151)                   -  %
Cost of revenue            23,033            27,282            (4,249)                 (16) %         47,209             52,152            (4,943)                  (9) %
Gross profit               17,391            16,966               425                    3  %         36,360             31,568             4,792                   15  %
Gross margin                   43  %             38  %                                                    44  %              38  %

Operating expenses         22,290            26,357            (4,067)                 (15) %         46,347             51,863            (5,516)                 (11) %
Operating loss           $ (4,899)$ (9,391)$  4,492                   48  %       $ (9,987)$ (20,295)$ 10,308                   51  %


In the second quarter of 2020, our total consolidated revenue decreased $3.8
million as compared with the year-earlier period. For the second quarter of 2020
compared to the prior year period, Napster segment revenues decreased by $5.2
million, and our Mobile Services segment revenues decreased by $0.5 million.
These decreases were partially offset by increases in revenues in our Consumer
Media segment of $0.5 million and in our Games segment of $1.4 million. See
below for further discussion of our segment results.
Cost of revenue decreased by $4.2 million for the quarter ended June 30, 2020 as
compared with the year-earlier period, primarily due to decreases of $0.1
million in our Mobile Services segment, $4.3 million in the Napster segment, and
$0.3 million in our Consumer Media segment, partially offset by a $0.3 million
increase in our Games segment.
Operating expenses decreased by $4.1 million in the quarter ended June 30, 2020
as compared with the year-earlier period, primarily due to reductions of $3.3
million in salaries and benefits, marketing, and infrastructure expenses. Also,
in the second quarter of 2019, we incurred expenses of $0.4 million for costs
associated with our acquisition of Napster.
For the six months ended June 30, 2020, our total consolidated revenue decreased
$0.2 million as compared with the year-earlier period. Napster segment revenues
decreased by $3.3 million. Napster's results are included in our consolidated
results for the six months ended June 30, 2020, whereas the six months ended
June 30, 2019 includes Napster from the acquisition date of January 18, 2019
through the end of the period. Our Consumer Media segment revenues increased by
$1.5 million and our Games segment revenues increased by $2.3 million, partially
offset by the revenue decline in our Mobile Services segment of $0.8 million.
See below for further discussion of our segment results.
Cost of revenue decreased by $4.9 million for the six months ended June 30, 2020
as compared with the year-earlier period, primarily due to decreases of $0.4
million in our Mobile Services segment, $4.6 million in Napster segment and $0.5
million in our Consumer Media segment, partially offset by a $0.4 million
increase in our Games segment.
Operating expenses decreased by $5.5 million for the six months ended June 30,
2020 as compared with the year-earlier period, primarily due to the reductions
of $4.4 million in salaries, benefits and infrastructure expenses. In the first
six months of 2020, we incurred expenses of $0.2 million for costs associated
with our acquisition of Napster, compared with $1.0 million in the first six
months of 2019.
                                       23
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Segment Operating Results
Consumer Media
Consumer Media segment results of operations were as follows (in thousands):
                                         Quarter Ended June 30,                                                                                                                       Six Months Ended June 30,

                                 2020                               2019                  $ Change           % Change             2020             2019            $ Change           % Change
Revenue                     $    3,159$  2,620$   539                   21  %       $ 6,654$  5,106$ 1,548                   30  %
Cost of revenue                    519                                803                   (284)                 (35) %         1,130             1,636             (506)                 (31) %
Gross profit                     2,640                              1,817                    823                   45  %         5,524             3,470            2,054                   59  %
Gross margin                        84   %                             69  %                                                        83  %             68  %
Operating expenses               2,204                              2,877                   (673)                 (23) %         4,662             5,996           (1,334)                 (22) %
Operating income (loss)     $      436$ (1,060)$ 1,496                      NM       $   862$ (2,526)$ 3,388                      NM


