REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)



	Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Total Shareholders’ Equity			Non-controlling Interests		Total Equity
	Shares	Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Total Shareholders’ Equity			Non-controlling Interests		Total Equity

Balances, January 1, 2018	37,341	$	37	$	638,727		$	(59,547	)	$	(500,044	)	$	79,173		$	—	$	79,173
Cumulative effect of revenue recognition accounting change										1,024			1,024			—		1,024
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	223	—		(232		)	—			—			(232		)	—		(232		)
Stock-based compensation	—	—		1,157			—			—			1,157			—		1,157
Investments unrealized gains (losses), net of tax effects of $0	—	—		—			1			—			1			—		1
Foreign currency translation adjustments	—	—		—			396			—			396			—		396
Net income (loss)	—	—		—			—			(5,178		)	(5,178		)	—		(5,178		)
Balances, March 31, 2018	37,564	$	37	$	639,652		$	(59,150	)	$	(504,197	)	$	76,342		$	—	$	76,342
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	48	—		103			—			—			103			—		103
Stock-based compensation	—	—		457			—			—			457			—		457
Investments unrealized gains (losses), net of tax effects of $1	—	—		—			2			—			2			—		2
Foreign currency translation adjustments							(1,604		)				(1,604		)			(1,604		)
Net income (loss)	—	—		—			—			(6,930		)	(6,930		)	—		(6,930		)
Balances, June 30, 2018	37,612	$	37	$	640,212		$	(60,752	)	$	(511,127	)	$	68,370		$	—	$	68,370



	Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Total Shareholders’ Equity			Non-controlling Interests			Total Equity
	Shares	Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Total Shareholders’ Equity			Non-controlling Interests			Total Equity

Balances, January 1, 2019	37,728	$	37	$	641,930		$	(61,118	)	$	(524,009	)	$	56,840		$	—		$	56,840
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	190	—		(271		)	—			—			(271		)	—			(271		)
Napster acquisition	—	—		(1,346		)	—			—			(1,346		)	570			(776		)
Stock-based compensation	—	—		1,384			—			—			1,384			—			1,384
Foreign currency translation adjustments	—	—		—			(87		)	—			(87		)	—			(87		)
Net income (loss)	—	—		—			—			1,533			1,533			(319		)	1,214
Other equity transactions	—	—		362			—			—			362			88			450
Balances, March 31, 2019	37,918	$	37	$	642,059		$	(61,205	)	$	(522,476	)	$	58,415		$	339		$	58,754
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares	131	—		128			—			—			128			—			128
Stock-based compensation	—	—		533			—			—			533			—			533
Foreign currency translation adjustments	—	—		—			(492		)	—			(492		)	—			(492		)
Net income (loss)	—	—		—			—			(9,202		)	(9,202		)	(253		)	(9,455		)
Balances, June 30, 2019	38,049	$	37	$	642,720		$	(61,697	)	$	(531,678	)	$	49,382		$	86		$	49,468

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Quarters and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018



Note 1	Description of Business and Summary of Significant Accounting Policies

Description of Business. RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play, and share digital media. The Company also develops and markets software products and services that enable the creation, distribution, and consumption of digital media, including audio and video. Our Napster music business, which we acquired on January 18, 2019, offers a comprehensive set of digital music products and services designed to provide consumers with broad access to digital music. For more information on Napster, see Note 5Acquisitions.

Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services, and the ability to generate related ~~revenue.~~revenue and cash flow.

In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”. ~~"RealPlayer~~®~~" and other trademarks of ours appearing in this report are our property.~~

Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its ~~wholly-owned subsidiaries.~~subsidiaries in which it has a more than 50% voting interest. Noncontrolling interests primarily represent third-party ownership in the equity of Napster and are reflected separately in the Company’s financial statements. Intercompany balances and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, ~~2017.~~2019. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 (the 10-K).

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Note 2	Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance, which was subsequently updated and amended in 2015 and 2016. The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.

The guidance permits two methods of adoption: the full retrospective method where the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, where the cumulative effect of applying the standard would be recognized at the date of initial application. We will adopt the requirements of the new standard effective January 1, 2018, and will use the modified retrospective transition method with the cumulative effect to the opening balance of retained earnings recognized as of the date of initial adoption.

Our evaluation of the new standard has made significant progress, and we continue to monitor any authoritative and interpretive guidance issued by standard-setting bodies for impacts on our evaluations. Under the new standard, we currently expect the greatest impact in certain areas where we will be required to estimate usage which drives the underlying revenue. Under the current guidance, we do not recognize revenues until we achieve fixed and determinable status, which would typically be at a later date. We also expect an impact related to the licensing of our RealTimes and RealPlayer products. As we transition to the new revenue standard, we will recognize the revenue predominantly at the time of delivery rather than over the contract period. Revenue recognition for all other product lines is not expected to be significantly impacted.

As a result of the new standard, based on currently executed contracts, we may be required to record a cumulative adjustment increasing our Retained Earnings on January 1, 2018. We expect that the new standard will not have a cash impact and will not affect the economics of the underlying customer contracts. We expect that our disclosures in our notes to the Consolidated Financial Statements related to revenue recognition will be significantly expanded under the new standard, specifically around the quantitative and qualitative information about our underlying performance obligations. Our assessment of impacts resulting from the new standard is substantially complete and we are in the process of finalizing our conclusions and evaluating the quantitative impact of these conclusions in both recognition and presentation in the related disclosures. We believe we are continuing to follow an appropriate timeline for proper recognition, presentation and disclosure upon adoption, including the related impacts to our internal controls.

~~In February 2016, the FASB issued new~~ guidance related to the accounting for ~~leases by lessees.~~leases. A major change in the new guidance is that lessees ~~will be~~are now required to present right-of-use assets and lease liabilities on the balance sheet. Enhanced disclosures are also required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. We adopted the new guidance effective January 1, 2019 and elected to apply the new guidance at the beginning of the year of adoption, rather than applying the new guidance retrospectively to each prior reporting period presented. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classification. We have finalized our assessment of the impacts resulting from the new standard, including the impact on our internal controls. As a result of our evaluation, we have modified certain accounting policies and practices and existing controls. Adoption of the standard resulted in the recognition of $12.5 million of operating lease assets and $14.6 million of current and long-term operating lease liabilities as of January 1, 2019. The difference between the operating lease assets and lease liabilities recorded upon adoption relates to previously accrued deferred rent and lease exit and related charges included on our balance sheet as of December 31, 2018. Lease exit and related charges previously recorded pertain to the reduction in use of RealNetworks' office space and included estimates of sublease income expected to be received. The new guidance ~~will be~~did not materially impact our consolidated statement of operations in the quarter of adoption or in the second quarter of 2019 and did not cause revision to

previously recorded estimates for lease exit charges. See Note 14Leases for additional information about the new accounting standard.

In June 2018, the FASB issued new guidance related to the measurement and classification for share-based awards to non-employees. The new guidance essentially aligns the measurement and classification for these awards with that for share-based awards to employees. We adopted the new guidance effective ~~for us on~~ January 1, ~~2019. We will be evaluating the effect that the guidance will have~~2019, with no material impact on our consolidated financial statements and related disclosures.

~~In November 2016, the FASB~~Recently issued guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. This guidance is effective for interim and annual reporting for us on January 1, 2018. We doaccounting pronouncements not ~~expect the adoption of this guidance to have a material impact on our statement of cash flows.~~yet adopted

In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds the reporting unit's fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning onafter December 15, 2019, with early adoption permitted. We ~~will be~~are evaluating the impact of ~~the~~this guidance, but do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures.

~~There~~



Note 3	Revenue Recognition

On January 1, 2018, we adopted the new revenue recognition standard by applying the modified retrospective approach to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition standard.

We recorded a net decrease to opening retained deficit of $1.0 million as of January 1, 2018 due to the cumulative impact of adopting the new revenue recognition standard. This impact primarily related to licensing of our RealPlayer product and full recognition of non-recurring engineering fees, which were previously deferred and amortized over the life of the contract.

We generate all of our revenue through contracts with customers. Revenue is either recognized over time as the service is provided, or at a point in time when the product is transferred to the customer, depending on the contract type. Our performance obligations typically have an original duration of one year or less.

Napster revenue arrangements include subscription services to the Napster music streaming service sold either directly to end users (direct to consumer) or through partners (business to business), who are generally telecommunications companies, that bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. Napster also sells subscriptions to third parties to provide access to the Napster platform that is typically embedded in the third party's branded or co-branded service. Such subscriptions are included in the business to business sales channel.

For services sold through third parties to end customers, we evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and are the principal (i.e. “gross”), or we arrange for other parties to provide the service to the end-user and are an agent (i.e. “net”). In our Napster business to business revenue stream, we generally operate as a principal in arrangements with end customers as we maintain control over the service prior to being transferred to the end customer.

Certain business to business customer arrangements include variable consideration based on usage. We estimate variable consideration as part of the total transaction price that is allocated to performance obligations, or distinct service periods within a performance obligation, on a relative standalone selling price basis.

Revenues related to Napster subscription services are recognized ratably over the contract period, typically 30 days. Direct to consumer subscriptions are paid in advance, typically on a monthly basis. Subscription services offered to businesses are invoiced on a monthly basis and the timing of payment generally does not vary significantly from the timing of invoice.

Disaggregation of Revenue

The following table presents our disaggregated revenue by source and segment (in thousands):



	Quarter Ended June 30, 2019								Six Months Ended June 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	944	$	957	$	—	$	—	$	1,679	$	1,556	$	—	$	—
Subscription Services	1,040		6,040		3,073		28,583		2,128		12,380		6,058		52,920
Product Sales	206		—		2,177		—		425		—		4,165		—
Advertising and Other	430		—		798		—		874				1,535		—
Total	$	2,620	$	6,997	$	6,048	$	28,583	$	5,106	$	13,936	$	11,758	$	52,920

	Quarter Ended June 30, 2018								Six Months Ended June 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	1,808	$	469	$	—	$	—	$	5,145	$	1,804	$	—	$	—
Subscription Services	1,225		6,250		2,689		—		2,510		13,619		5,382		—
Product Sales	299		—		1,953		—		639		—		4,355		—
Advertising and Other	552		—		479		—		1,073		—		847		—
Total	$	3,884	$	6,719	$	5,121	$	—	$	9,367	$	15,423	$	10,584	$	—

The following table presents our disaggregated revenue by sales channel (in thousands):



	Quarter Ended June 30, 2019								Six Months Ended June 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	1,375	$	6,881	$	1,115	$	13,804	$	2,553	$	13,698	$	2,151	$	25,899
Direct to Consumer	1,245		116		4,933		14,779		2,553		238		9,607		27,021
Total	$	2,620	$	6,997	$	6,048	$	28,583	$	5,106	$	13,936	$	11,758	$	52,920

	Quarter Ended June 30, 2018								Six Months Ended June 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	2,360	$	6,573	$	836	$	—	$	6,218	$	15,103	$	1,587	$	—
Direct to Consumer	1,524		146		4,285		—		3,149		320		8,997		—
Total	$	3,884	$	6,719	$	5,121	$	—	$	9,367	$	15,423	$	10,584	$	—

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to our customers. We record accounts receivable when the right to consideration becomes unconditional, except for the passage of time. For certain contracts, payment schedules may exceed one year; for those contracts we recognize a long-term receivable. As of June 30, 2019 and December 31, 2018, our balance of long-term accounts receivable was $0.1 million and $0.7 million, respectively, and is included in other long-term assets on our condensed consolidated balance sheets. The decrease in this balance from December 31, 2018 to June 30, 2019 is primarily due to the timing of expected cash receipts. During the quarter and six months ended June 30, 2019, we recorded no impairments to our contract assets.

We record deferred revenue when cash payments are received or due in advance of our completion of the underlying performance obligation. As of June 30, 2019, we had a deferred revenue balance of $6.2 million, an increase of $3.8 million from December 31, 2018, primarily due to deferred revenue associated with Napster.

Practical Expedients

For those contracts for which we recognize revenue at the amount to which we have the right to invoice for service performed, we do not disclose the value of any unsatisfied performance obligations. We also do not disclose the remaining unsatisfied performance obligations which have an original duration of one year or less. Additionally, we immediately expense sales commissions when incurred as the amortization period would have been ~~no other recent accounting pronouncements or changes in accounting pronouncements to be implemented that~~less than one year. These costs are ~~of significance or potential significance to RealNetworks.~~recorded within sales and marketing expense.



Note 34	Stock-Based Compensation

Total stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations and comprehensive income (loss) includes amounts related to stock options, restricted stock, and employee stock purchase plans and was as follows (in thousands):

Quarter Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Total stock-based compensation expense $ 748
$ 778
$ 3,045
$ 4,557



	Quarter Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Total stock-based compensation expense	$	533	$	457	$	1,917	$	1,614

The fair value of RealNetworks options granted determined using the Black-Scholes model used the following weighted-average assumptions:


	Quarter Ended September 30,				Nine Months Ended September 30,				Quarter Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Expected dividend yield	0	%	0	%	0	%	0	%	0	%	0	%	0	%	0	%
Risk-free interest rate	1.61	%	1.00	%	1.71	%	1.25	%	2.26	%	2.72	%	2.32	%	2.59	%
Expected life (years)	3.7		3.8		4.2		4.6		3.8		3.8		4.1		4.0
Volatility	34	%	32	%	35	%	35	%	41	%	35	%	41	%	35	%

The total stock-based compensation amounts for ~~2017~~2019 and ~~2016~~2018 disclosed above are recorded in their respective line items within operating expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Included in the expense for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 was stock compensation expense recorded in the first quarter of ~~2017~~2019 and ~~2016~~2018 related to our ~~2016~~2018 and ~~2015~~2017 incentive bonuses paid in fully vested restricted stock units, which were authorized and granted in the first quarter of ~~2017~~2019 and ~~2016,~~2018, respectively.

