UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q
(Mark One)

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 20172020
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 0-23137
1-37745
RealNetworks, Inc.
(Exact name of registrant as specified in its charter)
Washington91-1628146
(State of incorporation)
(I.R.S. Employer
Identification Number)
1501 First Avenue South, Suite 600
Seattle, Washington
98134
Seattle,Washington
(Address of principal executive offices)(Zip Code)
(206) 674-2700(206)674-2700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer¨Accelerated filerý
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Non-Accelerated FilerSmaller reporting company¨
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, Par Value $0.001 per shareRNWKThe NASDAQ Stock Market
Preferred Share Purchase RightsRNWKThe NASDAQ Stock Market
The number of shares of the registrant’s Common Stock outstanding as of October 26, 201729, 2020 was 37,302,869.

38,275,862.





TABLE OF CONTENTS
 
Page



2


PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Item 1.Financial Statements
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30,
2017
 December 31,
2016
September 30,
2020
December 31,
2019
ASSETS   ASSETS
Current assets:   Current assets:
Cash and cash equivalents$45,597
 $33,721
Cash and cash equivalents$13,245 $8,472 
Short-term investments13,482
 43,331
Trade accounts receivable, net of allowances26,651
 22,162
Trade accounts receivable, net of allowances of $623 and $516Trade accounts receivable, net of allowances of $623 and $51613,015 12,767 
Deferred costs, current portion508
 760
Deferred costs, current portion364 537 
Prepaid expenses and other current assets4,558
 4,910
Prepaid expenses and other current assets3,552 4,428 
Current assets of discontinued operationsCurrent assets of discontinued operations89,547 28,376 
Total current assets90,796
 104,884
Total current assets119,723 54,580 
Equipment, software, and leasehold improvements, at cost:   Equipment, software, and leasehold improvements, at cost:
Equipment and software45,557
 46,231
Equipment and software30,675 31,699 
Leasehold improvements3,464
 3,317
Leasehold improvements2,720 3,071 
Total equipment, software, and leasehold improvements, at cost49,021
 49,548
Total equipment, software, and leasehold improvements, at cost33,395 34,770 
Less accumulated depreciation and amortization44,962
 44,294
Less accumulated depreciation and amortization31,459 32,350 
Net equipment, software, and leasehold improvements4,059
 5,254
Net equipment, software, and leasehold improvements1,936 2,420 
Restricted cash equivalents and investments2,400
 2,700
Operating lease assetsOperating lease assets8,726 10,198 
Restricted cash equivalentsRestricted cash equivalents4,630 4,880 
Other assets2,177
 1,742
Other assets973 1,808 
Deferred costs, non-current portion1,010
 1,246
Deferred costs, non-current portion71 388 
Deferred tax assets, net871
 816
Deferred tax assets, net781 761 
Other intangible assets, net429
 938
Goodwill13,042
 12,857
Goodwill17,073 16,908 
Non-current assets of discontinued operationsNon-current assets of discontinued operations67,811 
Total assets$114,784
 $130,437
Total assets$153,913 $159,754 
   
LIABILITIES AND SHAREHOLDERS’ EQUITY   LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:   Current liabilities:
Accounts payable$18,560
 $18,225
Accounts payable$3,398 $4,042 
Accrued and other current liabilities12,933
 15,425
Accrued and other current liabilities25,272 17,495 
Commitment to Rhapsody
 1,500
Deferred revenue, current portion3,008
 3,430
Deferred revenue, current portion2,302 2,003 
Current debtCurrent debt3,900 
Current liabilities of discontinued operationsCurrent liabilities of discontinued operations70,713 72,641 
Total current liabilities34,501
 38,580
Total current liabilities105,585 96,181 
Deferred revenue, non-current portion553
 240
Deferred revenue, non-current portion46 96 
Deferred rent798
 748
Deferred tax liabilities, net98
 87
Deferred tax liabilities, net1,076 1,076 
Long-term lease liabilitiesLong-term lease liabilities6,672 8,234 
Long-term debtLong-term debt2,883 3,900 
Other long-term liabilities1,651
 2,201
Other long-term liabilities2,243 10,151 
Non-current liabilities of discontinued operationsNon-current liabilities of discontinued operations1,843 
Total liabilities37,601
 41,856
Total liabilities118,505 121,481 
Commitments and contingencies
 
Commitments and contingencies
Shareholders’ equity:   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 201637
 37
Preferred stock, $0.001 par value:Preferred stock, $0.001 par value:
Series A: authorized 200 shares, no shares issued and outstandingSeries A: authorized 200 shares, no shares issued and outstanding
Series B: authorized 8,100 shares; issued and outstanding 8,065 shares in 2020 and 0 shares in 2019Series B: authorized 8,100 shares; issued and outstanding 8,065 shares in 2020 and 0 shares in 2019
Undesignated series: authorized 51,700 sharesUndesignated series: authorized 51,700 shares
Common stock, $0.001 par value, authorized 250,000 shares; issued and outstanding 38,275 shares in 2020 and 38,227 shares in 2019Common stock, $0.001 par value, authorized 250,000 shares; issued and outstanding 38,275 shares in 2020 and 38,227 shares in 201938 38 
Additional paid-in capital637,862
 633,928
Additional paid-in capital655,143 644,070 
Accumulated other comprehensive loss(59,833) (61,645)Accumulated other comprehensive loss(61,717)(61,323)
Retained deficit(500,883) (483,739)
Accumulated deficitAccumulated deficit(557,002)(544,010)
Total shareholders’ equity77,183
 88,581
Total shareholders’ equity36,470 38,775 
Total liabilities and shareholders’ equity$114,784
 $130,437
Noncontrolling interestsNoncontrolling interests(1,062)(502)
Total equityTotal equity35,408 38,273 
Total liabilities and equityTotal liabilities and equity$153,913 $159,754 
See accompanying notes to unaudited condensed consolidated financial statements.

3



REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 Quarter Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016
Net revenue (A)$30,002
 $31,051
 $93,689
 $89,015
Cost of revenue (B)16,534
 16,740
 51,117
 47,610
Gross profit13,468
 14,311
 42,572
 41,405
Operating expenses:       
Research and development7,152
 6,699
 22,085
 23,185
Sales and marketing4,883
 7,183
 17,534
 24,157
General and administrative5,081
 7,086
 15,638
 21,380
Restructuring and other charges557
 499
 2,271
 1,297
Lease exit and related charges
 1,233
 
 2,191
Total operating expenses17,673
 22,700
 57,528
 72,210
Operating income (loss)(4,205) (8,389) (14,956) (30,805)
Other income (expenses):       
Interest income, net116
 119
 353
 316
Gain (loss) on investments, net
 6,021
 
 5,978
Equity in net loss of Rhapsody investment
 (233) (1,097) (629)
Other income (expense), net(50) (243) (288) (515)
Total other income (expenses), net66
 5,664
 (1,032) 5,150
Income (loss) before income taxes(4,139) (2,725) (15,988) (25,655)
Income tax expense (benefit)195
 331
 1,156
 919
Net income (loss)$(4,334) $(3,056) $(17,144) $(26,574)
        
Basic net income (loss) per share$(0.12) $(0.08) $(0.46) $(0.72)
Diluted net income (loss) per share$(0.12) $(0.08) $(0.46) $(0.72)
Shares used to compute basic net income (loss) per share37,200
 36,805
 37,112
 36,693
Shares used to compute diluted net income (loss) per share37,200
 36,805
 37,112
 36,693
        