Total Consumer Media revenue for the quarter ended June 30, 2020 increased $0.5
million as compared to the same quarter in 2019, due primarily to higher
software license revenues of $0.7 million, partially offset by lower
subscription services revenues of $0.1 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 $0.7 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 in China
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 $0.1 million decrease was primarily
due to declines in our legacy subscription products, which will continue to
organically decline.
Cost of revenue for the quarter ended June 30, 2020 decreased $0.3 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.
Total Consumer Media revenue for the six months ended June 30, 2020 increased
$1.5 million as compared to the prior year, due primarily to higher software
license revenues of $2.0 million, partially offset by lower subscription
services revenues of $0.3 million, described more fully below. The overall
increase in revenues was also offset by lower product sales, advertising and
other revenues of $0.2 million.
Software License
For our software license revenues, the $2.0 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 in China
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 $0.3 million decrease was primarily
due to declines in our legacy subscription products, which will continue to
organically decline.
Cost of revenue for the six months ended June 30, 2020 decreased $0.5 million
compared with the year-earlier period. This was primarily due to reductions in
salaries and benefits.
Operating expenses decreased $1.3 million as compared with the year-earlier
period, primarily due to reductions in salaries and benefits from headcount
reductions, and marketing expenses.
                                       24
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Mobile Services
Mobile Services segment results of operations were as follows (in thousands):
                                       Quarter Ended June 30,                                                                                                                       Six Months Ended June 30,

                                 2020                            2019                  $ Change           % Change             2020              2019            $ Change           % Change
Revenue                     $     6,461$  6,997$  (536)                  (8) %       $ 13,151$ 13,936$  (785)                  (6) %
Cost of revenue                   1,782                          1,865                    (83)                  (4) %          3,478             3,913             (435)                 (11) %
Gross profit                      4,679                          5,132                   (453)                  (9) %          9,673            10,023             (350)                  (3) %
Gross margin                         72   %                         73  %                                                         74  %             72  %
Operating expenses                5,682                          7,438                 (1,756)                 (24) %         13,270            14,999           (1,729)                 (12) %
Operating loss              $    (1,003)$ (2,306)$ 1,303                   57  %       $ (3,597)$ (4,976)$ 1,379                   28  %


Total Mobile Services revenue decreased by $0.5 million in the quarter ended
June 30, 2020 compared with the prior-year period. The revenue decrease was
primarily due to lower subscription services revenues of $0.6 million, described
more fully below.
Software License
Our software license revenues, which include our SAFR product, were flat year
over year.
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 $0.1 million.
Cost of revenue decreased by $0.1 million in the quarter ended June 30, 2020
compared with the prior-year period, due primarily to reductions in salaries and
benefits related to headcount reductions.
Operating expenses decreased by $1.8 million for the quarter ended June 30, 2020
compared with the year-earlier period due to lower salaries and benefits of $1.0
million, and lower marketing expenses of $0.8 million.
Total Mobile Services revenue decreased by $0.8 million in the six months ended
June 30, 2020 compared with the prior-year period. The revenue decrease was due
to lower subscription services revenues of $1.0 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
$1.4 million in our ringback tones business, partially offset by an increase in
our messaging platform business of $0.4 million.
Cost of revenue decreased by $0.4 million in the six months ended June 30, 2020
compared with the prior-year period, due primarily to reductions in salaries and
benefits related to headcount reductions.
Operating expenses decreased by $1.7 million for the six months ended June 30,
2020 compared with the year-earlier period, due primarily to a decrease in
salaries and benefits of $0.5 million and lower marketing expenses of $1.0
million.
                                       25
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Games

Games segment results of operations were as follows (in thousands):

                                                   Quarter Ended June 30,                                                                                     Six Months Ended June 30,

                                 2020             2019           $ Change           % Change             2020              2019            $ Change           % Change
Revenue                       $ 7,465$ 6,048$ 1,417                   23  %       $ 14,102$ 11,758$ 2,344                   20  %
Cost of revenue                 1,958            1,655              303                   18  %          3,752             3,325              427                   13  %
Gross profit                    5,507            4,393            1,114                   25  %         10,350             8,433            1,917                   23  %
Gross margin                       74  %            73  %                                                   73  %             72  %
Operating expenses              4,976            5,288             (312)                  (6) %          9,899            10,325             (426)                  (4) %
Operating income (loss)       $   531$  (895)$ 1,426                      NM       $    451$ (1,892)$ 2,343                      NM