As of ~~September~~June 30, ~~2017, $3.9~~2019, $3.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 23.1 years.



Note 45	~~Rhapsody Joint Venture~~Acquisitions

AsNapster

On January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc. (doing business as Napster) bringing our aggregate ownership to 84% of ~~September 30, 2017~~ ~~we owned approximately~~ ~~42%~~Napster's outstanding equity, thus giving RealNetworks a majority voting interest. Napster's music streaming service provides users with broad access to digital music, offering on-demand streaming and conditional downloads through unlimited access to a catalog of ~~the issued~~millions of music tracks. Napster offers music services worldwide and ~~outstanding stock of Rhapsody and account for our investment using the equity method of accounting.~~generates revenue primarily through subscriptions to its music services either directly to consumers or through distribution partners.

~~Rhapsody was initially~~Initially formed in 2007 and branded then as Rhapsody, Napster began as a joint venture between RealNetworks and MTV Networks, a division of Viacom International, Inc. ~~(MTVN),~~Prior to ~~own and operate a business-to-consumer digital audio music service known as Rhapsody.~~

~~Following certain restructuring transactions effective March 31, 2010,~~the acquisition of the additional 42% interest in Napster, we ~~began accounting~~accounted for our investment ~~in Rhapsody~~ using the equity method of accounting. As

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

We have preliminarily recorded 100% of the estimated fair value of the assets acquired and liabilities assumed as of January 18, 2019 based on the results of an independent valuation. The 16% of Napster that we do not own is accounted for as a noncontrolling interest in our consolidated financial statements, and as part of this consolidation, the carrying value of our previous 42% equity method investment was remeasured to fair value on the acquisition date. The remeasurement to fair value of the historical 42% ownership interest resulted in the recognition of a $2.7 million gain in the first quarter of 2019, which is a component of the overall gain recognized as a part of this transaction. Our consolidated balance sheet reflects Napster's working capital deficit, which results in a consolidated working capital deficit. RealNetworks does not have any contractual or implied obligation to provide funding or other financial support to Napster, or to guarantee or provide other such support related to Napster's third party borrowing or Napster's other obligations on our consolidated balance sheet, except as discussed in Note 15Commitments and Contingencies.

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

(a) an additional $14.0 million to seller, or

(b) if RealNetworks sells the interest to a third party for less than $15.0 million, the actual amount received by RealNetworks, minus the $1.0 million initial payment.

In the event that RealNetworks sells such equity interest for consideration in excess of $15.0 million, RealNetworks will pay seller additional consideration, dependent on the sale price, which shall in no event exceed an additional $25.0 million. In order for seller to receive the full $40.0 million, the proceeds from the sale of Napster received by RealNetworks for the 42% equity interest acquired would have to exceed $60.0 million. These contingent consideration amounts were part of the ~~2010 restructuring transactions, RealNetworks contributed $18.0~~total consideration at estimated fair value, as described in more detail below.

The following table summarizes the preliminary allocation of the total consideration to the estimated fair values of the assets acquired and liabilities assumed as of January 18, 2019 (in thousands):



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

Assets acquired and liabilities assumed, at estimated fair value:
Cash and cash equivalents	$	10,138
Accounts receivable	20,838
Prepaid expenses and other current assets	12,879
Restricted cash	2,322
Equipment, software and leasehold improvements	474
Operating lease assets	2,314
Other long-term assets	77
Deferred tax assets, net	5,942
Intangible assets	23,700
Goodwill	48,474
Total assets acquired	127,158

Accounts payable	937
Accrued royalties and fulfillment	71,980
Accrued and other current liabilities	7,475
Deferred revenue, current portion	3,600
Notes payable	12,115
Deferred tax liabilities, net	6,061
Long-term lease liabilities	1,197
Other long-term liabilities	1,515
Total liabilities assumed	104,880
Total net assets acquired	22,278
Noncontrolling interests	570
Net assets acquired	$	21,708

Under the acquisition method of accounting, the purchase price is allocated to the assets acquired and the liabilities assumed based on their estimated fair values. Due to the complexity and limited time since closing the transaction, the purchase price allocation is subject to change, which may result from additional information becoming available and additional analyses being performed on these acquired assets and assumed liabilities. Such changes could impact estimated fair values of intangible assets, accrued royalties and fulfillment, deferred revenue, and assets and liabilities assumed, as well as the contingent consideration, noncontrolling interests, and gain recognized from consolidation. Purchase price allocation adjustments may be recorded during the measurement period (a period not to exceed 12 months from the acquisition date). The final purchase price allocation could result in material differences, which could have a material impact on our financial statements.

Acquired intangible assets have a total weighted average useful life of approximately 8 years, are being amortized using the straight line method, and are comprised of the following (in thousands):



Intangible category	Estimated fair value		Method used to calculate fair value	Estimated remaining useful life
Trade name and trademarks	$	6,800	Relief-from-royalty	15 years
Developed technology	5,900		Excess earnings	4 years
Customer relationships	5,900		Cost-to-replace	3 years
Partner relationships	5,100		Distributor method	8 years
Total	$	23,700

The estimated fair value amounts for each of these intangibles were determined using a fair value measurement categorized within Level 3 of the fair value hierarchy.

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

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

The fair value of customer relationships was estimated using a cost-to-replace approach, whereby the number of subscribers and the cost to acquire subscribers are key estimates utilized in the valuation.

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

The fair value of deferred revenue was estimated using the income approach, utilizing a cost to fulfill analysis by estimating the direct and indirect costs related to supporting remaining obligations plus an assumed operating margin.

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

The fair value of our preexisting equity method investment was calculated using an average of the income and market approach to arrive at estimated total enterprise value. The income approach fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, as well as the selection of an appropriate discount rate. Estimates of revenue growth and operating expenses were based on internal projections and considered the historical performance of Napster's business. The discount rate applied was based on Napster's weighted-average cost of capital and included a small-company risk premium. The market approach fair value measurement was based on a market comparable methodology. We used a group of comparable companies and selected an appropriate EBITDA and revenue multiple to apply to Napster's trailing twelve months and projected 2019, 2020 and 2021 EBITDA (weighted 90%) and revenues (weighted 10%). Assumptions in both the income and market approaches are significant to the overall valuation of Napster and changes to these assumptions could materially impact the preliminary fair values of assets acquired and liabilities assumed, noncontrolling interests, total consideration, and gain on consolidation.

The fair value of the contingent consideration was estimated using multiple scenarios for each tranche of contingent consideration and then probability weighting each scenario and discounting them to estimated fair value of $11.6 million. This fair value calculation is directly impacted by the estimated total enterprise value described above. After the completion of the measurement period or in conjunction with changes in fair value unrelated to our preliminary estimate of fair value, the contingent consideration will be adjusted quarterly to fair value through earnings. Of the total amount of $11.6 million, we accrued $2.6 million and $9.0 million in ~~cash,~~Accrued royalties, fulfillment and other current liabilities, and Other long-term liabilities, respectively, as of March 31, 2019. See Note 6 Fair Value Measurements for details on the Rhapsody brand and certain other assets, including content licenses, in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10.0 million preference upon certain liquidation events.

~~We recorded our share of losses of Rhapsody of $0.0 million and $1.1 million~~adjustment to this liability for the second quarter of 2019.

The effective settlement of Napster's debt and ~~nine months ended~~ ~~September 30, 2017;~~warrants totaling $6.4 million represents the estimated fair value of debt and ~~$0.2 million~~warrants held between RealNetworks and ~~$0.6 million for the quarter and nine months ended September 30, 2016. Because~~Napster as of the ~~$10.0~~acquisition date. The estimated fair value is derived from the estimated total enterprise value described above. The resulting net gain of $5.5 million ~~liquidation preference~~is included in Other income (expenses) in the Consolidated statement of operations.

As discussed in Note 15Commitments and Contingencies, the preexisting $2.8 million guarantee related to Napster's outstanding indebtedness on their revolving credit facility was eliminated upon the ~~preferred stock~~consolidation of Napster. This resulted in RealNetworks recording a gain of $2.8 million, which is included in Other income (expenses) in the Consolidated statement of operations.

Prior to our acquisition of Napster, we ~~hold in Rhapsody,~~accounted for our investment under the equity method of accounting and recorded Napster 's foreign currency translation adjustments in our equity. As part of the acquisition method of accounting, we ~~did not record any share~~released these amounts and recorded a gain of ~~Rhapsody losses that would reduce our carrying~~$1.3 million, which is included in Other income (expenses) in the Consolidated statement of operations.

We recorded the fair value of ~~Rhapsody, which~~noncontrolling interests on the acquisition date, estimated at $0.6 million, using the estimated total enterprise value described above.

We also recorded goodwill of $48.5 million, representing the intangible assets that do not qualify for separate recognition for accounting purposes, including the expected growth in Napster's business to business model and the assembled workforce. The goodwill is ~~impacted by Rhapsody equity transactions, below $10.0~~reported in our Napster segment and is not deductible for income tax purposes. As discussed above, during the measurement period, purchase price allocation adjustments or changes in assumptions used in determining the total estimated enterprise value of Napster could materially impact goodwill recognized. Moreover, future performance of the Napster business will factor into our goodwill impairment analysis.

We began consolidating Napster's results of operations and cash flows into our consolidated financial statements after January 18, 2019. For the quarter ended June 30, 2019, Napster's revenue and net loss including noncontrolling interests in our consolidated statements of operations was $28.6 million ~~until Rhapsody's book value~~and $1.5 million, respectively. For the six months ended June 30, 2019, Napster's revenue and net loss including noncontrolling interests in our consolidated statements of operations was ~~reduced below $10.0 million. This occurred in~~$52.9 million and $3.3 million, respectively.

The following table provides the supplemental pro forma revenue and net results of the combined entity had the acquisition date of Napster been the first day of our first quarter of ~~2015. As~~2018 rather than during our first quarter of ~~September~~2019 (in thousands):



	Quarter Ended - Pro Forma (Unaudited) June 30,						Six Months Ended - Pro Forma (Unaudited) June 30,
	2019			2018			2019			2018
Net revenue	$	44,355		$	52,296		$	90,193		$	112,145
Net income (loss) attributable to RealNetworks ⁽¹⁾	(8,455		)	(4,694		)	(17,973		)	2,295

⁽¹⁾The pro forma net earnings attributable to RealNetworks for the quarter ended June 30, 2017, the carrying value of our Rhapsody equity investment was zero, as we do not have further commitment to provide future support to Rhapsody. Unless we commit to provide future financial support to Rhapsody, we do not record our share of Rhapsody losses that would reduce our carrying value of Rhapsody below zero, and instead we track those suspended losses separately.

~~In December 2016, RealNetworks entered into an agreement to loan up to $5 million to Rhapsody for general operating purposes, as did the other large owner of Rhapsody, Columbus Nova. In 2016, $3.5~~2018 include $0.4 million of transaction costs, and for the ~~loan was made by each lender. In January 2017,~~six months ended June 30, 2018, pro forma net earnings attributable to RealNetworks include the ~~remaining $1.5~~acquisition related gain of $12.3 million ~~commitment was funded by each lender.~~and $1.2 million of transaction costs. The ~~loan~~amounts in the supplemental pro forma earnings for the periods presented above fully eliminate intercompany transactions and conform Napster's accounting policies to RealNetworks'. These pro forma results also reflect amortization of acquisition-related intangibles and fair value adjustments to deferred revenue and contingent consideration.

The unaudited pro forma amounts are based upon the historical financial statements of RealNetworks and Napster and were prepared using the acquisition method of accounting and are not necessarily indicative of results for any current or future period. The purchase price allocation is ~~subordinate~~preliminary and is subject to ~~all existing loans,~~change prior to finalization. The final purchase price allocation could result in material differences, which could have a material impact on the accompanying pro forma amounts.

For the quarter and ~~bears an interest~~six months ended June 30, 2019, we incurred approximately $0.4 million and $1.2 million, respectively, in acquisition-related costs, including regulatory, legal, and other advisory fees, which we have recorded within general and administrative expenses.

Games

As described in more detail in our 2018 10-K, in order to acquire a ~~rate of 10% per annum, which accretes into the outstanding principal balance and will be due at the December 7, 2017 maturity date. Under the terms~~full workforce, we purchased 100% of the ~~loan agreement between RealNetworks and Rhapsody,~~shares of a ~~default by Rhapsody under its agreements with other third party lenders that would entitle such parties to accelerate repayments with an aggregate value in excess~~small, privately-held Netherlands-based game development studio for net cash consideration of $1$4.2 million would constitute a cross default of the RealNetworks and Columbus Nova loans. In that case, RealNetworks and Columbus Nova could elect to declare all outstanding obligations owed to us by Rhapsody to become immediately due and payable.

We recognized previously suspended losses up to the amount of the commitment at the time of signing the agreement in the fourth quarter of 2016, and, consequently, we do not have a receivable recorded related to this loan. As of the date of this report, we have no further commitments for additional fundings to Rhapsody.

~~In late March 2017, we were notified that Rhapsody would likely be in default of existing agreements with its third party lenders, which was confirmed~~ in April 2017. We believe this default constitutes a cross default under the loan agreements between Rhapsody and RealNetworks and Rhapsody and Columbus Nova. The default with the third party lenders relates to Rhapsody missing a quarterly revenue target that included assumptions regarding the launch of a new product which Rhapsody subsequently determined not to launch, thus contributing to a revenue shortfall. In June 2017, Rhapsody obtained forbearance agreements from the third party lenders, pursuant to which (in general terms) the lenders agreed to forbear from exercising any remedies they have against Rhapsody relating to defaults existing at June 30, 2017.2018.

In October 2017, Rhapsody entered into a financing agreement with a new third party, under which Rhapsody's wholly owned subsidiary will factor certain receivable in return for cash advances. Rhapsody applied the initial cash proceeds from this arrangement to pay in full and terminate all outstanding term loans with third party lenders and a portion of the amounts outstanding under a revolving credit facility.