Comprehensive income (loss):       
Unrealized investment holding gains (losses), net of reclassification adjustments$
 $72
 $10
 $239
Foreign currency translation adjustments, net of reclassification adjustments562
 428
 1,802
 483
Total other comprehensive income (loss)562
 500
 1,812
 722
Net income (loss)(4,334) (3,056) (17,144) (26,574)
Comprehensive income (loss)$(3,772) $(2,556) $(15,332) $(25,852)
        
(A) Components of net revenue:       
License fees$6,319
 $7,850
 $21,996
 $20,305
Service revenue23,683
 23,201
 71,693
 68,710
 $30,002
 $31,051
 $93,689
 $89,015
(B) Components of cost of revenue:       
License fees$1,655
 $1,755
 $5,381
 $4,458
Service revenue14,879
 14,985
 45,736
 43,152
 $16,534
 $16,740
 $51,117
 $47,610
 Quarter Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net revenue$16,554 $17,691 $50,461 $48,491 
Cost of revenue4,062 4,292 12,429 13,022 
Gross profit12,492 13,399 38,032 35,469 
Operating expenses:
Research and development5,781 6,931 18,375 21,439 
Sales and marketing5,130 5,644 15,969 17,501 
General and administrative4,124 5,242 13,063 17,674 
Restructuring and other charges307 691 1,097 1,587 
Total operating expenses15,342 18,508 48,504 58,201 
Operating loss(2,850)(5,109)(10,472)(22,732)
Other income (expenses):
Interest expense(7)(12)
Interest income31 89 
Gain (loss) on equity investments, net(37)(90)12,338 
Other income (expenses), net(104)85 63 197 
Total other income (expenses), net(142)85 (8)12,624 
Loss from continuing operations before income taxes(2,992)(5,024)(10,480)(10,108)
Income tax expense316 233 606 515 
Net loss from continuing operations(3,308)(5,257)(11,086)(10,623)
Net loss from discontinued operations, net of tax(1)(997)(2,466)(3,872)
Net loss(3,309)(6,254)(13,552)(14,495)
Net loss attributable to noncontrolling interests of continuing operations(77)(54)(196)(106)
Net income (loss) attributable to noncontrolling interests of discontinued operations(232)(364)(752)
Net loss attributable to RealNetworks$(3,238)$(5,968)$(12,992)$(13,637)
Net loss from continuing operations attributable to RealNetworks$(3,231)$(5,203)$(10,890)$(10,517)
Net loss from discontinued operations attributable to RealNetworks(7)(765)(2,102)(3,120)
Net loss attributable to RealNetworks$(3,238)$(5,968)$(12,992)$(13,637)
Net loss per share attributable to RealNetworks- Basic:
Continuing operations$(0.08)$(0.14)$(0.28)$(0.28)
Discontinued operations(0.02)(0.06)(0.08)
Total net loss per share - Basic$(0.08)$(0.16)$(0.34)$(0.36)
Net loss per share attributable to RealNetworks- Diluted:
Continuing operations$(0.08)$(0.14)$(0.28)$(0.28)
Discontinued operations(0.02)(0.06)(0.08)
Total net loss per share - Diluted$(0.08)$(0.16)$(0.34)$(0.36)
Shares used to compute basic net loss per share38,270 38,062 38,247 37,944 
Shares used to compute diluted net loss per share38,270 38,062 38,247 37,944 
See accompanying notes to unaudited condensed consolidated financial statements.

4



REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)

Quarter Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net loss$(3,309)$(6,254)$(13,552)$(14,495)
Comprehensive loss:
Foreign currency translation adjustments(7)(232)(394)(811)
Total other comprehensive loss(7)(232)(394)(811)
Comprehensive loss including noncontrolling interests(3,316)(6,486)(13,946)(15,306)
Comprehensive loss attributable to noncontrolling interests(71)(286)(560)(858)
Comprehensive loss attributable to RealNetworks$(3,245)$(6,200)$(13,386)$(14,448)
See accompanying notes to unaudited condensed consolidated financial statements.
5


REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Nine Months Ended
September 30,
 2017 2016
Cash flows from operating activities:   
Net income (loss)$(17,144) $(26,574)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:   
Depreciation and amortization2,402
 5,897
Stock-based compensation3,045
 4,557
Equity in net loss of Rhapsody1,097
 629
Deferred income taxes, net(55) (198)
Loss (gain) on investments, net
 (5,978)
Realized translation loss (gain)
 272
Fair value of warrants granted in 2015 and 2017, net of subsequent mark to market adjustments in 2017 and 2016(367) 112
Net change in certain operating assets and liabilities:   
Trade accounts receivable(3,516) (1,744)
Prepaid expenses and other assets1,072
 1,155
Accounts payable(447) 450
Accrued and other liabilities(3,630) (872)
Net cash provided by (used in) operating activities(17,543) (22,294)
Cash flows from investing activities:   
Purchases of equipment, software, and leasehold improvements(541) (2,009)
Proceeds from sale of equity and other investments
 2,110
Purchases of short-term investments(13,905) (59,124)
Proceeds from sales and maturities of short-term investments43,754
 68,473
Decrease (increase) in restricted cash equivalents and investments, net300
 190
Acquisitions
 (150)
Advance to Rhapsody(1,500) 
Proceeds from the sale of Slingo and social casino business
 4,000
Net cash provided by (used in) investing activities28,108
 13,490
Cash flows from financing activities:   
Proceeds from issuance of common stock (stock options and stock purchase plan)130
 166
Tax payments from shares withheld upon vesting of restricted stock(338) (843)
Net cash provided by (used in) financing activities(208) (677)
Effect of exchange rate changes on cash and cash equivalents1,519
 450
Net increase (decrease) in cash and cash equivalents11,876
 (9,031)
Cash and cash equivalents, beginning of period33,721
 47,315
Cash and cash equivalents, end of period$45,597
 $38,284
    
Supplemental disclosure of cash flow information:   
Cash received from income tax refunds$419
 $531
Cash paid for income taxes$1,124
 $1,876
Non-cash investing activities:   
Increase (decrease) in accrued purchases of equipment, software, and leasehold improvements$42
 $(6)
 Nine Months Ended
September 30,
 20202019
Cash flows from operating activities:
Net loss from continuing operations$(11,086)$(10,623)
Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities:
Depreciation and amortization697 943 
Stock-based compensation1,093 2,420 
(Gain) loss on equity investments, net90 (12,338)
Foreign currency (gain) loss25 (150)
Fair value adjustments to contingent consideration liability(200)700 
Net change in certain operating assets and liabilities:
Trade accounts receivable(323)(967)
Prepaid expenses, operating lease and other assets3,700 3,731 
Accounts payable(645)(289)
Accrued, lease and other liabilities(3,384)(1,736)
Net cash provided by (used in) operating activities- continuing operations(10,033)(18,309)
Net cash provided by (used in) operating activities- discontinued operations(4,086)(1,988)
Net cash provided by (used in) operating activities(14,119)(20,297)
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements(261)(831)
Proceeds from sales and maturities of short-term investments24 
Acquisition, net of cash acquired12,260 
Net cash provided by (used in) investing activities- continuing operations(261)11,453 
Net cash provided by (used in) investing activities- discontinued operations(192)(237)
Net cash (used in) provided by investing activities(453)11,216 
Cash flows from financing activities:
Proceeds from issuance of common stock (stock options and stock purchase plan)144 
Proceeds from issuance of preferred stock10,000 
Tax payments from shares withheld upon vesting of restricted stock(12)(289)
Proceeds from notes payable and long-term debt2,876 3,900 
Payment of financing fees(569)
Other financing activities2,106 900 
Net cash provided by (used in) financing activities- continuing operations14,970 4,086 
Net cash provided by (used in) financing activities- discontinued operations2,007 (8,331)
Net cash provided by (used in) financing activities16,977 (4,245)
Effect of exchange rate changes on cash, cash equivalents and restricted cash32 (390)
Net increase (decrease) in cash, cash equivalents and restricted cash2,437 (13,716)
Cash, cash equivalents and restricted cash, beginning of period22,179 37,191 
Cash, cash equivalents and restricted cash end of period24,616 23,475 
Less: Cash, cash equivalents and restricted cash from discontinued operations6,741 6,724 
Cash and cash equivalents from continuing operations, end of period$17,875 $16,751 
See accompanying notes to unaudited condensed consolidated financial statements.
6





REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
 Common Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Shareholders’
Equity
Noncontrolling InterestsTotal Equity
SharesAmount
 
Balances, January 1, 201937,728 $37 $641,930 $(61,118)$(524,009)$56,840 $$56,840 
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock190 — (271)— — (271)— (271)
Napster acquisition— — (1,346)— — (1,346)570 (776)
Stock-based compensation— — 1,384 — — 1,384 — 1,384 
Foreign currency translation adjustments— — — (87)— (87)— (87)
Net income (loss)— — — — 1,533 1,533 (319)1,214 
Other equity transactions— — 362 — — 362 88 450 
Balances, March 31, 201937,918 37 642,059 (61,205)(522,476)58,415 339 58,754 
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 stock131 — 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, 201938,049 37 642,720 (61,697)(531,678)49,382 86 49,468 
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 stock18 (3)— — (2)— (2)
Stock-based compensation— — 503 — — 503 — 503 
Foreign currency translation adjustments— — — (232)— (232)— (232)
Net income (loss)— — — — (5,968)(5,968)(286)(6,254)
Other equity transactions— — 353 — — 353 97 450 
Balances, September 30, 201938,067 $38 $643,573 $(61,929)$(537,646)$44,036 $(103)$43,933 

See accompanying notes to unaudited condensed consolidated financial statements.
7


REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
 Preferred StockCommon Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Shareholders’
Equity
Noncontrolling InterestsTotal Equity
SharesAmountSharesAmount
 
Balances, January 1, 2020$38,227 $38 $644,070 $(61,323)$(544,010)$38,775 $(502)$38,273 
Common stock issued for exercise of stock options, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock— — — — — — 
Stock-based compensation— — — — 380 — — 380 — 380 
Foreign currency translation adjustments— — — — — (907)— (907)— (907)
Net income (loss)— — — — — — (4,642)(4,642)(47)(4,689)
Issuance of Preferred B Stock8,065 — — 9,992 — — 10,000 — 10,000 
Balances, March 31, 20208,065 38,231 38 654,442 (62,230)(548,652)43,606 (549)43,057 
Common stock issued for exercise of stock options, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock— — 23 — (5)— — (5)— (5)
Stock-based compensation— — — — 323 — — 323 — 323 
Foreign currency translation adjustments— — — — — 520 — 520 — 520 
Net income (loss)— — — — — — (5,112)(5,112)(442)(5,554)
Balances, June 30, 20208,065 38,254 38 654,760 $(61,710)(553,764)39,332 (991)38,341 
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— — 21 — (7)— — (7)— (7)
Stock-based compensation— — — — 390 — — 390 — 390 
Foreign currency translation adjustments— — — — — (7)— (7)— (7)
Net income (loss)— — — — — — (3,238)(3,238)(71)(3,309)
Balances, September 30, 20208,065 $38,275 $38 $655,143 $(61,717)$(557,002)$36,470 $(1,062)$35,408 

See accompanying notes to unaudited condensed consolidated financial statements.
8



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 20172020 and 20162019
Note 1Description of Business and Summary of Significant Accounting Policies
Description of Business. RealNetworks Inc. and subsidiaries is a global provider of network-deliveredprovides digital media applicationssoftware and services that make it easy to manage, playconsumers, mobile carriers, device manufacturers, system integrators, and shareother businesses. Consumers use our digital media. The Company also develops and markets softwaremedia products and services that enableto store, organize, play, manage and enjoy their digital media content, either directly from us or through our distribution partners. See Note 5 Acquisitions and Dispositions for information on the creation, distribution and consumptionNapster music business, which offers a comprehensive set of digital media, including audiomusic products and video.services designed to provide consumers with broad access to digital music. As of the third quarter of 2020, Napster is being treated as a discontinued operation for accounting and disclosure purposes. Napster’s operating results and financial condition have been recast to conform to this presentation.
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, together with its subsidiaries, is referred to as “RealNetworks”,"RealNetworks," the “Company”, “we”, “us”,"Company," "we," "us," or “our”."our." "RealPlayer,®" "RMHD," "RealMedia," "GameHouse," "Kontxt," "SAFR" and other trademarks of ours appearing in this report are our property.
Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its 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 Scener Inc. ("Scener") 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 months ended September 30, 20172020 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2017.2020. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
Liquidity and Capital Resources. Our unrestricted cash and cash equivalents balance at September 30, 2020 was $13.2 million. Our operating losses for the quarter and nine months ended September 30, 2020 were $2.9 million and $10.5 million, respectively. We have evaluated our current liquidity position in light of our history of declining revenue and operating losses as well as our near-term expectations of net negative cash flows from operating activities. While we currently believe existing unrestricted cash balances along with current availability on our revolving line of credit will be sufficient to allow us to meet our obligations for the next 12 months, our assessment is subject to inherent risks and uncertainties. Moreover, our operating forecast is partly dependent on factors that are outside of our control. Compounding these risks, uncertainties, and other factors are the potential effects of the recent coronavirus pandemic and related impacts on global commerce and financial markets. These conditions, when evaluated within the guidance of ASC 205-40, raise substantial doubt about our ability to meet our obligations over the 12 months from the date of this filing and, therefore, to continue as a going concern. Our financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
We have active plans to mitigate these conditions. Specifically, we plan to reduce negative cash flow through operating expense reductions, as well as through the deferral of certain obligations where we believe that we have the legal basis to do so. In addition, we are evaluating various strategic opportunities, which may include selling certain businesses or product lines, soliciting external investment into certain of our businesses, or seeking other strategic partnerships. Our plans are subject to inherent risks and uncertainties, which become significantly magnified when the effects of the current pandemic and related financial impacts are included in the assessment. Accordingly, there can be no assurance that our plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 20162019 (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
9