Total Games revenue increased $1.4 million for the quarter ended June 30, 2020
as compared with the year-earlier period due primarily to increases of $1.5
million in product sales revenues and $0.2 million in advertising and other
revenues, partially offset by a $0.3 million decrease in our subscription
services revenues, described more fully below. Our Games segment has shifted 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 $0.3 million as a result of lower subscribers
in the second quarter of 2020.
Product Sales
Our product sales increased $1.5 million as a result of higher in-game purchases
of $2.4 million compared to the prior-year period, partially offset by lower
sales of games of $0.8 million, as we have shifted focus 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 $0.2 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 $0.3 million in the quarter ended June 30, 2020 when
compared with the prior-year period due to higher app store fees of $0.4
million, partially offset by lower publisher license and service royalties of
$0.1 million.
Operating expenses decreased $0.3 million in the quarter ended June 30, 2020
when compared with the prior-year period, due to lower professional services
fees of $0.2 million and salaries and benefits of $0.5 million, partially offset
by higher marketing expenses of $0.5 million.
Total Games revenue increased $2.3 million for the six months ended June 30,
2020 as compared with the year-earlier period due primarily to increases of $2.5
million in product sales revenues and $0.4 million in advertising and other
revenues, partially offset by a $0.6 million decrease in our subscription
services revenues.
Subscription Services
Our subscription sales decreased $0.6 million as a result of lower subscribers
in 2020.
Product Sales
Our product sales increased $2.5 million as a result of higher in-game purchases
of $4.0 million compared to the prior-year period, partially offset by lower
sales of games of $1.5 million, as we have shifted focus 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 $0.4 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 $0.4 million in the six months ended June 30, 2020
when compared with the prior-year period due to higher app store fees of $0.8
million, partially offset by lower publisher license and service royalties of
$0.3 million.
Operating expenses decreased $0.4 million in the six months ended June 30, 2020
when compared with the prior-year period, due to lower professional services
fees of $0.5 million and salaries and benefits of $0.8 million, partially offset
by higher marketing expenses of $1.1 million.
                                       26
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Napster

Napster segment results of operations were as follows (in thousands):

                                                     Quarter Ended June 30,                                                                                       Six Months Ended June 30,
                                 2020              2019            $ Change            % Change             2020              2019            $ Change            % Change
Revenue                       $ 23,339$ 28,583$ (5,244)                 (18) %       $ 49,662$ 52,920$ (3,258)                  (6) %
Cost of revenue                 18,770            23,026            (4,256)                 (18) %         38,842            43,422            (4,580)                 (11) %
Gross profit                     4,569             5,557              (988)                 (18) %         10,820             9,498             1,322                   14  %
Gross margin                        20  %             19  %                                                    22  %             18  %
Operating expenses               6,609             6,638               (29)                   -  %         13,070            12,170               900                    7  %
Operating loss                $ (2,040)$ (1,081)$   (959)                 (89) %       $ (2,250)$ (2,672)$    422                   16  %


As described in Note 5 Acquisitions, we acquired control and began consolidating
Napster effective January 18, 2019. Our consolidated results include Napster
from the acquisition date forward.
Subscription Services
Napster's subscription revenues for the quarter ended June 30, 2020 decreased
$5.2 million compared to the same quarter of 2019 due to a $1.9 million decrease
in direct to consumer revenues and a $3.4 million decrease in sales through
distribution partners. The decreases were primarily due to lower subscribers.
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 ended June 30, 2020 decreased $4.3
million primarily due to lower royalties related to the decline in revenue in
the second quarter of 2020 compared to the prior year period.
Operating expenses were flat for the quarter ended June 30, 2020 compared to the
prior year period, with lower salaries and benefits of $0.5 million offset by
higher professional service fees and restructuring charges.
Subscription Services
Napster's subscription revenues for the six months ended June 30, 2020 decreased
$3.3 million compared to the same quarter of 2019 due to a $0.6 million decrease
in direct to consumer revenues and a $2.6 million decrease in sales through
distribution partners. The decreases were primarily due to lower subscribers,
offset in part by an early termination fee from a platform partner in the first
quarter of 2020. 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.
Napster's cost of revenues for the six months ended June 30, 2020 decreased $4.6
million primarily due to lower royalties related to the decline in revenue.
Operating expenses increased by $0.9 million for the six months ended June 30,
2020 primarily due the inclusion of a full quarter of expenses in the first
quarter of 2020 compared to the prior year period and restructuring charges
incurred in the six months ended June 30, 2020.
Corporate
Corporate results of operations were as follows (in thousands):
                                                  Quarter Ended June 30,                                                                                      Six Months Ended June 30,

                               2020              2019            $ Change           % Change             2020              2019            $ Change           % Change
Cost of revenue             $      4$    (67)$    71                      NM       $      7$   (144)$   151                      NM