The forbearance agreement entered into in June 2017 (as discussed above) has been further extended with the remaining third party lender through November 30, 2017, or until a new default event, whichever may occur first. As of the date of our filing, to our knowledge, Rhapsody has not incurred any such default events; and RealNetworks and Columbus Nova have not elected to declare all amounts outstanding under our loan agreements to be immediately due and payable.

~~Summarized financial information for Rhapsody, which represents~~ ~~100%~~ ~~of their financial information, is as follows (in thousands):~~

Quarter Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Net revenue $ 42,816
$ 54,306
$ 134,414
$ 160,269
Gross profit 7,245
15,195
19,927
29,288
Net income (loss) (627 ) 1,632
(13,960 ) (11,421 )



Note 56	Fair Value Measurements

Items Measured at Fair Value on a Recurring Basis

The following ~~table presents~~tables present information about our financial assets that have been measured at fair value on a recurring basis as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~,2018, and indicates the fair value hierarchy of the valuation inputs utilized to determine ~~such~~ fair value (in thousands).

Fair Value Measurements as of Amortized Cost as of
September 30, 2017 September 30, 2017
Level 1 Level 2 Level 3 Total
Cash and cash equivalents:
Cash $ 27,254
$ —
$ —
$ 27,254
$ 27,254
Money market funds 16,843
—
—
16,843
16,843
Corporate notes and bonds —
1,500
—
1,500
1,500
Total cash and cash equivalents 44,097
1,500
—
45,597
45,597
Short-term investments:
Corporate notes and bonds —
13,482
—
13,482
13,478
Total short-term investments —
13,482
—
13,482
13,478
Restricted cash equivalents and investments —
2,400
—
2,400
2,400
Warrants issued by Rhapsody (included in Other assets) —
—
1,140
1,140
—
Total $ 44,097
$ 17,382
$ 1,140
$ 62,619
$ 61,475



	Fair Value Measurements as of								Amortized Cost as of
	June 30, 2019								June 30, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash	$	25,660	$	—	$	—	$	25,660	$	25,660
Money market funds	679		—		—		679		679
Total cash and cash equivalents	26,339		—		—		26,339		26,339
Restricted cash equivalents	—		2,124		—		2,124		2,124
Total assets	$	26,339	$	2,124	$	—	$	28,463	$	28,463
Liabilities:
Accrued royalties, fulfillment and other current liabilities
Napster acquisition contingent consideration	$	—	$	—	$	2,685	$	2,685	N/A
Other long-term liabilities
Napster acquisition contingent consideration	—		—		9,215		9,215		N/A
Total liabilities	$	—	$	—	$	11,900	$	11,900	N/A


	Fair Value Measurements as of								Amortized Cost as of		Fair Value Measurements as of								Amortized Cost as of
	December 31, 2016								December 31, 2016		December 31, 2018								December 31, 2018
	Level 1		Level 2		Level 3		Total				Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash	$	32,585	$	—	$	—	$	32,585	$	32,585	$	22,853	$	—	$	—	$	22,853	$	22,853
Money market funds	136		—		—		136		136		12,708		—		—		12,708		12,708
Corporate notes and bonds	—		1,000		—		1,000		1,000
Total cash and cash equivalents	32,721		1,000		—		33,721		33,721		35,561		—		—		35,561		35,561
Short-term investments:
Corporate notes and bonds	—		43,331		—		43,331		43,343		—		24		—		24		24
Total short-term investments	—		43,331		—		43,331		43,343		—		24		—		24		24
Restricted cash equivalents and investments	—		2,700		—		2,700		2,700
Warrant issued by Rhapsody (included in Other assets)	—		—		773		773		—
Total	$	32,721	$	47,031	$	773	$	80,525	$	79,764
Restricted cash equivalents											—		1,630		—		1,630		1,630
Warrants issued by Napster (included in Other assets)											—		—		865		865		—
Total assets											$	35,561	$	1,654	$	865	$	38,080	$	37,215

Income Taxes

During the quarters ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, we recognized income tax expense of $0.2 million related to U.S. and ~~$0.3~~foreign income taxes, respectively. During the six months ended June 30, 2019 and 2018, we recognized income tax expense of $0.5 million and $0.4 million, respectively, related to U.S. and foreign income taxes. ~~The change in income tax expense during the quarter ended September 30, 2017 was largely the result of changes in our jurisdictional income.~~

As of ~~September~~June 30, ~~2017, there have been no material changes to RealNetworks’~~2019, RealNetworks has $4.5 million in uncertain tax positions, ~~disclosures~~of which $4.1 million of unrecognized tax positions was recorded through purchase accounting on January 18, 2019 as ~~provided in Note 14~~a result of the ~~2016 10-K.~~acquisition of Napster. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.

The majority of our tax expense is due to income in our foreign jurisdictions and we have not benefitted from losses in the U.S. and certain foreign jurisdictions in the ~~third~~second quarter of ~~2017.~~2019. 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 ~~September~~June 30, ~~2017,~~2019, 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 ~~third~~second quarter of ~~2017~~2019 was minimal.

As of September 30, 2017, we have not provided for U.S. federal and state income taxes on certain undistributed earnings of our foreign subsidiaries, since such earnings are considered indefinitely reinvested outside the U.S. or may be remitted tax-free to the U.S. If these amounts were distributed to the U.S., in the future in the form of dividends or otherwise, RealNetworks could be subject to additional U.S. income and foreign withholding taxes. It is not practicable to determine the foreign withholding and U.S. income tax liability or benefit on such earnings due to the timing of such future distributions, the availability of foreign tax credits, and the complexity of the computation if such earnings were not deemed to be permanently reinvested. If future events, including material changes in estimates of cash, working capital, and long-term investment requirements necessitate that these earnings be distributed, an additional provision for U.S. income and foreign withholding taxes may be necessary.

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.

~~Geographic Revenue~~

~~Revenue by geographic region was as follows (dollars in thousands):~~

Quarters ended September 30, Nine months ended September 30,
2017 2016 $ Change % Change 2017 2016 $ Change % Change
United States $ 10,084
$ 10,642
$ (558 ) (5 )% $ 30,713
$ 31,379
$ (666 ) (2 )%
Europe 3,337
3,288
49
1 % 9,736
10,002
(266 ) (3 )%
Republic of Korea 12,054
10,582
1,472
14 % 37,026
30,227
6,799
22 %
Rest of world 4,527
6,539
(2,012 ) (31 )% 16,214
17,407
(1,193 ) (7 )%
Total net revenue $ 30,002
$ 31,051
$ (1,049 ) (3 )% $ 93,689
$ 89,015
$ 4,674
5 %

~~Revenue in the United States decreased by $0.6 million in the quarter ended September 30, 2017 compared with the year-earlier period, primarily due to decreases in our Mobile Services segment.~~

Revenue in the United States decreased by $0.7 million in the nine months ended September 30, 2017 as compared to the prior-year period, primarily due to lower revenue in our Mobile Services and Consumer Media segments, offset by increases in our Games segment .

Revenue in Europe was flat in the quarter ended September 30, 2017 compared with the year-earlier period due to lower revenues generated by our Games segments, offset by slight increases in our Mobile Services segment.

Revenue in Europe decreased by $0.3 million in the nine months ended September 30, 2017 compared with the year-earlier period due to lower revenues generated by our Games segment, offset in part by a slight increases in our Consumer Media and Mobile Services segments.

Revenue in Korea increased by $1.5 million in the quarter ended September 30, 2017 compared with the year-earlier period. The increase is due to additional revenues of $1.5 million generated by our low-margin music on demand services in our Mobile Services segment, which is the primary source of revenue in Korea.

Revenue in Korea increased by $6.8 million in the nine months ended September 30, 2017 compared with the year-earlier period. Of this increase, $5.9 million was generated by our low-margin music on demand services in our Mobile Services segment and an additional $1.2 million due to increased sales of intellectual property in our Consumer Media segment.

Revenue in the rest of world decreased by $2.0 million in the quarter ended September 30, 2017 compared with the year-earlier period. The decrease was due to lower revenues in our Consumer Media segment due to timing of shipment by our customers.

Revenue in the rest of world decreased by $1.2 million in the nine months ended September 30, 2017 compared with the year-earlier period. The decrease was due to lower revenues of $2.6 million in our Consumer Media segment, offset in part by increased revenues in our Mobile Services segment of $1.7 million.

New Accounting Pronouncements

See Note 2Recent 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, cash equivalents, short-term investments, and restricted cash (in thousands):


	September 30, 2017		December 31, 2016		June 30, 2019			December 31, 2018
Working capital	$	56,295	$	66,304	$	(37,964	)	$	33,481
Cash, cash equivalents, and short-term investments	59,079		77,052		26,339			35,585
Restricted cash equivalents and investments	2,400		2,700
Restricted cash equivalents					2,124			1,630

The ~~2017~~2019 decrease in working capital from December 31, 2018 was due primarily to the consolidation of ~~cash,~~Napster, which has a negative working capital position, due in part to its accrued music royalties, which totaled $74.1 million at June 30, 2019.

Cash and cash equivalents, and short-term investments decreased from December 31, ~~2016 was~~2018 due ~~primarily~~ to our ongoing negative cash ~~flows used in~~flow from operating activities, which totaled ~~$17.5~~$16.1 million in the first ~~nine~~six months of ~~2017.~~2019, and Napster's net repayment of debt of $4.3 million, offset in part by our January 2019 acquisition of Napster, which added $9.9 million of net cash and cash equivalents. In the near term, we expect to see continued net negative cash flow from operating activities.

The increase in restricted cash equivalents is due to Napster's restricted amounts. See Note 6 Fair Value Measurements for additional details.

The following summarizes cash flow activity (in thousands):

Nine months ended September 30,
2017 2016
Cash provided by (used in) operating activities $ (17,543 ) $ (22,294 )
Cash provided by (used in) investing activities 28,108
13,490
Cash provided by (used in) financing activities (208 ) (677 )



	Six Months Ended June 30,
	2019			2018
Cash used in operating activities	$	(16,099	)	$	(12,730	)
Cash provided by investing activities	11,411			954
Cash used in financing activities	(3,951		)	(129		)

Cash used in operating activities consisted of net income (loss) including noncontrolling interests adjusted for certain non-cash items such as depreciation and amortization, stock-based compensation, gain on equity investment, fair value adjustments to contingent consideration liability and the effect of changes in certain operating assets and liabilities.

Cash used in operating activities was ~~$4.8~~$3.4 million ~~less~~higher in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to the same period in ~~2016.~~2018. Cash used in operations was ~~less~~higher due ~~primarily~~ to ~~a lower~~our higher operating loss recorded for ~~2017 than~~ the ~~same period in~~six months ended June 30, 2019 compared to the prior year ~~driven mainly~~period, partially offset by our ongoing cost reduction efforts, as previously discussed. The effect of the lower operating loss was offset in part by the change in operating assets and liabilities during 2017 compared to 2016. In the current year, we used cash of $6.5 million from the net change in operating assets and ~~liabilities while in 2016 the net change in operating assets and liabilities used $1.0 million.~~liabilities.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, cash provided by investing activities of ~~$28.1~~$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, cash equivalents and restricted cash on Napster's balance sheet at that date. As fully described below, we are obligated to make further cash payments relating to the acquisition. The increase was offset in part by fixed asset purchases of $0.9 million.

For the six months ended June 30, 2018, cash provided by investing activities of $1.0 million was due to sales and maturities ~~net of purchases,~~ of short-term investments, which totaled ~~$29.8~~$5.7 million. The ~~increase was~~maturities were offset ~~in part~~ by our ~~advance paid to Rhapsody~~purchase of ~~$1.5~~a Netherlands-based game development studio in the second quarter of 2018 for net cash consideration of $4.2 million ~~as discussed further in~~ ~~Note 4Rhapsody Joint Venture~~, and by fixed asset purchases of ~~$0.5~~$0.6 million.

~~For~~Cash used by financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019 was $4.0 million. This cash ~~provided by investing activities of $13.5 million~~outflow was primarily due to ~~sales and maturities, net~~Napster's April 30, 2019 payoff of purchases, of short-term investments, which totaled $9.3 million, the receipt of proceeds of $4.0 million from the first anniversary payment relating to the 2015 sale of the Slingo and social casino games business, and the receipt of $2.1 million relating to the sale of a domain name, both of which occurredits outstanding revolver, in the ~~third quarter~~amount of ~~2016. These increases were partially offset by purchases of equipment, software and leasehold improvements of $2.0~~$4.9 million. Napster's borrowings are described in Note 10Notes Payable - Napster.

Cash used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was ~~$0.2~~$0.1 million. This cash outflow was ~~due mainly to tax payments on shares withheld upon vesting of restricted stock.~~

~~Cash used in financing activities for the nine months ended September 30, 2016 was $0.7 million. This cash outflow was primarily~~ due to tax payments on shares withheld upon vesting of restricted ~~stock.~~stock, net of proceeds received from the employee stock purchase plan.

Three customers in our Napster segment accounted for more than 10% of trade accounts receivable as of June 30, 2019, with the customers accounting for 26%, 13% and 10% each. Three customers individually comprised more than 10% of trade accounts receivable at December 31, 2018, with the customers accounting for 23%, 11% and 10% each. One customer in our Napster segment accounted for 14% of consolidated revenue, or $12.0 million, during the six months ended June 30, 2019. No individual customer accounted for 10% or more of our consolidated revenue during the six months ended June 30, 2018.

While we currently have no planned significant capital expenditures for the remainder of ~~2017~~2019 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 5Acquisitions, 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 have accrued $0.8 million as a current liability as of June 30, 2019. We also have recognized a liability for the estimated fair value of the contingent consideration. As discussed in Note 5Acquisitions, this fair value amount was estimated using multiple scenarios for each tranche of contingent consideration and then probability weighting each scenario and discounting them to arrive at an estimated fair value. This fair value calculation is directly impacted by the total estimated enterprise value of Napster. After the completion of the measurement period or in conjunction with changes in fair value unrelated to our preliminary estimate of fair value, the contingent consideration will be adjusted quarterly to fair value through earnings. As of June 30, 2019, the estimated fair value of the contingent consideration was $11.9 million, with $2.7 million recognized as a current liability and $9.2 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, 2019.