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 2Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In May 2014,August 2020, the Financial Accounting Standards Board (FASB)("FASB") issued new revenue recognition guidance which was subsequently updatedthat simplifies the accounting for convertible debt instruments and amended in 2015convertible preferred stock by reducing the number of accounting models and 2016.the number of embedded conversion features that could be recognized separately from the primary contract. The guidance requires an entity to recognizeenhances transparency and improves disclosures for convertible instruments and earnings per share guidance. It is effective for annual reporting periods beginning after December 15, 2023, with early adoption permitted. This update permits the amountuse 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, oreither the modified retrospective or fully retrospective method where the cumulative effect of applying the standard would be recognized at the date of initial application.transition. 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. A major change in the new guidance is that lessees will be required to present right-of-use assets and lease liabilities on the balance sheet. The new guidance will be effective for us on January 1, 2019. We will be evaluating the effect that thethis new guidance will have on our consolidated financial statements and related disclosures.
In November 2016, the FASB 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 do not expect the adoption of this guidance to have a material impact on our statement of cash flows.
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, 2019,2022, with early adoption permitted. We will be evaluating the impact of the guidance, but do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures.
ThereIn June 2016, the FASB issued new guidance amending existing guidance for the accounting of credit losses on financial instruments. Under the new guidance, the valuation allowance for credit losses is expected to be incurred over the financial asset’s contractual term. We reviewed the new credit loss standard and determined that it applies to our accounts receivable, which are typically of short duration and for which we have not historically experienced significant credit losses. This guidance is effective for us in fiscal years beginning after December 15, 2022 with any cumulative effect of adoption recorded as an adjustment to retained earnings. We are in the process of evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures.
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Note 3Revenue Recognition
We generate all of our revenue through contracts with customers. Revenue is either recognized over time as the service is provided, or at a point in time when the product is transferred to the customer, depending on the contract type. Our performance obligations typically have an original duration of one year or less.
Disaggregation of Revenue
The following table presents our disaggregated revenue by source and segment (in thousands):
Quarter Ended September 30, 2020Nine Months Ended September 30, 2020
Consumer MediaMobile ServicesGamesConsumer MediaMobile ServicesGames
Business Line
Software License$642 $931 $$4,364 $2,734 $
Subscription Services892 5,469 2,705 2,719 16,817 8,205 
Product Sales193 3,874 676 10,564 
Advertising and Other816 1,032 1,438 2,944 
Total$2,543 $6,400 $7,611 $9,197 $19,551 $21,713 
Quarter Ended September 30, 2019Nine Months Ended September 30, 2019
Consumer MediaMobile ServicesGamesConsumer MediaMobile ServicesGames
Business Line
Software License$1,987 $888 $$3,666 $2,444 $
Subscription Services1,028 6,007 3,056 3,156 18,387 9,114 
Product Sales207 3,078 632 7,243 
Advertising and Other410 1,030 1,284 2,565 
Total$3,632 $6,895 $7,164 $8,738 $20,831 $18,922 
The following table presents our disaggregated revenue by sales channel (in thousands):
Quarter Ended September 30, 2020Nine Months Ended September 30, 2020
Consumer MediaMobile ServicesGamesConsumer MediaMobile ServicesGames
Sales Channel
Business to Business$1,457 $6,304 $1,191 $5,800 $19,250 $3,483 
Direct to Consumer1,086 96 6,420 3,397 301 18,230 
Total$2,543 $6,400 $7,611 $9,197 $19,551 $21,713 
Quarter Ended September 30, 2019Nine Months Ended September 30, 2019
Consumer MediaMobile ServicesGamesConsumer MediaMobile ServicesGames
Sales Channel
Business to Business$2,398 $6,784 $1,362 $4,951 $20,482 $3,513 
Direct to Consumer1,234 111 5,802 3,787 349 15,409 
Total$3,632 $6,895 $7,164 $8,738 $20,831 $18,922 
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 September 30, 2020 and December 31, 2019, our balance of long-term accounts receivable was $0.5 million and $0.3 million, respectively, and is included in other long-term assets on our condensed consolidated balance sheets. The increase in this balance from December 31, 2019 to September 30, 2020 is primarily due to a contract renewal in 2020. During the quarter and nine months ended September 30, 2020, we recorded no impairments to our contract assets.
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We record deferred revenue when cash payments are received in advance of our completion of the underlying performance obligation. As of September 30, 2020 and December 31, 2019, we had a deferred revenue balance of $2.3 million and $2.1 million, respectively.
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 thatless than one year. These costs are of significance or potential significance to RealNetworks.recorded within sales and marketing expense.

Note 34Stock-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
September 30,
Nine Months Ended
September 30,
 2020201920202019
Total stock-based compensation expense$390 $503 $1,093 $2,420 
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
September 30,
Nine Months Ended
September 30,
2017 2016 2017 2016 2020201920202019
Expected dividend yield0% 0% 0% 0%Expected dividend yield%%%%
Risk-free interest rate1.61% 1.00% 1.71% 1.25%Risk-free interest rate0.21 %1.71 %0.40 %2.16 %
Expected life (years)3.7
 3.8
 4.2
 4.6
Expected life (years)4.03.84.04.1
Volatility34% 32% 35% 35%Volatility45 %41 %45 %41 %
The total stock-based compensation amounts for 20172020 and 20162019 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 months ended September 30, 2017 and 20162019 was stock compensation expense recorded in the first quarter of 2017 and 20162019 related to our 2016 and 20152018 incentive bonuses paid in fully vested restricted stock units, which were authorized and granted in the first quarter of 2017 and 2016, respectively.2019. Our 2019 incentive bonuses were paid fully in cash.



As of September 30, 2017, $3.92020, there was $1.7 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 45Rhapsody Joint VentureAcquisitions and Dispositions
AsNapster Acquisition
On January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc. (doing business as Napster) which brought our aggregate ownership to 84% of September 30, 2017Napster's outstanding equity, thus giving RealNetworks a majority voting interest. On August 24, 2020, RealNetworks announced that Napster is being sold to MelodyVR Group PLC in a transaction that is expected to close in the fourth quarter of 2020. See below for additional details.
Subsequent to RealNetworks’ January 18, 2019 acquisition, Napster has continued to operate as an independent business with its own board of directors, strategy and leadership team. Napster's separate legal existence is further supported by each company's ongoing compliance with corporate formalities, the independent direction of Napster's activities, and the consistent treatment of each of RealNetworks and Napster as distinct organizations. Accordingly, Napster remains a distinct legal entity and RealNetworks assumes no ownership or control over the assets or liabilities of Napster.
The 16% of Napster that we owned approximately 42% of the issued and outstanding stock of Rhapsody and accountdo not own has been accounted for our investment using the equity method of accounting.
Rhapsody was initially formed in 2007 as a joint venture between RealNetworks and MTV Networks, a division of Viacom International Inc. (MTVN), to own and operate a business-to-consumer digital audio music service known as Rhapsody.noncontrolling interest in our consolidated financial statements.
Following certain restructuring transactions effective March 31, 2010, we began accounting for our investment in Rhapsody using the equity method of accounting. As part of the 2010 restructuring transactions, RealNetworks contributed $18.0acquisition, we recorded a gain of $12.3 million recognized in cash,Other income (expenses) in the Rhapsody brand and certain other assets, including content licenses, in exchange for sharesConsolidated statement 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 for the quarter and nine months ended September 30, 2017; and $0.2 million and $0.6 million for the quarter and nine months ended September 30, 2016. Because of the $10.0 million liquidation preference on the preferred stock we hold in Rhapsody, under the equity method of accounting we did not record any share of Rhapsody losses that would reduce our carrying value of Rhapsody, which is impacted by Rhapsody equity transactions, below $10.0 million, until Rhapsody's book value was reduced below $10.0 million. This occurredoperations in the first quarter of 2015. As2019. We recorded intangible assets of $23.7 million, consisting of trade name and
12