Operating expenses             2,819             4,116           (1,297)                 (32) %          5,446             8,373           (2,927)                 (35) %
Operating loss              $ (2,823)$ (4,049)$ 1,226                   30  %       $ (5,453)$ (8,229)$ 2,776                   34  %


Operating expenses decreased by $1.3 million in the quarter ended June 30, 2020
compared with the year-earlier period, primarily due to a reduction in salaries
and benefits. The overall change was also impacted by lower Napster acquisition
costs of $0.4 million and $0.2 million of lower expense for the change in the
fair value of the Napster contingent consideration liability, as further
discussed in Note 6 Fair Value Measurements.
Operating expenses decreased by $2.9 million for the six months ended June 30,
2020 compared with the year-earlier period, primarily due to a reduction in
salaries and benefits in the first half of 2020. The overall change was also
impacted by lower Napster acquisition costs of $0.8 million for the six months
ended June 30, 2020 and a $0.5 million favorable change in the fair value of the
Napster contingent consideration liability, as further discussed in Note 6 Fair
Value Measurements.
                                       27
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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 June 30,                                                                                       Six Months Ended June 30,
                                       2020              2019            $ Change            % Change             2020              2019            $ Change            % Change
Research and development            $  7,802$  8,876$ (1,074)                 (12) %       $ 16,420$ 17,709$ (1,289)                  (7) %
Sales and marketing                    6,927             8,360            (1,433)                 (17) %         15,044            16,502            (1,458)                  (9) %
General and administrative             6,680             8,392            (1,712)                 (20) %         13,793            16,756            (2,963)                 (18) %
Restructuring and other charges          881               729               152                   21  %          1,090               896               194                   22  %

Total consolidated operating
expenses                            $ 22,290$ 26,357$ (4,067)                 (15) %       $ 46,347$ 51,863$ (5,516)                 (11) %


Research and development expenses decreased by $1.1 million in the quarter ended
June 30, 2020 as compared with the year-earlier period, primarily due to lower
salaries and benefits and professional service fees totaling $1.0 million.
Research and development expenses decreased by $1.3 million for the six months
ended June 30, 2020 as compared with the year-earlier period, primarily due to
lower salaries and benefits and professional fees totaling $0.8 million, and a
decrease in infrastructure expenses of $0.4 million.
Sales and marketing expenses decreased $1.4 million in the quarter ended June
30, 2020 as compared with the year-earlier period, primarily due to a $1.3
million reduction in salaries and benefits.
Sales and marketing expenses decreased $1.5 million in the six months ended June
30, 2020 as compared with the year-earlier period due primarily to lower
salaries and benefits of $2.0 million, partially offset by an increase of $0.2
million of professional services fees.
General and administrative expenses decreased by $1.7 million in the quarter
ended June 30, 2020 as compared with the year-earlier period, primarily due to a
reduction in salaries and benefits, and infrastructure costs. The overall change
was also impacted by lower Napster acquisition costs of $0.4 million and $0.2
million of lower expense for the change in the fair value of the Napster
contingent consideration liability, further discussed in Note 6 Fair Value
Measurements.
General and administrative expenses decreased by $3.0 million in the six months
ended June 30, 2020 as compared with the year-earlier period, primarily due to a
reduction in salaries and benefits, and infrastructure costs. The overall change
was also impacted by lower Napster acquisition costs of $0.8 million and a $0.5
million favorable change in the fair value of the Napster contingent
consideration liability, 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.
Other Income (Expense)
Other income (expense), net was as follows (in thousands):
                                                         Quarter Ended June 30,                                                     Six Months Ended June 30,
                                                  2020             2019          $ Change          2020             2019               $ Change
Interest expense                               $   (278)$ (43)$  (235)$ (540)$   (209)$      (331)
Interest income                                      23             40              (17)             28               117                  (89)
Gain (loss) on equity investment, net               (53)             -              (53)            (53)           12,338              (12,391)
Other income (expense), net                        (134)           183             (317)            661               310                  351
Total other income (expense), net              $   (442)$ 180

$ (622)$ 96$ 12,556$ (12,460)