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 19Subsequent Event, the bank will extend a revolving line of credit not to exceed $10 million in the aggregate. Advances on the revolving line of credit will be used for working capital and general corporate purposes. As of the date of this filing, we have not requested a draw on the revolving line of credit, though may do so in future.

We believe that ~~our~~RealNetworks' current unrestricted cash and cash equivalents, ~~and short-term investments~~ will be sufficient to meet ~~our~~ anticipated cash needs for working capital and capital expenditures for at least the next 12 months. For Napster to meet its future liquidity needs, it will need additional financing to fund its operations and growth. RealNetworks has no contractual or implied legal obligation to provide funding or other financial support to Napster.

In the future, we may seek to raise additional funds through public or private equity financing, or through other sources such as credit facilities. Such sources of funding may or may not be available to us at 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.

If Rhapsody continues to incur losses, if it otherwise experiences a significant decline in its business or financial condition, or if we provide financial support to or increase our investment in Rhapsody, we could incur further losses on our investment, which could have an adverse effect on our financial condition, liquidity, and results of operations. For further information on Rhapsody, please refer to ~~Note 4Rhapsody Joint Venture~~.

Our cash equivalents ~~and short-term investments~~ consist of investment grade securities, as specified in our investment policy guidelines. The policy limits the amount of credit exposure to any one non-U.S. Government or non-U.S. Agency issue or issuer to a maximum of 5% of the total portfolio. These securities are subject to interest rate risk and will decrease in value if interest rates increase. Because we have historically had the ability to hold our fixed income investments until maturity, we do not expect our operating results or cash flows to be significantly affected by a sudden change inmoney market ~~interest rates in our securities portfolio.~~mutual funds.

We conduct our operations primarily in ~~five~~three functional currencies: the U.S. dollar, the ~~Korean won, the Japanese yen, the British pound~~euro and the ~~euro.~~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 ~~September~~June 30, ~~2017, approximately $19.6~~2019, $17.1 million of ~~unrestricted~~the $26.3 million of cash and cash equivalents ~~and short-term investments~~ was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. income and foreign withholding taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. Additionally, the Company currently has significant net operating losses and other tax attributes that could be used to offset potential U.S. income tax that could result if these amounts were distributed to the U.S. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We do not expect restrictions or potential taxes on repatriation of amounts held outside of the U.S to have a material effect on our overall liquidity, financial condition or results of operations.

Off-Balance Sheet Arrangements

We have operating lease obligations for office facility leases with future cash commitments that are not required to be recorded on our consolidated balance sheet. Accordingly, these operating lease obligations constitute off-balance sheet arrangements. In addition, since we do not maintain accruals associated with certain guarantees, as discussed in Note 16Guarantees, ~~Guarantees,~~ to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q, ~~those~~thus these guarantee obligations ~~also~~ constitute off-balance sheet arrangements.

As disclosed in Note 14Leases, we adopted the new accounting requirement for leases on January 1, 2019 and thus our operating lease obligations are now recorded on our consolidated balance sheet, rather than disclosed as off-balance sheet items.

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 policies and estimates are as follows:

Revenue recognition;

~~Estimating music publishing rights and music royalty accruals;~~

~~Estimating recoverability of deferred costs;~~

~~Estimating allowances for doubtful accounts and sales returns;~~

~~Estimating losses on excess office facilities;~~

~~Valuation of equity method investments;~~Music Royalties;

Valuation of definite-lived ~~assets;~~assets and goodwill; and

~~Valuation of goodwill;~~

~~Stock-based compensation; and~~

Accounting for income taxes.

Revenue Recognition. We recognize revenue ~~when persuasive evidence~~from contracts with customers as control of ~~an arrangement exists, delivery has occurred,~~ the ~~sales price~~promised good or service is ~~fixed or determinable,~~transferred. Please refer to Note 3Revenue Recognition in both this 10-Q and collection is probable. Physical products are considered delivered to the customer once they have been shipped and title and risk of loss have been transferred. For online sales, the products or services are considered delivered at the time the product or services are made available, digitally, to the end user.our 2018 10-K for further details regarding our recognition policies.

~~We recognize revenue~~Music Royalties. In certain circumstances, Napster estimates the amounts of royalties payable to record labels, music publishers, or other rights-holders in relation to Napster’s use of music content on ~~a gross or net basis. In most arrangements, we contract directly with end user customers,~~its music services (both domestic and are the primary obligor. In such arrangements, we recognize revenue on a gross basis. In some cases, we utilize third-party distributors who are the primary obligor to sell products or services directly to end user customers. In such instances, we recognize revenue on a net basis.

In our direct to consumer operations, we derive revenue primarily through (1) subscriptions sold by our Games segment and subscriptions of SuperPass within our Consumer Media segment, (2) sales of content downloads, software and licenses offered by our Consumer Media, Mobile Services, and Games segments and (3) the sale of advertisinginternational). Material differences in these estimates and the ~~distribution of third-party products on our websites and in our games.~~

Consumer subscription products are paid in advance, typically for monthly, quarterly or annual duration. Subscription revenue is recognized ratably over the related subscription time period. Revenue from sales of content downloads, software and licenses is recognized at the time the product is made available, digitally,actual amounts ultimately determined to the end user. Revenue generated from advertising on our websites and from advertising and the distribution of third-party products included in our products is recognized as revenue at the time of delivery.

We also generate revenue through business-to-business channels by providing services within our Mobile Services segment enabling mobile carriers to deliver audio and video content to their customers and by selling software licenses and products and related support and other services. Revenue generated from services provided to mobile carriers that enable the delivery of audio and video content to their customers is recognized as the services are provided. Setup fees to build these services are recognized ratably upon launch of the service over the remaining expected term of the service.

Non-software revenue arrangements containing multiple elements are divided into separate units of accounting, after being evaluated for specific criteria. If the criteria for separation are met, revenue is allocated to the individual units using the relative price method. If the criteria are not met, the elements are treated as one unit of accounting and revenue recognition is delayed until all elements have been delivered. In the case of revenue arrangements containing software, elements are divided into separate units of accounting only when vendor-specific objective evidence has been established. In cases where vendor-specific objective evidence has not been established, undelivered elements are combined into one unit of accounting and are not recognized in revenue until all elements have been delivered.

~~Estimating Music Publishing Rights and Music Royalty Accruals.~~ ~~We have made estimates of amounts that may~~ be ~~owed related to music royalties for our historical domestic and international music services. Material differences~~payable may impact the

amount and timing of ~~our~~ expense in future periods. Napster’s license agreements with rights-holders for ~~any period if management made different~~the content used on its music service are often complex, and the determination of royalty accruals can involve significant judgments, ~~or utilized different estimates. Under copyright law, we may be required to pay licensing fees for digital sound recordings~~assumptions, and ~~compositions we have delivered. Copyright law generally does not specify the rate and terms~~estimates of the ~~licenses, which~~amounts to be paid. The variables involved in determining royalty payments or accruals may include the applicable revenue, the type of content used, the country it is used in, the number of plays, the number of subscribers, the rights granted to trial or promotional users, and identification of the appropriate license holder, among other variables. In addition, some rights-holders have allowed the use of their content prior to finalizing the applicable license agreement. In these circumstances, royalties are ~~determined by voluntary negotiations among the parties or, for certain compulsory licenses where voluntary negotiations are unsuccessful, by arbitration. Our estimates are~~accrued based on ~~contracted or statutory rates, when established, or management’s~~our best ~~estimates based on facts and circumstances regarding~~estimate of the ~~specific music services and agreements~~expected amount.

In certain jurisdictions, rights-holders may have several years to claim royalties for musical compositions, in ~~similar geographies or with similar agencies.~~respect of which ownership has not already been claimed. While ~~we have based our~~Napster bases its estimates on contractual rates, historical experience and on various other assumptions that management believes to be reasonable, ~~under the circumstances,~~ actual results may differ materially from these estimates under different assumptions or conditions.

~~Estimating Recoverability~~Many of ~~Deferred Costs.~~ ~~We defer costs on projects for service revenue and system sales. Deferred costs consist primarily of direct and incremental costs~~our content license agreements give the rights-holders the right to ~~customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for~~audit our ~~employees and other third parties. We recognize such costs as a component of cost of revenue,~~royalty payments. Given the timing of which is dependent upon the revenue recognition policy by contract. For revenue recognized under the completed contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer acceptance. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized ratably over the termcomplexity of the contract, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each balance sheet date, we review deferred costs to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.

Assessing the recoverability of deferred project costs is based on significant assumptions and estimates, including future revenue and cost of sales. Significant or sustained decreases in revenue or increases in cost of sales in future periodslicensing arrangements, any such audit could result in ~~impairments~~disputes over whether Napster has correctly reported and paid the proper royalties. If such a dispute were to occur, we could be required to pay additional royalties, and the amounts involved could be material.

Napster may occasionally be involved in legal actions or other third-party assertions related to use of ~~deferred project costs. We cannot accurately predict~~content on our platform. These actions might be costly and could adversely impact our financial position, results of operations, or cash flows. Napster records a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated. Determining whether a loss is probable and ~~timing of~~estimable requires management to use significant judgment. Given the uncertainties associated with any ~~such impairments. Should~~litigation, the ~~value of deferred project costs become impaired, we would record the appropriate charge, which~~actual outcome can be different than our estimates and could ~~have a material adverse effect on~~adversely affect our ~~financial condition or~~ results of ~~operations.~~

~~Estimating Allowances for Doubtful Accounts~~operations, financial position, and ~~Sales Returns.~~ We make estimates of the uncollectible portion of our accounts receivable. We specifically analyze the age of accounts receivable and historical bad debts, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Similarly, we make estimates of potential future product returns related to current period revenue. We analyze historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance. Significant judgments and estimates are made and used in connection with establishing allowances for doubtful accounts and sales returns. Material differences may result in the amount and timing of our revenue for any period if we were to make different judgments or utilize different estimates or actual future experience was different from the judgments and estimates.

~~Estimating losses on excess office facilities.~~ We make significant estimates in determining the appropriate amount of accrued loss on excess office facilities, including estimates of sublease income expected to be received. If we make different estimates, our loss on excess office facilities could be significantly different from that recorded, which could have a material impact on our operating results.cash flows.

Valuation of ~~Equity Method Investments.~~Definite-Lived Assets and Goodwill. ~~We use the equity method of accounting for investments~~Assets acquired and liabilities assumed in circumstances where we have the ability to exert significant influence, but not control, over an investee or joint venture. We record our percentage interest in the investee's recorded income or loss and changes in the investee's capital under this method, which will increase or decrease the reported value of our investment. See ~~Note 4~~, ~~Rhapsody Joint Venture, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q, for additional information. We initially record our investment based on~~ a business acquisition are measured at fair value ~~analysis~~under the purchase accounting method and any goodwill is recognized as the excess of the ~~investment.~~

We evaluate impairment of an investment valued under the equity method if events and circumstances warrant. An impairment charge would be recorded if a decline in value of an equity investment below its carrying amount were determined to be other than temporary. In determining if a decline is other than temporary, we consider factors such as the length of time and extent to whichtotal purchase price over the fair value of assets acquired and liabilities assumed. The fair value estimates are based upon estimates and assumptions relating to future revenues, cash flows, operating expenses and costs of capital. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the ~~investment has been less than~~cash flows of long-term operating plans and risk-commensurate discount rates and cost of capital. In addition, the size, scope, and complexity of an acquisition will affect the time it takes to obtain the necessary information to record the acquired assets and liabilities at fair value. It may take up to one year to finalize the initial fair value estimates used in the preliminary purchase accounting. Accordingly, it is reasonably likely that our initial estimates will be subsequently revised, which could affect carrying ~~amount~~amounts of ~~the investee or joint venture, the near-term~~goodwill, intangibles, noncontrolling interests, contingent consideration, and ~~longer-term operating~~potentially other assets and liabilities in our financial ~~prospects of the investee or joint venture and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery.~~statements.

~~Valuation of Definite-Lived Assets.~~ ~~Definite-lived~~Our definite-lived assets consist primarily of ~~property, plant and equipment, as well as~~ amortizable intangible assets acquired in business ~~combinations.~~combinations, property, plant and equipment, and right-of-use operating lease assets. Definite-lived assets are amortized on a straight line basis over their estimated useful lives. We review definite-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison

of their carrying amount to future undiscounted cash flows the assets are expected to generate. If definite-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value.

The impairment analysis of definite-lived assets is based upon estimates and assumptions relating to our future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital. Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, and their resulting impact on the estimates and assumptions relating to the value of our definite-lived assets could result in the need to perform an impairment analysis in future periods which could result in a significant impairment. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary from period to period. Changes in these estimates and assumptions could materially affect the estimate of future undiscounted cash flows and related fair market values of these assets and result in significant impairments, which could have a material adverse effect on our financial condition or results of operations. For further discussion, please see the risk factor entitled, "Any impairment to our goodwill, and definite-lived assets could result in a significant charge to our earnings" under Item 1A Risk Factors of our 2016 10-K.

~~Valuation of Goodwill.~~We test goodwill for impairment on an annual basis, in our fourth quarter, or more frequently if circumstances indicate reporting unit carrying values may exceed their fair values. Circumstances that may indicate a reporting unit's carrying value exceeds its fair value include, but are not limited to: poor economic performance relative to historical or projected future operating results; significant negative industry, economic or company specific trends; changes in the mannerAs part of ~~our use of the assets or the plans for our business; and loss of key personnel.~~

~~When evaluating goodwill for impairment, based upon our annual~~this test, ~~or due to changes in circumstances described above,~~ we first perform a qualitative assessment to determine if the fair value of a reporting unit is more likely than not less than the reporting unit's carrying amount including goodwill. If this assessment indicates it is more likely than not, we then compare the carrying value of the reporting unit to the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, we then calculate the implied estimated fair value of goodwill for the reporting unit and compare it to the carrying amount of goodwill for the reporting unit. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to implied estimated value.