trademarks, developed technology, customer relationships, and partner relationships. We recorded goodwill of $45.5 million, representing the intangible assets that do not qualify for separate recognition for accounting purposes. Additionally, as discussed in Note 6 Fair Value Measurements, we recorded contingent consideration for the 42% equity interest acquired in January 2019. The contingent consideration is required to be adjusted quarterly to fair value through earnings. For the quarter ended September 30, 2017,2020, the carryingfair value analysis was not impacted by Napster’s signing of our Rhapsody equity investment was zero, as we do not have further commitmentthe merger agreement described below due to provide future supportthe contingent conditions required to Rhapsody. Unless we commit to provide future financial support to Rhapsody, we do not record our share of Rhapsody lossesbe met for closing that would reduce our carrying value of Rhapsody below zero,transaction and instead we track those suspended losses separately.various uncertainties regarding consideration allocation and valuation.
In December 2016, Napster Disposition
RealNetworks, Inc. entered into a Support Agreement dated August 25, 2020 by and among its 84%-owned subsidiary, Napster, and MelodyVR Group PLC, an agreementEnglish public limited company. The Support Agreement was executed in connection with an Agreement and Plan of Merger by and among Napster, MelodyVR, and a wholly owned subsidiary of MelodyVR. Pursuant to loan upthe Merger Agreement, MelodyVR's subsidiary will merge with and into Napster, with Napster surviving and becoming a wholly owned subsidiary of MelodyVR. Other than as Securityholder Representative, RealNetworks is not a party to $5the Merger Agreement.
Pursuant to the merger transaction, the transaction is valued at approximately $70 million as MelodyVR will assume approximately $44 million of Napster's payment obligations, primarily relating to music licensing, and MelodyVR will pay consideration of approximately $26.3 million to Rhapsodycertain holders of debt and equity of Napster, comprised of $12.0 million in cash and approximately $11.3 million in the form of ordinary shares of MelodyVR and subject to a $3.0 million 18-month indemnity escrow. The shares of MelodyVR that RealNetworks receives may not be sold or transferred, except in limited circumstances, for general operating purposes, as did the other large ownera period of Rhapsody, Columbus Nova. In 2016, $3.5 million of the loan was made by each lender. In January 2017, the remaining $1.5 million commitment was funded by each lender. The loan is subordinate to all existing loans, and bears an interest 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 of the loan agreement between RealNetworks and Rhapsody, 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 of $1 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 atone year. At the time of signingclosing, the agreementconsideration will be applied to the full repayment of the advance to Napster on the revolving line of credit, as discussed in Note 8 Debt, payment of Napster's transaction expenses, and payment of amounts payable to certain of Napster's common stockholders. The final value to RealNetworks from the transaction is subject to the allocation to recipients of cash and MelodyVR equity, the market value of MelodyVR equity, payment to the party from which a 42% equity interest was acquired in January 2019, transaction expenses, and the eventual payout of the indemnity escrow.
The transaction is currently expected to close in the fourth quarter of 2016,2020. Effective on the execution of the Agreement and consequently, we do notPlan of Merger on August 25, 2020, Napster is being treated as a discontinued operation and held-for-sale for accounting and disclosure purposes. As such, Napster’s operating results and financial condition have a receivable recorded relatedbeen recast to conform to this loan. Aspresentation.
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the dateperiods presented:
September 30, 2020December 31, 2019
Cash and cash equivalents$6,247 $8,333 
Trade accounts receivable, net of allowance16,621 16,740 
Other current assets2,424 3,303 
Total current assets of discontinued operations25,292 28,376 
Net equipment, software, and leasehold improvements445 401 
Other intangible assets16,371 19,286 
Goodwill45,520 45,520 
Other non-current assets1,919 2,604 
Total assets of discontinued operations$89,547 $96,187 
Accrued royalties, fulfillment and other current liabilities$59,504 $65,310 
Notes payable7,945 7,331 
Total current liabilities of discontinued operations67,449 72,641 
Other non-current liabilities3,264 1,843 
Total liabilities of discontinued operations$70,713 $74,484 

Included in Accrued royalties and fulfillment in the tables directly above are Napster's music royalties totaling $49.7 million and $54.2 million at September 30, 2020 and December 31, 2019, respectively. Napster’s agreements and arrangements with rights holders for the content used in its business are complex and the determination of this report, weroyalty accruals involves significant judgments, assumptions, and estimates of the amounts to be paid. The variables involved in determining royalty accruals include unmatched royalty accruals, revenue to be recognized, the type of content used and the country it is used in, outstanding royalty audits, and identification of appropriate license holders, among other variables. In addition, some rights
13


holders have no further commitmentsallowed the use of their content while negotiations of the terms and conditions are ongoing. In certain jurisdictions, rights holders have several years to claim royalties for additional fundingsmusical composition. While Napster bases its estimates on historical experience and on various assumptions that management believes to Rhapsody.be reasonable under the circumstances, actual results may differ materially from these estimates in the event of modified assumptions or conditions.
Related to Napster's accrued music royalties are amounts that are advanced to certain music publishers for royalty amounts that have been agreed as being owed, but for which the underlying rights holder have not yet been specifically matched. These prepaid royalty amounts totaling $1.2 million and $2.0 million at September 30, 2020 and December 31, 2019, respectively, are included in Other current assets in the tables directly above. When these amounts are ultimately matched and invoiced to Napster, the prepaid royalty amount and the related accrued royalty liability are offset.
In late March 2016, Napster was notified of a putative consumer class action lawsuit relating to an alleged failure to pay so-called “mechanical royalties” on behalf of the plaintiffs and “other similarly-situated holders of mechanical rights in copyrighted musical works.” On April 7, 2017, we were notified that Rhapsody would likely be in default of existing agreements with its third party lenders, whichthe plaintiffs and Napster agreed to settlement terms during a mediation session. The long form Settlement Agreement was confirmed in April 2017. We believe this default constitutes a cross defaultexecuted effective on January 16, 2019. The damages payable under the loan agreements between RhapsodySettlement Agreement will be calculated on a claims-made basis. In May 2019, public notice was posted about the settlement informing purported class members that they could make claims or object to the settlement, and RealNetworks and Rhapsody and Columbus Nova.the claims period ended on December 31, 2019. The default withfinal calculation is not yet complete, but based on preliminary results; the third party lenders relatesclaimed damages are not expected to Rhapsody missing a quarterly revenue target that included assumptions regardingbe material. Valid claims are currently expected to be paid by Napster in 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.next 12 months.
In October 2017, RhapsodyNapster entered into a financing agreementNon-Recourse Purchase of Eligible Receivables Agreement (NRP Agreement) with an international bank (Purchaser) in which Napster will sell and assign on a new third party, under which Rhapsody's wholly owned subsidiary will factor certain receivablecontinuing basis its eligible receivables to the Purchaser 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 portion90% of the amountsreceivables upfront, up to a maximum amount of $15.0 million in advances. The interest rate is 2.25% above the 1-month-EURIBOR with a minimum 0.0% rate applying to the 1-month-EURIBOR rate. Napster had $7.9 million and $7.3 million of borrowings outstanding underas of September 30, 2020 and December 31, 2019, respectively, as reflected in Notes Payable in the tables directly above. These borrowings have an interest rate of 2.25%.
Included in other non-current liabilities in the tables directly above is Napster's Paycheck Protection Program (PPP) loan. In May 2020, following its own assessment of eligibility and approval of the Napster Board of Directors, Napster issued a revolving credit facility.promissory note to a participating bank in the principal amount of $1.7 million, pursuant to the PPP. The Napster note has a maturity of 2 years, an interest rate of 1.0%, no pre-payment penalty, a six-month deferment period, and is eligible for forgiveness pursuant to PPP guidelines. The Napster PPP loan will be derecognized upon repayment of the loan in accordance with its term and/or upon confirmation of forgiveness from the SBA.
See Note 13 Related Party Transactions for details on certain transactions and relationships between Napster and RealNetworks.
The forbearance agreement entered into in June 2017 (as discussed above) has been further extended withfollowing tables summarize the remaining third party lender through November 30, 2017, or until a new default event, whichever may occur first. Asloss from discontinued operations for each 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.periods:

Quarter Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenue$23,563 $27,302 $73,225 $80,222 
Cost of revenue17,438 21,986 56,280 65,408 
Gross profit6,125 5,316 16,945 14,814 
Operating expenses5,828 6,472 19,013 18,642 
Operating income (loss)297 (1,156)(2,068)(3,828)
Other income (expenses)(261)236 (299)253 
Income (loss) from discontinued operations before income taxes36 (920)(2,367)(3,575)
Income tax expense37 77 99 297 
Net income (loss) from discontinued operations(1)(997)(2,466)(3,872)
Noncontrolling interests in net income (loss) from discontinued operations(232)(364)(752)
Net loss from discontinued operations attributable to RealNetworks$(7)$(765)$(2,102)$(3,120)


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

14
 Quarter Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016
Net revenue$42,816
 $54,306
 $134,414
 $160,269
Gross profit7,245
 15,195
 19,927
 29,288
Net income (loss)(627) 1,632
 (13,960) (11,421)



Note 56Fair Value Measurements
Items Measured at Fair Value on a Recurring Basis
The following table presentstables present information about our financial assets that have been measured at fair value on a recurring basis as of September 30, 20172020 and December 31, 2016,2019, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands).:

Fair Value Measurements as ofAmortized Cost as of
 September 30, 2020September 30, 2020
 Level 1Level 2Level 3Total
Assets:
Cash and cash equivalents$13,245 $$$13,245 $13,245 
Restricted cash equivalents3,500 1,130 4,630 4,630 
Total assets$16,745 $1,130 $$17,875 $17,875 
Liabilities:
Accrued and other current liabilities
Napster acquisition contingent consideration$$$12,400 $12,400 N/A
Other long-term liabilities
Simple Agreements for Future Equity2,106 2,106 N/A
Total liabilities$$$14,506 $14,506 N/A

 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 funds16,843
 
 
 16,843
 16,843
Corporate notes and bonds
 1,500
 
 1,500
 1,500
Total cash and cash equivalents44,097
 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 ofAmortized Cost as of
 December 31, 2019December 31, 2019
 Level 1Level 2Level 3Total
Assets:
Cash and cash equivalents:
Cash$8,472 $$$8,472 $8,472 
Money market funds
Total cash and cash equivalents8,472 8,472 8,472 
Restricted cash equivalents3,500 1,380 4,880 4,880 
Total assets$11,972 $1,380 $$13,352 $13,352 
Liabilities:
Accrued and other current liabilities
Napster acquisition contingent consideration$$$2,800 $2,800 N/A
Other long-term liabilities
Napster acquisition contingent consideration9,800 9,800 N/A
Total liabilities$$$12,600 $12,600 N/A


 Fair Value Measurements as of Amortized Cost as of
 December 31, 2016 December 31, 2016
 Level 1 Level 2 Level 3 Total  
Cash and cash equivalents:         
Cash$32,585
 $
 $
 $32,585
 $32,585
Money market funds136
 
 
 136
 136
Corporate notes and bonds
 1,000
 
 1,000
 1,000
Total cash and cash equivalents32,721
 1,000
 
 33,721
 33,721
Short-term investments:         
Corporate notes and bonds
 43,331
 
 43,331
 43,343
Total short-term investments
 43,331
 
 43,331
 43,343
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 and investments as of September 30, 20172020 and December 31, 20162019 relate to cash pledged as collateral against letters of credit in connection with lease agreements.agreements, and our Loan and Security Agreement ("Loan Agreement") requires us to maintain a minimum balance of $3.5 million unrestricted cash at the bank. See Note 8 Debt for additional details.


Realized gains or losses on salesAccrued and other current liabilities as of short-term investment securities for the quarters and nine months ended September 30, 2017 and 2016 were not significant. Gross unrealized gains and gross unrealized losses on short-term investment securities as of September 30, 2017 and December 31, 2016 were also not significant.
Investments with remaining contractual maturities of five years or less are classified as short-term because2020 includes the investments are marketable and highly liquid, and we have the ability to utilize them for current operations. Contractual maturities of short-term investments as of September 30, 2017 (in thousands):
 
Estimated
Fair Value
Within one year$11,969
Between one year and five years1,513
Total short-term investments$13,482
In February 2015, Rhapsody issued warrants to purchase Rhapsody common shares to each of RealNetworks and Rhapsody's one other large stockholder, Columbus Nova. The warrants were issued as compensation for past services provided by RealNetworks and Columbus Nova, and both warrants covered the same number of underlying shares. The exercise price of the warrants was equal to theestimated fair value of the underlying shares oncontingent consideration for the issuance date, and we used the Black-Scholes option-pricing model to calculateNapster acquisition, which was determined using a fair value measurement categorized within Level 3 of the fair value of the warrant, using an expected term ofhierarchy. As discussed in Note 5 yearsAcquisitions and expected volatility of 55%. On the date of issuance, we recognized and recorded the $1.2 millionDispositions, this liability is adjusted quarterly to fair value of the warrant issued to RealNetworks within Other assets in the unaudited condensed consolidated balance sheets, and as an expense reduction within General and administrative expense in the unaudited condensed consolidated statements of operations. The warrants are free-standing derivatives and as such their fair value is determined each quarter using updated inputs in the Black-Scholes option-pricing model.through earnings. During the nine months ended September 30, 2017,2020, we recorded the decreasechange in the fair value of the warrants was $0.1 million.contingent consideration of $0.2 million, as a decrease to the total liability on the consolidated balance sheet and as a reduction of general and administrative expenses on the consolidated statement of operations. The fair value as of September 30, 2020 is based on a range of possible outcomes as the final payout is currently uncertain due to contingent conditions required to be met for closing Napster's merger transaction with MelodyVR and various uncertainties regarding merger consideration allocation and valuation.
Scener is a RealNetworks subsidiary, which is developing a platform that transforms the experience of viewing video entertainment into a social, connected playground. As of September 30, 2020, RealNetworks owned approximately 82% of Scener's outstanding equity, and we consolidate its financial results into our financial statements. The financial results of the subsidiary are reported in our Consumer Media segment. In February 2017, Rhapsody issued additional warrantsthe third quarter of 2020, Scener received $2.1 million in cash in
15


return for issuing rights to purchase Rhapsody commoninvestors for certain shares to both RealNetworks and Columbus Nova. Consistent withof Scener's capital stock contingent upon the warrants issued in 2015, the 2017 warrantsoccurrence of specific future capital raising events by Scener. The rights were each issued as compensationa Simple Agreement for past services provided by RealNetworksFuture Equity ("SAFE Notes"). The future contingent events also contemplate the possibility of Scener having to pay back the original cash investment to each investor. Under the applicable accounting guidance, SAFE Notes are recorded as a liability on our consolidated financial statements within Other long-term liabilities and Columbus Nova, and both warrants covered the same number of underlying shares.are required to be recorded at fair value each quarter. The exercise price of the warrants exceeded the fair value of the underlying shares on the issuance date, and we used the Black-Scholes option-pricing model to calculate the fair valueSAFE Notes as of the warrant, using an expected term of 5 years and expected volatility of 55%, resulting in a recognized fair value of $0.5 million in Other assets in the unaudited condensed consolidated balance sheets, and as an expense reduction within general and administrative expense in the unaudited condensed consolidated statements of operations. During the nine months ended September 30, 2017,2020 was determined to be equal to the decrease in the fair value of the warrants was insignificant.proceeds received.
Items Measured at Fair Value on a Non-recurring Basis
Certain of our assets and liabilities are measured at estimated fair value on a non-recurring basis, using Level 3 inputs. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). During the nine months ended September 30, 20172020 and 2016,2019, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.