Interest expense relates to RealNetworks and Napster's notes payable and
long-term debt, as described in more detail in Note 8 Notes Payable and
Long-term debt.
Gain (loss) on equity investment, net, for the six months ended June 30, 2019
included a $12.3 million gain in the first quarter of 2019 related to
RealNetworks' consolidation of Napster, as described in more detail in Note 5
Acquisitions.
The fluctuations in Other income (expense) primarily relate to foreign exchange
gains and losses.
                                       28
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Income Taxes
We recognized income tax expense of $0.2 million and $0.2 million during the
quarters ended June 30, 2020 and 2019, respectively, related to U.S. and foreign
income taxes. During the six months ended June 30, 2020 and 2019, we recognized
income tax expense of $0.4 million and $0.5 million, respectively, related to
U.S. and foreign income taxes.
As of June 30, 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 the U.S. and certain foreign
jurisdictions in the second quarter of 2020. We generate income in a number of
foreign jurisdictions, some of which have higher or lower tax rates relative to
the U.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 ended June 30, 2020, decreases in
tax expense from income generated in foreign jurisdictions with lower tax rates
in comparison to the U.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 the U.S. federal statutory rate. The effect of
differences in foreign tax rates on the Company's tax expense for the second
quarter of 2020 was minimal.
We file numerous consolidated and separate income tax returns in the U.S.,
including federal, state and local returns, as well as in foreign jurisdictions.
With few exceptions, we are no longer subject to United 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):
                               June 30, 2020       December 31, 2019
Working capital               $     (36,258)$        (41,601)
Cash and cash equivalents            19,688                 16,805
Restricted cash equivalents           5,374                  5,374


Cash and cash equivalents increased from December 31, 2019 due to the $10.0
million in cash proceeds from the first quarter 2020 issuance of Series B
Preferred Stock and the total cash proceeds of $4.6 million from the PPP
promissory notes issued in the second quarter of 2020, as described in Note 8
Notes Payable and Long-term debt, partially offset by our ongoing cash flows
used in operating activities, which totaled $8.6 million in the first six months
of 2020, and Napster's net repayment of debt of $2.8 million.
The following summarizes cash flow activity (in thousands):
                                                        Six Months Ended 

June 30,

                                                        2020                

2019

Cash used in operating activities                 $     (8,577)$ (16,099)
Cash (used in) provided by investing activities           (326)             

11,411

Cash provided by (used in) financing activities         11,882              

(3,951)



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) loss on equity
investments, fair value adjustments to contingent consideration liability and
the effect of changes in certain operating assets and liabilities.
Cash used in operating activities was $7.5 million lower in the six months ended
June 30, 2020 as compared to the same period in 2019. This improvement was
primarily due to our lower operating loss recorded for the six months ended June
30, 2020 compared to the prior year period.
For the six months ended June 30, 2020, cash used by investing activities
consisted of fixed asset purchases of $0.3 million.
For the six months ended June 30, 2019, cash provided by investing activities of
$11.4 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,
                                       29
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cash equivalents and restricted cash on Napster's balance sheet at that date.
The increase was offset in part by fixed asset purchases of $0.9 million.
Cash provided by financing activities for the six months ended June 30, 2020 was
$11.9 million. This cash inflow was primarily due to the $10.0 million in cash
proceeds from the first quarter 2020 issuance of Series B Preferred Stock and
the total cash proceeds of $4.6 million from the PPP promissory notes issued in
the second quarter of 2020, offset by Napster's net repayment of debt of $2.8
million. See Note 8 Notes Payable and Long-term debt and Note 13 Related Party
Transactions for additional details.
Cash used by financing activities for the six months ended June 30, 2019 was
$4.0 million. This cash outflow was primarily due to Napster's April 30, 2019
payoff of its Loan and Security Agreement (Revolver LSA), in the amount of $4.9
million.
Three customers accounted for more than 10% of trade accounts receivable as of
June 30, 2020, with the customers accounting for 23%, 12% and 10% 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 13% of consolidated revenue, or
$10.5 million, during the six months ended June 30, 2020. One customer in our
Napster segment accounted for 14% of consolidated revenue, or $12.0 million,
during the six months ended June 30, 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 June 30, 2020,
the estimated fair value of the contingent consideration was $12.4 million, with
$5.4 million recognized as a current liability and $7.0 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 June 30,
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 June 30, 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.
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 pandemic and related
financial impacts. 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 securities could result in dilution to our shareholders. In addition, in
the future, we may enter into cash or stock acquisition
                                       30
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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.
Our revenue and expenses are primarily denominated in U.S. dollars. For our
foreign operations, the majority of our revenues and expenses are denominated in
other currencies, such as the euro, Brazilian real, 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 June 30, 2020, approximately $8.8 million of the $19.7 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.
                                       31

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