~~Significant judgments~~

The impairment analysis of definite-lived assets and goodwill is based upon estimates ~~are required in determining the reporting units~~ and ~~assessing the fair value~~assumptions relating to our future revenue, cash flows, operating expenses, costs of ~~the reporting units.~~capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital.

~~Stock-Based Compensation.~~ ~~Stock-based compensation cost is estimated at the grant date based~~ Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, and their resulting impact on the ~~award’s fair~~estimates and assumptions relating to the value of our definite-lived and is recognized as expense over the requisite service period, which is the vesting period. For stock options, the fair value is calculated using the Black-Scholes option-pricing model or other appropriate valuation models such as a Monte Carlo simulation. The valuation models require various highly judgmental assumptions including volatility in our common stock price and expected option life. If any of the assumptions usedgoodwill assets could result in the ~~valuation models change significantly, stock-based compensation expense for new awards may differ~~need to perform an impairment analysis in future periods which could result in a significant impairment. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary from period to period. Changes in these estimates and assumptions could materially affect the estimate of future cash flows and related fair values of these assets and result in ~~the future from the amounts recorded in~~significant impairments, which could have a material adverse effect on our ~~consolidated statement~~financial condition or results of operations. For ~~all awards, we are required~~further discussion, please see the risk factor entitled, "Any impairment to ~~estimate forfeitures at the time of grant~~our goodwill and ~~revise those estimates~~definite-lived assets could result in ~~subsequent periods if actual forfeitures differ from those estimates. We use historical data~~a significant charge to ~~estimate pre-vesting forfeitures.~~our earnings" under Item 1A Risk Factors.

Accounting for Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred income tax expense and deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities and operating loss and tax credit carryforwards are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are expected to be recovered or settled. We must make assumptions, judgments and estimates to determine the current and deferred provision for income taxes, deferred tax assets and liabilities and any valuation allowance to be recorded against deferred tax assets. Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

Each reporting period, we must periodically assess the likelihood that our deferred tax assets will be recovered from future sources of taxable income, and to the extent that recovery is not more likely than not, a valuation allowance must be established. The establishment of a valuation allowance and increases to such an allowance result in either increases to income tax expense or reduction of income tax benefit in the statement of operations and comprehensive income. In certain instances, changes in the valuation allowance may be allocated directly to the related components of shareholders' equity on the consolidated balance sheet. Factors we consider in making such an assessment include, but are not limited to, past performance and our expectation of future taxable income, macroeconomic conditions and issues facing our industry, existing contracts, our ability to project future results and any appreciation of our investments and other assets.

~~As of September 30, 2017, $19.6 million of the $59.1 million of cash, cash equivalents, and short-term investments was held by our foreign subsidiaries.~~

As of September 30, 2017, we have not provided for U.S. federal and state income taxes on certain undistributed earnings of our foreign subsidiaries, since such earnings are considered indefinitely reinvested outside the U.S. or may be remitted tax-free to the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, RealNetworks could be subject to additional U.S. income and foreign withholding taxes. It is not practicable to determine the foreign withholding and U.S. federal income tax liability or benefit on such earnings due to the timing of such future distributions, the availability of foreign tax credits, and the complexity of the computation if such earnings were not deemed to be permanently reinvested. If future events, including material changes in estimates of cash, working capital, and long-term investment requirements necessitate that these earnings be distributed, an additional provision for U.S. income and foreign withholding taxes may be necessary.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our market risk involves forward-looking statements. All statements that do not relate to matters of historical fact should be considered forward-looking statements. Actual results could differ materially from those projected in any forward-looking statements.

Interest Rate Risk. Our exposure to interest rate risk from changes in market interest rates relates primarily to ~~our short-term investment portfolio. Our short-term investments consist of investment grade debt securities as specified in our investment policy. Investments in both fixed and~~Napster's Notes payable. Napster's borrowing arrangements have floating rate ~~instruments carry~~interest payments and thus have a degree of interest rate ~~risk. The fair value of fixed rate securities may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected~~risk, if interest rates ~~fall. Additionally, a declining rate environment creates reinvestment risk because as securities mature the proceeds are reinvested at a lower rate, generating less interest income. See~~ ~~Note 5~~, Fair Value Measurements, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q, for additional information. Due in part to these factors, our future interest income may be adversely impacted due to changes in interest rates. In addition, we may incur losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. Because we have historically had the ability to hold our short-term investments until maturity, we would not expect our operating results or cash flows to be significantly impacted by a sudden change in market interest rates. There have been no material changes in our investment methodology regarding our cash equivalents and short-term investments during the quarter ended September 30, 2017.increase. Based on ~~our cash, cash equivalents, short-term investments, and restricted cash equivalents~~Napster's outstanding Notes payable as of ~~September~~June 30, ~~2017,~~2019, a hypothetical 10% increase/decrease in interest rates would not increase/decrease our annual interest ~~income~~expense or cash flows by more than a nominal amount.

~~Investment Risk.~~ As of September 30, 2017, we had an investment in the voting capital stock of a privately held technology company. See Note 1, Description of Business and Summary of Significant Accounting Policies - ~~Equity Method Investments,~~ ~~and Management's Discussion and Analysis of Financial Condition and Results of Operations -~~ ~~Critical Accounting Policies and Estimates~~ (~~Valuation of equity method investments) in our Form 10-K for details on our accounting treatment for this investment, including the analysis of other-than-temporary impairments.~~

Foreign Currency Risk. We conduct business internationally in several currencies and thus are exposed to adverse movements in foreign currency exchange rates.

Our exposure to foreign exchange rate fluctuations arise in part from: (1) translation of the financial results of foreign subsidiaries into U.S. dollars in consolidation; (2) the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes; and (3) non-U.S. dollar denominated sales to foreign customers. ~~We manage a portion of these risks through the use of financial derivatives, but fluctuations could impact our results of operations and financial position.~~

Where appropriate, we manage foreign currency risk for certain material short-term intercompany balances through the use of foreign currency forward contracts. These contracts require us to exchange currencies at rates agreed upon at the

contract’s inception. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the short-term intercompany balances, these financial instruments help alleviate the risk that might otherwise result from certain changes in currency exchange rates. We do not designate our foreign exchange forward contracts related to short-term intercompany accounts as hedges and, accordingly, we adjust these instruments to fair value through results of operations. However, we may periodically hedge a portion of our foreign exchange exposures associated with material firmly committed transactions, long-term investments, highly predictable anticipated exposures and net investments in foreign subsidiaries. To the extent we continue to experience adverse economic conditions, our unhedged exposures are impacted by movements in currency exchange rates and we may record losses related to such unhedged exposures in future periods that may have a material adverse effect on our financial condition and results of operations.

Our foreign currency risk management program reduces, but does not entirely eliminate, the impact of currency exchange rate movements.

We have cash balances denominated in foreign currencies which are subject to foreign currency fluctuation risk. The majority of our foreign currency denominated cash is held in ~~Korean won~~euro, Chinese yuan and ~~euros.~~Japanese yen. A hypothetical 10% increase or decrease in ~~the Korean won and euro~~those currencies relative to the U.S. dollar as of ~~September~~June 30, ~~2017~~2019 would not result in a material impact on our financial position, results of operations or cash flows.


Item 4.	Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~September~~June 30, ~~2017~~.2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based upon that evaluation, our chief executive officer and chief financial officer concluded that, as of ~~September~~June 30, ~~2017~~,2019, our disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting

~~There~~As disclosed in Note 5Acquisitions, on January 18, 2019, RealNetworks acquired an additional 42% interest in Napster from its former joint venture partner resulting in RealNetworks having a controlling interest, owning 84% of Napster's outstanding equity. Napster is included in RealNetworks' condensed consolidated financial statements from the date of acquisition to June 30, 2019. As of June 30, 2019, our management has not fully assessed Napster's internal controls over financial reporting and will be testing Napster's internal controls for design and operating effectiveness throughout 2019. The Securities and Exchange Commission permits companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition, and our management has elected to exclude Napster from our assessment. Napster accounted for approximately 68% of total assets as of June 30, 2019 and approximately 63% of total revenues of the Company for the six months ended June 30, 2019. We have performed additional analysis and procedures to enable management to conclude that we believe the condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented in conformity with U.S. GAAP.

Except for the change related to Napster, there have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the ~~third~~second quarter of ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

See Note 15, Commitments and Contingencies, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q.


Item 1A.	Risk Factors

~~Our operations and financial results are subject to various risks and uncertainties. Readers~~You should carefully consider the ~~risk factors~~risks described below together with all of the other information included in ~~Part I, Item 1A, "Risk Factors" in our Annual Report on~~this Form 10-K (as amended) for the year ended December 31, 2016, which could adversely affect our business or financial condition, including (without limitation) results of operations, liquidity and the trading price of our common stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2016.10-Q. The risks and uncertainties described ~~in our 2016 Form 10-K and in this and other reports filed with the Securities and Exchange Commission~~below are not the only ~~risks~~ones facing our company. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occurs, our business, financial condition or operating results, and the trading price of our common stock, could be materially harmed.

Our growth initiatives could take longer than planned, be unsuccessful, or deplete our cash resources potentially leading to the incurrence of debt, any of which would have a material adverse effect on the performance of our businesses and financial results.

In recent years, we have developed new products and technologies, and funded initiatives, intended to create growth in our businesses, while simultaneously taking steps to reduce costs and increase profitability. These growth initiatives, several of which have been unsuccessful over recent years, have impacted all segments of our organization, requiring us to allocate limited resources among our diverse business units.

Given the ambitious and significant nature of our growth initiatives, there is substantial risk that we may be unsuccessful in implementing our plans in a timely manner, our cash reserves may be depleted or insufficient to fully implement our plans, our growth initiatives may not gain adequate momentum, or the combination of our growth initiatives and cost reductions may not prove to be profitable. In any such case, our business would suffer, and our operational and financial results would be negatively impacted to a significant degree.

In August 2019, RealNetworks and Napster entered into a loan agreement with a third-party financial institution. Under the terms of that agreement, the bank will extend a revolving line of credit not to exceed $10 million in the aggregate. The loan agreement contains customary covenants, including financial covenants, minimum EBITDA levels, and maintaining an unrestricted cash balance of $3.5 million. We have not had a debt facility in place in our recent past, therefore the entry into this facility introduces new risks to the company, including the risk that constraints around covenants may lead to less flexibility in operational decision making, the risk of default and various implications thereof, and the potential increase in liabilities on our balance sheet in the event that we draw down the line of credit. The occurrence of any of these risks would negatively impact our financial results and stock price.

Our 84% equity interest in Napster could result in material negative implications to our financial condition and stock price.

From March 31, 2010, when we completed the restructuring of our digital audio music service joint venture, Rhapsody America LLC, now doing business under the Napster brand, until January 18, 2019, we did not have a majority voting interest in Napster. During that period, we accounted for Napster using the equity method of accounting and disclosed only strategic, business and financial information regarding Napster in our financial statements and disclosures, in accordance with accounting principles generally accepted in the United States, or GAAP. Historically, Napster generated significant accounting losses and, applying the equity method of accounting, we recognized our share of such losses on our investment. As we had no implicit or explicit commitment to provide future financial support to Napster, we did not record any further share of Napster losses that would reduce our carrying value of Napster below zero.

On January 18, 2019, we acquired an additional 42% of the outstanding equity of Rhapsody International, Inc., which we refer to as Napster as noted above, from a third party in a distressed sale resulting in our ownership of an aggregate of 84% of Napster's outstanding stock. See Note 5Acquisitions, for additional information. We also now have the right to nominate directors constituting a majority of the Napster board of directors, however, Napster will continue to operate as an independent business with its own board of directors, strategy, and leadership team. Accordingly, although we have no legal or constructive obligation to fund Napster losses and it is our intention to have Napster continue to operate as an independent company, RealNetworks has in the past extended loans to Napster and may do so in the future.

Due to our majority voting interest and the consolidation of Napster's results and financial position with ours, Napster's current liabilities are included in RealNetworks' consolidated balance sheet, including accrued but unbilled music royalties related to past services, the ultimate payment of which is uncertain. These liabilities, although not a legal or constructive obligation of RealNetworks, result in consolidated working capital being negative, which causes management to consider whether liquidity risks exist. While we believe that these liabilities are separate obligations of Napster and RealNetworks assumes no responsibility for these liabilities, in the remote event that any such liquidity issues become significant or are

deemed material to our consolidated financial statements, there could be material negative implications to our financial condition and the trading price of our stock.

As discussed in Note 5Acquisitions, under the acquisition method of accounting, the purchase price is allocated to the assets acquired and the liabilities assumed based on their estimated fair values. The estimated fair values of the assets and liabilities, as well as the contingent consideration and noncontrolling interests, all involve the application of judgments and estimates, including but not limited to, estimation of expected future cash flows and related discount rates. The purchase price allocation is preliminary and is subject to change prior to finalization, which may result from additional information becoming available and additional analyses being performed on these acquired assets and assumed liabilities. The final purchase price allocation could result in material differences, which could have a material impact on our operating results and financial condition.

In addition, now that we are consolidating Napster’s quarterly financial results beginning with our first quarter of 2019, we will need to receive Napster’s quarterly financial statements and related information in order to timely prepare our quarterly and annual consolidated financial statements and disclosures in our quarterly reports on Form 10-Q and annual reports on Form 10-K. Any failure in receiving Napster's financial statements and related information in a timely and materially accurate manner could cause our reports to be filed in an untimely and/or inaccurate manner, which would preclude us from utilizing certain registration statements and could negatively impact our stock price. See Note 5Acquisitions, for further information related to Napster.