See Note 11, Lease Exit and Related Charges, for a discussion of the losses related to reductions in the use of RealNetworks' office space, which were recorded at the estimated fair value of remaining lease obligations, less expected sub-lease income.



Note 6Allowance for Doubtful Accounts Receivable and Sales Returns
Activity in the allowance for doubtful accounts receivable and sales returns (in thousands):
 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 translation73
 (1)
Balances, September 30, 2017$687
 $170
Our low-margin music on demand customer, LOEN Entertainment, Co, Ltd. (LOEN), accounted for 63% of trade accounts receivable as of September 30, 2017. At December 31, 2016, the same customer accounted for 64% of trade accounts receivable.
LOEN accounted for 38% or $11.4 million of consolidated revenue during the quarter ended September 30, 2017, and 36% or $33.8 million during the nine months ended September 30, 2017, which is reflected in our Mobile Services segment.
LOEN accounted for 32% of consolidated revenue or $9.9 million during the quarter ended September 30, 2016 and 31% or $27.9 million during the nine months ended September 30, 2016, which is reflected in our Mobile Services segment.
Note 7Other Intangible Assets
Other intangible assets (in thousands):
   September 30, 2017 December 31, 2016
   
Gross
Amount
 
Accumulated
Amortization
 Net 
Gross
Amount
 
Accumulated
Amortization
 Net
Amortizing intangible assets:            
 Customer relationships $30,810
 $30,452
 $358
 $29,308
 $28,781
 $527
 Developed technology 24,440
 24,422
 18
 23,574
 23,263
 311
 Patents, trademarks and tradenames 3,758
 3,705
 53
 3,530
 3,430
 100
 Service contracts 5,413
 5,413
 
 5,205
 5,205
 
 Total $64,421
 $63,992
 $429
 $61,617
 $60,679
 $938

No impairments of other intangible assets were recognized in either of the nine months ended September 30, 2017 or 2016.
Note 8Goodwill
Changes in goodwill (in thousands):
Balance, December 31, 2016$12,857
Effects of foreign currency translation185
Balance, September 30, 2017$13,042


Goodwill by segment (in thousands):


 September 30,
2017
Consumer Media$580
Mobile Services2,164
Games10,298
Total goodwill$13,042

No impairment of goodwill was recognized in either of the nine months ended September 30, 2017 or in 2016.
Note 97Accrued and Other Current Liabilitiesother current liabilities
Accrued and other current liabilities (in thousands):
September 30, 2020December 31, 2019
Royalties and other fulfillment costs$1,157 $1,535 
Employee compensation, commissions and benefits4,172 4,655 
Sales, VAT and other taxes payable1,020 801 
Operating lease liabilities - current3,577 3,643 
Napster acquisition contingent consideration12,400 2,800 
Other2,946 4,061 
Total accrued and other current liabilities$25,272 $17,495 


Note 8Debt
The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, established the Paycheck Protection Program (PPP) to provide a direct incentive for small businesses to keep workers on their payroll. Through the PPP, participating banks write loans to eligible businesses and loan amounts are forgiven to the extent that employee retention criteria are met and proceeds are used to cover eligible costs over an elected 8-week or 24-week measurement period following loan funding. In April 2020, following an assessment of eligibility and approval of its Board of Directors, RealNetworks issued a promissory note to a participating bank in the principal amount of $2.9 million pursuant to the PPP. The note has a maturity of 2 years, an interest rate of 1.0%, no pre-payment penalty, a six-month deferment period, and is eligible for forgiveness pursuant to PPP guidelines. On April 28, 2020, the Secretary of the Treasury and Small Business Administration (SBA) announced that the government will review all PPP loans of more than $2.0 million before there is forgiveness. RealNetworks' PPP loan will be derecognized upon repayment of the loan in accordance with its terms and/or upon confirmation of forgiveness from the SBA.
In August 2019, RealNetworks and Napster entered into a Loan and Security Agreement (Loan Agreement) with a third-party financial institution. Under the terms of the Loan Agreement, the bank extended a revolving line of credit not to exceed $10.0 million in the aggregate. Available advances on the revolving line of credit, which will be used for working capital and general corporate purposes, are based on a borrowing base that comprises accounts receivable and direct to consumer deposits. Borrowings under the Loan Agreement are secured by a first priority security interest in the assets of RealNetworks and Napster. Advances bear interest at a rate equal to one-half of one percentage point (0.5%) above the greater of the prime rate or 5.5%, with monthly payments of interest only and principal due at the end of the two-year term. The Loan Agreement contains customary covenants, including financial covenants, minimum EBITDA levels to be updated annually, and maintaining a minimum balance of $3.5 million unrestricted cash at the bank. 
As of September 30, 2020, RealNetworks had $3.9 million outstanding debt from the revolving line of credit, which was loaned to Napster bearing interest and fees commensurate with our costs. See Note 13 Related Party Transactions for additional details.
16


 September 30, 2017 December 31, 2016
Royalties and other fulfillment costs$2,951
 $2,629
Employee compensation, commissions and benefits3,690
 5,136
Sales, VAT and other taxes payable2,944
 3,258
Other3,348
 4,402
Total accrued and other current liabilities$12,933
 $15,425
We paid and capitalized $0.6 million of financing fees to enter into the revolving line of credit, and the financing fees are being amortized over the term of the debt. The unamortized fees were $0.3 million at September 30, 2020 and are included in Deferred costs, current on our condensed consolidated balance sheets.