We need to successfully monetize our new products and services in order to sustain and grow our businesses, and manage our cash resources.

In order to sustain our current level of business and to implement our growth initiatives, we must successfully monetize our new products and services, including through existing and new relationships with distribution partners. Our digital media products and services must be attractive and useful to distribution partners and end users. The successful acceptance and monetization of these products and services, therefore, is subject to unpredictable and volatile factors beyond our control, including end-user preferences, competing products and services, the rapid pace of change in the market and the effectiveness of our distribution channels. Any failure by us to timely and accurately anticipate consumers’ changing needs and preferences, emerging technological trends and data privacy norms, or changes in the competitive or regulatory landscape for our products and services could result in a failure to monetize our new products or the loss of market opportunities, both of which we have experienced at various times in our past.

Moreover, in order to grow our new businesses, we must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether the products and services that we are developing or have introduced will meet the demands of the relevant market. As we have experienced, we may not realize a sufficient return, or may experience losses, on these investments, thereby further straining our limited cash resources and negatively affecting our ability to pursue other needed growth or strategic opportunities.

Sustaining and growing our businesses, and managing our constrained cash resources, are subject to these risks inherent in developing, distributing and monetizing our new products and services. Our failure to manage these risks could further impair our operations and financial results to a material degree.

Furthermore, our products and services have been in the past and may be in the future subject to legal challenge. Responding to any such claims may require us to enter into royalty and licensing agreements on unfavorable terms, require us to stop distributing or selling, or to redesign our products or services, or to pay damages, any of which could constrain our growth plans and cash resources.

Our businesses, including in connection with our growth initiatives, face substantial competitive challenges that may impair our success, thus negatively impacting our future growth.

Our digital media products and services, including legacy and products/services central to our growth initiatives, face a wide variety of competitors, many of which have longer operating histories, greater name or brand recognition, more employees and significantly greater resources than we do. In addition, current and potential competitors may include relatively new businesses that develop or use innovative technologies, products or features that could disrupt the market for technologies, products or features we currently market or are seeking to develop. In attempting to compete with any or all of these competitors, we may experience, as we have in the past, some or all of the following consequences, any of which would adversely affect our operating results and the trading price of our stock:

reduced prices or margins;

loss of current and potential customers, or partners and potential partners who distribute our products and services or who provide content that we distribute to our customers;

changes to our products, services, technologies, licenses or business practices or strategies;

lengthened sales cycles;

inability to meet demands for more rapid sales or development cycles;

industry-wide changes in content distribution to customers or in trends in consumer consumption of digital media products and services;

pressure to prematurely release products or product enhancements; or

degradation in our stature or reputation in the market.

Our Consumer Media technologies for media playback and production (RealPlayer, RealMedia VB and RealMedia HD) compete with alternative media playback technologies and audio and video content formats that have obtained broad market penetration. RealMedia VB and RealMedia HD are codecs, technology that enables compression and decompression of the media content in a (usually proprietary) format. We license our codec technology primarily to computer, smartphone and other mobile device manufacturers, and also to other partners that can support our efforts to build a strong ecosystem, like content providers and integrated circuit developers. To compete effectively, codec technologies must appeal to, and be adopted for use by, a wide range of parties: producers and providers of media content, consumers of media content, and device manufacturers who pre-load codec technologies into their devices. Our ability to sustain or grow this business is dependent on the successful promotion and adoption of our codec technologies to a wide and diverse target market, which is a complex and highly uncertain undertaking. If we are unable to compete successfully, our Consumer Media business could continue to decline.

The market for our Mobile Services business is highly competitive and continues to rapidly evolve. Our SaaS services face competition from a proliferation of applications and services, many of which carriers can deploy or offer to their subscribers, or which consumers can acquire independently of their carrier. We expect pricing pressure in this business to continue to materially impact our operating results in this business.

The branded services in our Games business compete with other developers, aggregators and distributors of mobile, online, and downloadable games. Our competitors vary in size and capabilities, some of which have high volume distribution channels and greater financial resources than we do; while others may be smaller and more able to quickly or efficiently adjust to market conditions. We also face significant price competition in the casual games market, and some of our competitors may be able to offer games for free, or reduce prices more aggressively. We expect competition to continue to intensify in this market. Our games development studios compete primarily with other developers of mobile, online, and downloadable games, and must continue to develop popular and high-quality game titles. Our Games business must also continue to execute on opportunities to expand the play of our games on a variety of non-PC platforms, including mobile, in order to maintain our competitive position and to grow the business.

The distribution and license of our technology products and services are governed by contracts with third parties, the terms of which subject us to significant risks that could negatively impact our revenue, expenses and assumption of liability related to such contracts.

In our Consumer Media and Mobile Services segments, we distribute and license most of our technology products and services pursuant to contracts with third parties, such as mobile carriers and their partners, online service providers, and OEMs and device manufacturers, many of whom may have stronger negotiating leverage due to their size and reach. These contracts govern the calculation of revenue generated and expenses incurred, how we recognize revenue and expenses in our financial statements, and the allocation of risk and liabilities arising from the product or service or distribution thereof. Terms impacting revenue, over which we may have limited if any control, may involve revenue sharing arrangements, end user pricing, usage levels, and exclusivity, all of which significantly affect the level of revenue that we may realize from the relationship. Moreover, contract terms around marketing and promotion of our products and other expense allocation could result in us bearing higher expenses or achieving weaker performance than we had anticipated from the relationship.

In addition, although our contracts with third parties are typically for a fixed duration, they could be terminated early; and they may be renegotiated on less favorable terms or may not be renewed at all by the other party. We must, therefore, seek additional contracts with third parties on an ongoing basis to sustain and grow our business. We expect to face continuing and increased competition for the technology products and services we provide, and there is no assurance that the parties with which we currently have contracts will continue or extend current contracts on the same or more favorable terms, or that we will obtain alternative or additional contracts for our technology products and services. As we have recently experienced in our China business, the further loss of existing contracts, the failure to enter new contracts, or the deterioration of terms in our contracts with third parties could materially harm our operating results and financial condition.

Nearly all of our contracts in which we provide to another party services or rights to use our technology include some form of obligation by us to indemnify the other party for certain liabilities and losses incurred by them, including liabilities resulting from third party claims for damages that arise out of the use of our technology. These indemnification terms provide us with certain procedural safeguards, including the right to control the defense of the indemnified party. We have in the past incurred costs to defend and settle such claims. Claims against which we may be obligated to defend others pursuant to our contracts could in the future result in payments that could materially harm our business and financial results.

Our operating results are difficult to predict and may fluctuate, which may contribute to continued weakness in our stock price.

The trading price for our common stock has a history of volatility although, more recently, has been in decline. As a result of the rapidly changing markets in which we compete, and restructuring, impairment and other one-time events specific to us, our operating results may fluctuate or continue to decline from period to period, which may contribute to further volatility or continued weakness of our stock price. Moreover, the general difficulty in forecasting our operating results and metrics, especially when factoring in our growth initiatives, could result in actual results that differ materially from expected results, again causing further volatility and continued weakness in our stock price.

The difficulty in forecasting our operating results may also cause over or under investment in certain growth initiatives, as such investment is often planned based on expected financial results, thus causing more severe fluctuations in operating results and, likely, further volatility in our stock price.

Any impairment to our goodwill and definite-lived assets could result in a material charge to our earnings.

In accordance with GAAP, we test goodwill for possible impairment on an annual basis or more frequently in the event of certain indications of possible impairment. We review definite-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in a reporting unit’s fair value, changes in our operating plans and forecasts, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of our business, a significant sustained decline in our market capitalization and other factors. If we were to determine that an impairment had occurred, we would be required to record an impairment charge, which could have a material negative, and unpredicted, impact on our financial results. We recorded goodwill and definite-lived intangibles upon the acquisition of Napster that totaled $72.2 million on the acquisition date. See Note 5Acquisitions, for further information related to Napster. The total carrying value of our goodwill and definite-lived intangible assets as of June 30, 2019 was $87.0 million.

Continued loss of revenue from our subscription services is likely to continue to harm our operating results.

Our operating results have been and will continue to be adversely impacted by the loss of subscription revenue related to our more traditional products and services. Subscribers cancel their subscriptions to our services for many reasons, including a perception that they do not use the services sufficiently or that the service does not provide enough value, a lack of attractive or exclusive content generally or as compared with competitive service offerings, or because customer service issues are not satisfactorily resolved. Revenue from our SuperPass subscription service, for example, has continued to decline over several periods, due to changes in consumer preferences and changes on our part to focus on other products and services we offer, and we expect this trend to continue.

Government regulation of the Internet, facial recognition technology, and other related technologies is evolving, and unfavorable developments could have an adverse effect on our operating results.

We are subject to regulations and laws specific to the marketing, sale and delivery of goods and services. These laws and regulations, which continue to evolve, cover taxation, user privacy, data collection and protection, copyrights, electronic contracts, sales procedures, automatic subscription renewals, credit card processing procedures, consumer protections, digital games distribution, broadband Internet access and content restrictions. We cannot guarantee that we have been or will be fully compliant in every jurisdiction, as it is not entirely clear how existing laws and regulations governing issues such as privacy, taxation and consumer protection apply or will be enforced with respect to the products and services we sell. Moreover, as Internet commerce continues to evolve, increasing regulation and/or enforcement efforts by federal, state and foreign agencies and the prospects for private litigation claims related to our data collection, privacy policies or other e-commerce practices become more likely. In addition, the adoption of any laws or regulations or the imposition of other legal requirements that adversely affect our ability to market, sell, and deliver our products and services could decrease our ability to offer or customer demand for our service offerings, resulting in lower revenue. For example, the European Union's General Data Protection Regulation (GDPR), effective in May 2018, created a varietyof new compliance obligations, with significant penalties for noncompliance. We cannot provide assurance that the changes that we have adopted to our business practices will be compliant or that new compliance frameworks such as this will not have a negative impact on our financial results.

In addition, through the operation of our SAFR product, we are subject to regulations and laws generally and specifically applicable to the provision of facial recognition technology. New laws and regulations are under discussion and those that exist are untested, thus we cannot guarantee that we have been or will be fully compliant in every jurisdiction.

Future regulations, or changes in laws and regulations or their existing interpretations or applications, could require us to further change our business practices, raise compliance costs or other costs of doing business and result in additional historical or future liabilities for us, resulting in adverse impacts on our business and our operating results.

As a consumer-facing business, we receive complaints from our customers regarding our consumer marketing efforts and our customer service practices. Some of these customers may also complain to government agencies, and from time to time, those agencies have made inquiries to us about these practices. In addition, we may receive complaints or inquiries directly from governmental agencies that have not been prompted by consumers. We cannot provide assurance that governmental agencies will not bring future claims, as they have on occasion in the past, regarding our marketing, or consumer services or other practices.

We face financial and operational risks associated with doing business in non-U.S. jurisdictions and operating a global business, that have in the past and could in the future have a material adverse impact on our business, financial condition and results of operations.

A material portion of our revenue is derived from sales outside of the U.S. and most of our employees are located outside of the U.S. Consequently, our business and operations depend significantly on global and national economic conditions and on applicable trade regulations and tariffs. For example, our business in China could be negatively affected by an actual or perceived lack of stability or consistency in U.S.-China trade policy. The growth of our business is also dependent in part on successfully managing our international operations. Our non-U.S. sales, purchases and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:

periodic local or geographic economic downturns and unstable political conditions;

price and currency exchange controls;

fluctuation in the relative values of currencies;

difficulty in repatriating money, whether as a result of tax laws or otherwise;

compliance with current and changing tax laws, and the coordination of compliance with U.S. tax laws and the laws of any of the jurisdictions in which we do business;

difficulties protecting intellectual property;

compliance with labor laws and other laws governing employees;

local labor disputes;

changes in trading policies, regulatory requirements, tariffs and other barriers, or the termination or renegotiation of existing trade agreements;

impact of changes in immigration or other policies impacting our ability to attract, hire, and retain key talent; and

difficulties in managing a global enterprise, including staffing, collecting accounts receivable, and managing suppliers, distributors and representatives.

Because consumers may consider the purchase of our digital entertainment products and services to be a discretionary expenditure, their decision whether to purchase our products and services may be influenced by macroeconomic factors that affect consumer spending such as unemployment, access to credit, negative financial news, and declines in income. In addition, mobile telecommunication carriers and other business partners may reduce their business or advertising spending with us or for our products and services they distribute to users in the face of adverse macroeconomic conditions, such as financial market volatility, government austerity programs, tight credit, and declines in asset values. We have in the past recorded material asset impairment charges due in part to weakness in the global economy, and we may need to record additional impairments to our assets in future periods in the event of renewed weakness and uncertainty in the global or a relevant national economy. Accordingly, any significant weakness in the national and/or global economy could materially impact our business, financial condition and results of operations in a negative manner.

Our international operations involve risks inherent in doing business globally, including difficulties in managing operations due to distance, language, and cultural differences, local economic conditions, different or conflicting laws and regulations, taxes, and exchange rate fluctuations. The functional currency of our foreign subsidiaries is typically the local currency of the country in which each subsidiary operates. We translate our subsidiaries’ revenues into U.S. dollars in our financial statements, and continued volatility in foreign exchange rates, particularly if the U.S. dollar strengthens against the euro, may result in lower reported revenue or net assets in future periods. If we do not effectively manage any of the risks inherent in running our international businesses, our operating results and financial condition could be harmed.

Our business is conducted in accordance with existing international trade relationships, and trade laws and regulations. Changes in geopolitical relationships and laws or policies governing the terms of foreign trade, such as the recent rise in protectionist politics and economic nationalism, could create uncertainty regarding our ability to operate and conduct commercial relationships in affected jurisdictions, which could have a material adverse effect on our business and financial results. Additionally, our global operations may also be adversely affected by political events, domestic or international terrorist events and hostilities or complications due to natural or human-caused disasters. These uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.

The loss of key personnel at RealNetworks or our material subsidiaries, or difficulty recruiting and retaining them, could significantly harm our business or jeopardize our ability to meet our growth objectives.

Our success depends substantially on the contributions and abilities of certain key executives and employees, and we cannot provide assurance that we will be able to retain such executives and employees in the future. Executive-level turnover, as we have experienced in the past and could experience in the future, could impact our ability to retain key executives and employees, which could then harm our business and operations to the extent there is customer or employee uncertainty arising from any such transition. These risks also apply to our material subsidiaries, most notably Napster, which has experienced a high level of turnover.

Our success is also substantially dependent upon our ability to identify, attract and retain highly skilled management, technical and sales personnel. Qualified individuals are in high demand and competition for such qualified personnel in our industry, particularly engineering talent, is extremely intense, and we may incur significant costs to attract or retain them. Changes in immigration or other policies in the U.S. or other jurisdictions that make it more difficult to hire and retain key talent, or to assign individuals to any of our locations as needed to meet business needs, could adversely affect our ability to attract key talent or deploy individuals as needed, and thereby adversely affect our business and financial results. There can be no assurance that we will be able to attract and retain the key personnel necessary to sustain our business or support future growth.

Acquisitions and divestitures involve costs and risks that could harm our business and impair our ability to realize potential benefits from these transactions.

As part of our business strategy, we have acquired and sold technologies and businesses in the past and expect that we will continue to do so in the future. Most recently, our January 18, 2019 acquisition of a controlling interest in Napster represents a significant acquisition for RealNetworks. Although Napster will continue to operate independently and its business will not be integrated into our businesses, we still face transaction-related costs and risks related to the acquisition such as the consolidation of Napster's financial results into our financial statements.

The failure to adequately manage transaction costs and address the financial, legal and operational risks raised by acquisitions and divestitures of technology and businesses could harm our business and prevent us from realizing the benefits of these transactions. In addition, we may identify and acquire target companies, but those companies may not be complementary to our current operations and may not leverage our existing infrastructure or operational experience, which may increase the risks associated with completing acquisitions.

Transaction-related costs and financial risks related to completed and potential future purchase or sale transactions may harm our financial position, reported operating results, or stock price. Previous acquisitions have resulted in significant expenses, including amortization of purchased technology, amortization of acquired identifiable intangible assets and the incurrence of charges for the impairment of goodwill and other intangible assets, which are reflected in our operating expenses. New acquisitions and any potential additional future impairment of the value of purchased assets, including goodwill, could have a material negative impact on our future operating results. In compliance with GAAP, we evaluate these assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that our goodwill or definite-lived assets may not be recoverable, include reduced future revenue and cash flow estimates due to changes in our forecasts, and unfavorable changes to valuation multiples and discount rates due to changes in the market. If we were to conclude that any of these assets were impaired, we would have to recognize an impairment charge that could materially impact our financial results.

Purchase and sale transactions also involve operational risks that could harm our existing operations or prevent realization of anticipated benefits from a transaction. These operational risks include:

difficulties and expenses in assimilating the operations, products, technology, information systems, and/or personnel of the acquired company;

retaining key management or employees of the acquired company;

entrance into unfamiliar markets, industry segments, or types of businesses;

operating, managing and integrating acquired businesses in remote locations or in countries in which we have little or no prior experience;

diversion of management time and other resources from existing operations;

impairment of relationships with employees, affiliates, advertisers or content providers of our business or acquired business;

assumption of known and unknown liabilities of the acquired company, including intellectual property claims; and

potential impacts to our system of internal controls and disclosure controls and procedures.

We may be unable to adequately protect our proprietary rights or leverage our technology assets, and may face risks associated with third-party claims relating to intellectual property rights associated with our products and services.

Our ability to compete across our businesses partly depends on the superiority, uniqueness and value of our technology, including both internally developed technology and technology licensed from third parties. To protect our proprietary rights, we

rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Our efforts to protect our intellectual property rights may not assure our ownership rights in our intellectual property, protect or enhance the competitive position of our products, services and technology, or effectively prevent misappropriation of our technology.

From time to time we receive claims and inquiries from third parties alleging that our technology used in our business may infringe the third parties’ proprietary rights. These claims, even if not meritorious, could force us to make significant investments of time, attention and money in defense, and give rise to monetary damages, penalties or injunctive relief against us. We may be forced to litigate, to enforce or defend our patents, trademarks or other intellectual property rights, or to determine the validity and scope of other parties' proprietary rights in intellectual property. To resolve or avoid such disputes, we may also be forced to enter into royalty or licensing agreements on unfavorable terms or redesign our product features, services and technology to avoid actual or claimed infringement of misappropriation or technology. Any such dispute would likely be costly and distract our management, and the outcome of any such dispute (such as additional licensing arrangements or redesign efforts) could fail to improve our business prospects or otherwise harm our business or financial results.

Nearly all of our contracts by which we provide to another party services or rights to use our technology include some form of obligation by us to indemnify the other party for certain liabilities and losses incurred by them, including liabilities resulting from third party claims for damages that arise out of the use of our technology. Also, in 2012 we sold most of our patents, including patents that covered streaming media, to Intel Corporation, in a contract by which we agreed to indemnify Intel Corporation for certain third-party infringement claims against these patents up to the purchase price we received in the sale. Claims against which we may be obligated to defend others pursuant to our contracts expose us to the same risks and adverse consequences described above regarding claims we may receive directly alleging that our trademarks or technology used in our business may infringe a third party's proprietary rights.

Disputes regarding the validity and scope of patents or the ownership of technologies and rights associated with streaming media, digital distribution, and online businesses are common and likely to arise in the future. We also routinely receive challenges to our trademarks and other proprietary intellectual property that we are using in our business activities. We are likely to continue to receive claims of third parties against us, alleging contract breaches, infringement of copyrights or patents, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition or violations of privacy rights.

Our business and operating results will suffer and we may be subject to market risk and legal liability if our systems or networks fail, become unavailable, unsecured or perform poorly so that current or potential users do not have adequate access to our products, services and websites.

Our ability to provide our products and services to our customers and operate our business depends on the continued operation and security of our information systems and networks and those of our service providers. A significant or repeated reduction in the performance, security or availability of our information systems and network infrastructure or that of our service providers could harm our ability to conduct our business, and harm our reputation and ability to attract and retain users, customers, advertisers and content providers. Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate.

We sell many of our products and services through online sales transactions directly with consumers, and their credit card information is collected and stored by our payment processors. The systems of our third party service providers may not prevent future improper access or disclosure of credit card information or personally identifiable information. We have an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client, third party payment providers, and server products. A security breach that leads to disclosure of consumer account information, or any failure by us to comply with our posted privacy policy or existing or new privacy legislation, could harm our reputation, impact the market for our products and services, or subject us to litigation. We have on occasion experienced system errors and failures that caused interruption in availability of products or content or an increase in response time. Problems with our systems and networks, or the third party systems and networks that we utilize, could result from a failure to adequately maintain and enhance these systems and networks, natural disasters and similar events, power failures, intentional actions to disrupt systems and networks and many other causes. Many of our services do not currently have fully redundant systems or a formal disaster recovery plan, and we may not have adequate business interruption insurance to compensate us for losses that may occur from a system outage.

Changes in regulations applicable to the Internet and e-commerce that increase the taxes on the services we provide could materially harm our business and operating results.

As Internet commerce continues to evolve, increasing taxation by state, local or foreign tax authorities becomes more likely. For example, taxation of electronically delivered products and services or other charges imposed by government agencies may also be imposed. We collect transactional taxes and we believe we are compliant and current in all jurisdictions where we have a collection obligation for transaction taxes. Any regulation imposing greater taxes or other fees for products

and services could result in a decline in the sale of products and services and the viability of those products and services, harming our business and operating results. A successful assertion by one or more states or foreign tax authorities that we should collect and remit sales or other taxes on the sale of our products or services could result in substantial liability for past sales.

In those countries where we have a tax obligation, we collect and remit value added tax, or VAT, on sales of “electronically supplied services” provided to European Union residents. The collection and remittance of VAT subjects us to additional currency fluctuation risks.

Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.

We prepare our financial statements in conformity with GAAP. These accounting principles are subject to interpretation or changes by the Financial Accounting Standards Board, or FASB, and the SEC, and new accounting pronouncements and varying interpretations of accounting standards and practices have occurred in the past and are expected to occur in the future. Moreover, our financial statements require the application of judgments and estimates regarding a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, the acquisition method of accounting and its related estimated fair value amounts, stock-based compensation, music publisher and royalty accruals, and intangible asset valuations. Changes in accounting standards or practices, or in our judgments and estimates underlying accounting standards and practices, could harm our operating results and/or financial condition. An example of a new accounting pronouncement is the new lease accounting guidance. As discussed in Note 14 to the accompanying notes to the condensed consolidated financial statements, this new guidance requires us to record lease assets and lease liabilities on the balance sheet, which previously were off-balance sheet obligations subject to disclosure but not recognition. Changes to existing accounting rules or to our judgments and estimates underlying those rules could materially impact our reported operating results and financial condition.

We may be subject to additional income tax assessments and changes in applicable tax regulations could adversely affect our financial results.

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, income taxes payable, and net deferred tax assets. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in our historical financial statements. An audit or litigation can result in significant additional income taxes payable in the U.S. or foreign jurisdictions which could have a material adverse effect on our financial condition and results of operations.

Our Chairman of the Board and Chief Executive Officer beneficially owns approximately 37% of our stock, which gives him significant control over certain major decisions on which our shareholders may vote or which may discourage an acquisition of us.

Robert Glaser, our Chairman of the Board and Chief Executive Officer, beneficially owns approximately 37% of our common stock. As a result, Mr. Glaser and his affiliates will have significant influence to:

elect or defeat the election of our directors;

amend or prevent amendment of our articles of incorporation or bylaws;

effect or prevent a merger, sale of assets or other corporate transaction; and

control the outcome of any other matter submitted to the shareholders for vote.

The stock ownership of Mr. Glaser may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of RealNetworks, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.

Provisions of our charter documents, shareholder rights plan, and Washington law could discourage our acquisition by a third party.

Our articles of incorporation provide for a strategic transactions committee of the board of directors. Without the prior approval of this committee, and subject to certain limited exceptions, the board of directors does not have the authority to:

adopt a plan of merger;

authorize the sale, lease, exchange or mortgage of assets representing more than 50% of the book value of our assets prior to the transaction or on which our long-term business strategy is substantially dependent;

authorize our voluntary dissolution; or

take any action that has the effect of any of the above.

Mr. Glaser has special rights under our articles of incorporation to appoint or remove members of the strategic transactions committee at his discretion that could make it more difficult for RealNetworks to be sold or to complete another change of control transaction without Mr. Glaser’s consent. RealNetworks has also entered into an agreement providing Mr. Glaser with certain contractual rights relating to the enforcement of our charter documents and Mr. Glaser’s roles and authority within RealNetworks. These rights and his role as Chairman of the Board of Directors, together with Mr. Glaser’s significant beneficial ownership, create unique potential for concentrated influence of Mr. Glaser over potentially material transactions involving RealNetworks and decisions regarding the future strategy and leadership of RealNetworks.

We have adopted a shareholder rights plan, which was amended and restated in December 2008, amended in April 2016 and February 2018, and again amended and restated in December 2018. The plan provides that shares of our common stock have associated preferred stock purchase rights, the exercise of which would make the acquisition of RealNetworks by a third party more expensive to that party, having the effect of discouraging third parties from acquiring RealNetworks without the approval of our board of directors, which has the power to redeem these rights and prevent their exercise.

Washington law imposes restrictions on some transactions between a corporation and certain significant shareholders. The foregoing provisions of our charter documents, shareholder rights plan, our agreement with Mr. Glaser, and Washington law, as well as our charter provisions that provide for a classified board of directors and the availability of “blank check” preferred stock, could have the effect of making it more difficult or more expensive for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions may therefore have the effect of limiting the price that investors might be willing to pay in the future for our common stock.

Our January 2019 acquisition of a majority stake in Napster subjects our consolidated financial condition to new risks and uncertainties, including the following:

Napster’s financial results and growth are subject to risks involving revenue concentration, strategic focus, and market competition.

In recent years, Napster’s business has shifted from a predominant reliance on a direct to consumer subscription model to delivering its music streaming content to users through business partners. With this shift in strategy, Napster’s revenue has become concentrated among fewer partners, its sales cycle has become longer and more complex, and its competitive landscape has shifted. All of these factors contribute to risks and uncertainties that could impair the implementation of Napster’s growth strategy thus causing declines in Napster’s revenue and gross margin. Any such declines would negatively impact our consolidated financial results.

As Napster’s direct to consumer subscription base declines due to intense competition in the music streaming market, its growth has become dependent on successful implementation of its platform-as-a-service strategy. Reliance on fewer key partnerships brings risk to Napster’s revenue base, and developing relationships with distribution partners requires a significant investment of time and resources, with partnerships taking longer to execute than anticipated and terms becoming increasingly complex as negotiations continue. The result is a higher degree of risk in Napster’s revenue base, compressed margins, and more uncertainty in its strategy.

Napster’s access to content and dependence on third-party licenses cause substantial risk and uncertainty to its business and could, therefore, harm our financial results.

Napster’s business relies on its ability to access content in a cost-efficient and dependable manner. To secure the rights necessary to stream music to its users, Napster must obtain licenses from record labels, aggregators, artists, publishers, performing rights organizations, collecting societies, and other copyrights owners and their agents. These rights holders, to the extent that Napster is able to identify them, possess different levels of bargaining power, require payment by Napster of varying royalty rates, and may or may not continue to make licenses available to Napster. Uncertainty with regard to, and any significant changes in, royalty rates, content availability, or Napster’s ability to identify and negotiate with these rights holders could have a material adverse effect on Napster’s revenue, profitability, and ability to provide its services. This, in turn, could harm our financial condition and stock price.

Related to Napster’s ability to access the content necessary to provide its streaming services is its dependence on third-party licenses, including the major record labels that hold the rights to stream a significant number of sound recordings. Specifically, three major labels dominate the market, and the loss of access to content controlled by any one of these labels would materially limit Napster’s offering, which would likely result in the loss of users, through both consumer subscriptions and business partnerships. Any such loss could materially impact Napster’s revenue and cause negative implications to our consolidated financial results.

The various complexities involved in Napster’s music royalty accrual could negatively impact our financial results.

As is common in the music streaming industry, Napster’s ability to determine and appropriately accrue music royalty liabilities involves a significant degree of risk and uncertainty. This accrual requires, among other things, identification of rights

holders, application of statutory and contractual royalty rates, contractual terms such as advances and minimum guarantees, estimation of market share, user information and geographies, and a significant degree of judgment. Also, in certain jurisdictions, rights holders may have several years to claim royalties for musical compositions, in respect of which ownership has not already been claimed. While Napster bases its estimates on contractual rates, historical experience and on various other assumptions that management believes to be reasonable, actual results may differ materially from these estimates under different assumptions or conditions. The complexity, subjectivity, and variability around Napster’s royalty accrual could result in actual royalty costs exceeding amounts accrued, negatively impacting Napster’s profitability and our financial results.

Also common in the industry are royalty audits, lawsuits filed by rights holders, and other third-party assertions related to use of content on our platform. Napster has been the target of these types of actions in the past and expects to continue to be in the future. These matters create uncertainty, are costly, and can require a significant amount of management’s attention. Moreover, negotiations and disclosures related to these types of matters and disputes can cause damage to key business relationships, which could materially harm Napster’s business and prospects, thus impairing our consolidated financial results.

Underlying the complexity and risk involved in Napster’s ability to determine its music royalty liabilities, is the reliability of its systemsof internal control and disclosure controls and procedures. We cannot provide assurance that these systems are or will continue to be effective. Although a subsidiary of ours, Napster is a privately held company that has not historically been subject to public reporting requirements or the related scrutiny. In the event that Napster’s system of internal controls, particularly relating to its music royalty accrual, is found to be ineffective, it would likely have significant negative implications to Napster’s financial results and, therefore, to our consolidated financial results, and could be implicated in our required testing of internal controls pursuant to the Sarbanes-Oxley Act of 2002.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable


Item 3.	Default Upon Senior Securities

None


Item 4.	Mine Safety Disclosures

Not applicable


Item 5.	Other Information

~~None.~~None


Item 6.	Exhibits

See Index to Exhibits below.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q Report to be signed on its behalf by the undersigned, thereunto duly authorized.



	REALNETWORKS, INC.

	By:		/s/ Cary Baker
			Cary Baker
	Title:		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

Dated: ~~November 2, 2017~~August 5, 2019

INDEX TO EXHIBITS



Exhibit Number	Description

2.2	First Amendment to Purchase Agreement, dated as of June 11, 2019, by and between RealNetworks Digital Music of California, Inc., a California corporation (Buyer) and Rhapsody Applebee, LLC, a Delaware limited liability company (Seller)

10.1 *	Loan and Security Agreement, dated as of August 1, 2019, by and among RealNetworks, Inc., Rhapsody International Inc., RealNetworks Digital Music of California, Inc., and Western Alliance Bank

31.1	Certification of Robert Glaser, Chairman and Chief Executive Officer of RealNetworks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Cary Baker, Senior Vice President, Chief Financial Officer and ~~Treasurerof~~Treasurer of RealNetworks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Robert Glaser, Chairman and Chief Executive Officer of RealNetworks, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of Cary Baker, Senior Vice President, Chief Financial Officer and ~~Treasurerof~~Treasurer of RealNetworks, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

* Portions of the exhibit have been omitted.

3349



	RealNetworks, Inc.
	(Exact name of registrant as specified in its charter)
Washington		91-1628146
(State of incorporation)		(I.R.S. Employer Identification Number)
1501 First Avenue South, Suite 600 Seattle, Washington		98134
(Address of principal executive offices)		(Zip Code)
	(206) 674-2700
	(Registrant’s telephone number, including area code)



Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer	¨ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	¨ý
		Emerging growth company	¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.001 per share	RNWK	The NASDAQ Stock Market
Preferred Share Purchase Rights	RNWK	The NASDAQ Stock Market



	Page

Part I. Financial Information	3
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1725
Item 3. Quantitative and Qualitative Disclosures About Market Risk	2936
Item 4. Controls and Procedures	3037
Part II. Other Information	3138
Item 1. Legal Proceedings	3138
Item 1A. Risk Factors	3138
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3147
Item 3. Default Upon Senior Securities	3147
Item 4. Mine Safety Disclosures	3147
Item 5. Other Information	3147
Item 6. Exhibits	3147
Signature	3248
Index to Exhibits	3349


	September 30, 2017			December 31, 2016			June 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	45,597		$	33,721		$	26,339		$	35,561
Short-term investments	13,482			43,331			—			24
Trade accounts receivable, net of allowances	26,651			22,162
Trade accounts receivable, net of allowances of $644 and $560							31,957			11,751
Deferred costs, current portion	508			760			465			331
Prepaid expenses and other current assets	4,558			4,910			20,382			5,911
Total current assets	90,796			104,884			79,143			53,578
Equipment, software, and leasehold improvements, at cost:
Equipment and software	45,557			46,231			32,079			37,458
Leasehold improvements	3,464			3,317			3,319			3,292
Total equipment, software, and leasehold improvements, at cost	49,021			49,548			35,398			40,750
Less accumulated depreciation and amortization	44,962			44,294			32,268			37,996
Net equipment, software, and leasehold improvements	4,059			5,254			3,130			2,754
Restricted cash equivalents and investments	2,400			2,700
Operating lease assets							13,672			—
Restricted cash equivalents							2,124			1,630
Other assets	2,177			1,742			2,739			3,997
Deferred costs, non-current portion	1,010			1,246			797			528
Deferred tax assets, net	871			816			854			851
Other intangible assets, net	429			938			21,616			26
Goodwill	13,042			12,857			65,395			16,955
Total assets	$	114,784		$	130,437		$	189,470		$	80,319

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,560		$	18,225		$	5,224		$	3,910
Accrued and other current liabilities	12,933			15,425
Commitment to Rhapsody	—			1,500
Accrued royalties, fulfillment and other current liabilities							97,951			11,312
Commitment to Napster							—			2,750
Deferred revenue, current portion	3,008			3,430			6,054			2,125
Notes payable							7,878			—
Total current liabilities	34,501			38,580			117,107			20,097
Deferred revenue, non-current portion	553			240			179			268
Deferred rent	798			748			—			986
Deferred tax liabilities, net	98			87			1,262			1,168
Long-term lease liabilities							10,384			—
Other long-term liabilities	1,651			2,201			11,070			960
Total liabilities	37,601			41,856			140,002			23,479
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.001 par value, no shares issued and outstanding:
Series A: authorized 200 shares	—			—			—			—
Undesignated series: authorized 59,800 shares	—			—			—			—
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 37,289 shares in 2017 and 37,501 shares in 2016	37			37
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 38,049 shares in 2019 and 37,728 shares in 2018							37			37
Additional paid-in capital	637,862			633,928			642,720			641,930
Accumulated other comprehensive loss	(59,833		)	(61,645		)	(61,697		)	(61,118		)
Retained deficit	(500,883		)	(483,739		)	(531,678		)	(524,009		)
Total shareholders’ equity	77,183			88,581			49,382			56,840
Total liabilities and shareholders’ equity	$	114,784		$	130,437
Noncontrolling interests							86			—
Total equity							49,468			56,840
Total liabilities and equity							$	189,470		$	80,319



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	Estimated Fair Value
Within one year	$	11,969
Between one year and five years	1,513
Total short-term investments	$	13,482



~~Note 6~~	~~Allowance for Doubtful Accounts Receivable and Sales Returns~~



	Allowance For
	Doubtful Accounts Receivable			Sales Returns
Balances, December 31, 2016	$	633		$	169
Addition (reduction) to allowance	(19		)	13
Amounts written off	—			(11		)
Foreign currency translation	73			(1		)
Balances, September 30, 2017	$	687		$	170



		June 30, 2019						December 31, 2018
		Gross Amount		Accumulated Amortization		Net		Gross Amount		Accumulated Amortization		Net
Amortizing intangible assets:
	Customer relationships	$	41,155	$	31,358	$	9,797	$	30,993	$	30,993	$	—
	Developed technology	29,934		24,710		5,224		24,446		24,446		—
	Patents, trademarks and tradenames	10,471		3,879		6,592		3,765		3,765		—
	Service contracts	5,454		5,451		3		5,538		5,512		26
	Total	$	87,014	$	65,398	$	21,616	$	64,742	$	64,716	$	26



	Future Amortization
2019 (Excluding the six months ended June 30, 2019)	$	2,266
2020	4,526
2021	4,526
2022	2,641
2023	1,145
Thereafter	6,512
	$	21,616



Balance, December 31, 2018	$	16,955
Increases due to current year acquisitions	48,474
Effects of foreign currency translation	(34		)
Balance, June 30, 2019	$	65,395



Balance, December 31, 2016	$	12,857
Effects of foreign currency translation	185
Balance, September 30, 2017	$	13,042



Note 9	Accrued royalties, fulfillment and ~~Other Current Liabilities~~other current liabilities



	FORM 10-Q



	Employee Separation Costs
Costs incurred and charged to expense for the nine months ended September 30, 2017	$	2,271
Costs incurred and charged to expense for the nine months ended September 30, 2016	$	1,297



	Employee Separation Costs		Asset Related and Other Costs		Total
Costs incurred and charged to expense for the six months ended June 30, 2019	$	344	$	552	$	896
Costs incurred and charged to expense for the six months ended June 30, 2018	$	688	$	—	$	688



	Employee Separation Costs
Accrued liability at December 31, 2016	$	209
Costs incurred and charged to expense for the nine months ended September 30, 2017	2,271
Cash payments	(2,024		)
Accrued liability at September 30, 2017	$	456



Accrued loss at December 31, 2016	$	3,186
Additions and adjustments to the lease loss accrual, including estimated sublease income	—
Less amounts paid, net of sublease amounts	(1,275		)
Accrued loss at September 30, 2017	1,911
Less current portion (included in Accrued and other current liabilities)	(313		)
Accrued loss, non-current portion (included in Other long term liabilities)	$	1,598



	June 30, 2019
Weighted-average remaining lease term (in years)	4 years
Weighted-average discount rate	5.13	%



	Operating Leases
2019 (Excluding the six months ended June 30, 2019)	$	2,737
2020	4,909
2021	3,296
2022	2,429
2023	2,347
Thereafter	1,634
Total minimum payments^(a)	17,352
Less: Imputed interest	1,940
Present value of total minimum payments^(b)	$	15,412


	Quarter Ended September 30,						Nine Months Ended September 30,
Corporate													Quarter Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Cost of revenue	$	2		$	4		$	62		$	(87	)	$	(67	)	$	7		$	(144	)	$	17
Operating expenses	2,948			5,705			10,202			16,948			4,116			2,429			8,373			5,696
Operating income (loss)	$	(2,950	)	$	(5,709	)	$	(10,264	)	$	(16,861	)	$	(4,049	)	$	(2,436	)	$	(8,229	)	$	(5,713	)


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations


	Quarters ended September 30,											Nine months ended September 30,											Quarter Ended June 30,											Six months ended June 30,
	2017			2016			$ Change			% Change		2017			2016			$ Change			% Change		2019			2018			$ Change			% Change		2019			2018			$ Change			% Change
Total revenue	$	30,002		$	31,051		$	(1,049	)	(3	)%	$	93,689		$	89,015		$	4,674		5	%	$	44,248		$	15,724		$	28,524		181	%	$	83,720		$	35,374		$	48,346		137	%
Cost of revenue	16,534			16,740			(206		)	(1	)%	51,117			47,610			3,507			7	%	27,282			4,625			22,657			490	%	52,152			9,761			42,391			434	%
Gross profit	13,468			14,311			(843		)	(6	)%	42,572			41,405			1,167			3	%	16,966			11,099			5,867			53	%	31,568			25,613			5,955			23	%
Gross margin	45		%	46		%						45		%	47		%						38		%	71		%						38		%	72		%
Operating expenses	17,673			22,700			(5,027		)	(22	)%	57,528			72,210			(14,682		)	(20	)%	26,357			17,932			8,425			47	%	51,863			37,400			14,463			39	%
Operating income (loss)	$	(4,205	)	$	(8,389	)	$	4,184		50	%	$	(14,956	)	$	(30,805	)	$	15,849		51	%
Operating loss																							$	(9,391	)	$	(6,833	)	$	(2,558	)	(37	)%	$	(20,295	)	$	(11,787	)	$	(8,508	)	(72	)%



	Quarter Ended September 30,												Nine months ended September 30,
		2017			2016			$ Change			% Change		2017			2016			$ Change			% Change
Revenue		$	19,123		$	17,683		$	1,440		8	%	$	57,434		$	51,445		$	5,989		12	%
Cost of revenue		13,325			13,026			299			2	%	40,668			36,347			4,321			12	%
Gross profit		5,798			4,657			1,141			25	%	16,766			15,098			1,668			11	%
Gross margin		30		%	26		%						29		%	29		%
Operating expenses		6,437			8,075			(1,638		)	(20	)%	21,261			26,653			(5,392		)	(20	)%
Operating income (loss)		$	(639	)	$	(3,418	)	$	2,779		81	%	$	(4,495	)	$	(11,555	)	$	7,060		61	%