Note 109Restructuring Charges
Restructuring and other charges in 20172020 and 20162019 consist of costs associated with the ongoing reorganization of our business operations and our ongoing expense re-alignment efforts. The expense amounts in both yearsefforts, which primarily relate primarily to severance costs due to workforce reductions.
Restructuring charges are as follows (in thousands):
 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 and Other CostsAsset Related and Other CostsTotal
Costs incurred and charged to expense for the nine months ended September 30, 2020$965 $132 $1,097 
Costs incurred and charged to expense for the nine months ended September 30, 2019$1,050 $537 $1,587 
Changes to the accrued restructuring liability (which is included in Accrued and other current liabilities) for 20172020 are as follows (in thousands) are as follows::
Employee Separation CostsAsset Related and Other CostsTotal
Accrued liability at December 31, 2019$110 $174 $284 
Costs incurred and charged to expense for the nine months ended September 30, 2020965 965 
Cash payments(824)(174)(998)
Accrued liability at September 30, 2020$251 $$251 

17
 Employee Separation Costs
Accrued liability at December 31, 2016$209
Costs incurred and charged to expense for the nine months ended September 30, 20172,271
Cash payments(2,024)
Accrued liability at September 30, 2017$456





Note 1110Lease Exit and Related Charges
As a result of the reduction in use of RealNetworks' office space, lease exit and related charges have been recognized representing rent and contractual operating expenses over the remaining life of the leases, including estimates of sublease income expected to be received. We continue to regularly evaluate the market for office space. If the market for such space changes further in future periods, we may have to revise our estimates which may result in future adjustments to expense for excess office facilities.
Changes to accrued lease exit and related charges (which is included in Accrued and other current liabilities) for 2017 (in thousands) are as follows:
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, 20171,911
Less current portion (included in Accrued and other current liabilities)(313)
Accrued loss, non-current portion (included in Other long term liabilities)$1,598

Note 12Shareholders’ Equity
Accumulated Other Comprehensive Income (Loss)

Changes in components of accumulated other comprehensive income (loss) (in thousands):
   Quarter Ended
September 30,
 Nine Months Ended
September 30,
   2017 2016 2017 2016
Investments        
 Accumulated other comprehensive income (loss), beginning of period $4
 $1,464
 $(6) $1,297
 Unrealized gains (losses), net of tax effects of $0, $42, $5 and $141 
 72
 10
 239
 Net current period other comprehensive income (loss) 

72
 10
 239
 Accumulated other comprehensive income (loss) balance, end of period $4

$1,536
 $4
 $1,536
Foreign currency translation        
 Accumulated other comprehensive income (loss), beginning of period $(60,399) $(60,722) $(61,639) $(60,777)
 Translation adjustments 562
 156
 1,802
 211
 Reclassification adjustments for losses (gains) included in other income (expense) 
 272
 
 272
 Net current period other comprehensive income (loss) 562

428
 1,802
 483
 Accumulated other comprehensive income (loss) balance, end of period $(59,837)
$(60,294) $(59,837) $(60,294)
Total accumulated other comprehensive income (loss), end of period $(59,833)
$(58,758) $(59,833) $(58,758)

Note 13Income Taxes
As of September 30, 2017, there have been no material changes to RealNetworks’ uncertain tax positions disclosures as provided in Note 14 of the 2016 10-K. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.
We file numerous consolidated and separate income tax returns in the U.S. including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal income tax examinations for tax years before 2013 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.


Note 14Earnings (Loss) Per Share
Basic net income (loss) per share (EPS) is computed by dividing net income (loss) attributable to RealNetworks by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) attributable to RealNetworks by the weighted average number of common and dilutive potential common shares outstanding during the period. Basic and diluted EPS (in thousands, except per share amounts):
 Quarter Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net loss from continuing operations attributable to RealNetworks$(3,231)$(5,203)$(10,890)$(10,517)
Net loss from discontinued operations attributable to RealNetworks(7)(765)(2,102)(3,120)
Net loss attributable to RealNetworks$(3,238)$(5,968)$(12,992)$(13,637)
Weighted average common shares outstanding used to compute basic EPS38,270 38,062 38,247 37,944 
Dilutive effect of stock based awards
Weighted average common shares outstanding used to compute diluted EPS38,270 38,062 38,247 37,944 
Net loss per share attributable to RealNetworks- Basic:
Continuing operations$(0.08)$(0.14)$(0.28)$(0.28)
Discontinued operations(0.02)(0.06)(0.08)
Total net loss per share - Basic$(0.08)$(0.16)$(0.34)$(0.36)
Net loss per share attributable to RealNetworks- Diluted:
Continuing operations$(0.08)$(0.14)$(0.28)$(0.28)
Discontinued operations(0.02)(0.06)(0.08)
Total net loss per share - Diluted$(0.08)$(0.16)$(0.34)$(0.36)
 Quarter Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016
Net income (loss)$(4,334) $(3,056) $(17,144) $(26,574)
Weighted average common shares outstanding used to compute basic EPS37,200
 36,805
 37,112
 36,693
Dilutive effect of stock based awards
 
 
 
Weighted average common shares outstanding used to compute diluted EPS37,200
 36,805

37,112

36,693
        
Basic EPS$(0.12) $(0.08) $(0.46) $(0.72)
Diluted EPS$(0.12) $(0.08) $(0.46) $(0.72)

During the quarter and nine months ended September 30, 2017, 5.32020, 6.7 million and 5.26.9 million shares of common stock, respectively, of potentially issuable shares from common stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect. During the quarter and nine months ended September 30, 2019, 8.0 million and 7.6 million shares of common stock, respectively, of potentially issuable shares from common stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.
In February 2020, Mr. Glaser, Chairman of the Board and Chief Executive Officer of RealNetworks, invested approximately $10.0 million in RealNetworks in exchange for the issuance to him of 8,064,516 shares of Series B Preferred Stock. The Series B Preferred Stock is convertible into common stock on a one-to-one basis subject to the limitation described in Note 13 Related Party Transactions. During the quarter and nine months ended September 30, 2016, 4.6 million and 4.8 million2020, these shares of common stock, respectively, of potentially issuable shares from stock awards were also excluded from the calculation of diluted EPS because of their antidilutive effect.
18



Note 1511Commitments and Contingencies
From time to time we areWe have been in the past and may becould become in the future subject to legal proceedings, governmental investigations, and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks, and other intellectual property rights. Although we believe that resolving such claims, individually or in aggregate, will not have a material adverse impact on our business or financial condition, these matters are subject to inherent uncertainties. Such claims, even if not meritorious, could force us to expend significant financial and managerial resources. In addition, given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. In the event of a determination adverse to us, we may incur substantial monetary liability, and/or be required to change our business practices. Either of these could have a material adverse effect on our consolidated financial statements.  
Note 16Guarantees
InOn April 6, 2020, RealNetworks Asia Pacific Co., Ltd. received notice of a civil lawsuit filed by Korean Music Copyright Association (KOMCA) seeking damages of $2.6 million. Also named as a defendant in the ordinary courselawsuit is Kakao M Corp (formerly known as LOEN Entertainment Corp.), one of business,the largest media publishing companies in Korea, which operates the Melon music platform. The claim is for a late payment penalty under a music licensing contract, pursuant to which, from 2004 to 2017, RealNetworks licensed music for its services to LOEN for its Melon platform. The current lawsuit relates solely to the late payment of music licensing fees under the contract; the underlying music licensing fees were paid by Kakao M to KOMCA in a separate settlement prior to KOMCA’s filing of this lawsuit. While we believe we have meritorious defenses to this lawsuit and intend to vigorously defend RealNetworks, litigation is subject to potential obligations for standard warranty and indemnification provisions that are contained within many of our customer license and service agreements. Our warranty provisions are consistent with those prevalent in our industry,inherently uncertain and we do not have a historycannot predict the outcome of incurring losses on warranties; therefore, we do not maintain accruals for warranty-related obligations. With regard to indemnification provisions, nearly all of our carrier contracts obligate us to indemnify our carrier customers for certain liabilities that may be incurred by them.this matter. We have receivednot recorded an accrual related to this settlement as of September 30, 2020 as it is early in the past,litigation and may receive in the future, claims for indemnification from some of our carrier customers.
In relation to certain patents and other technology assets we sold to Intel in the second quarter of 2012, we have specific obligations to indemnify Intel for breaches of the representations and warranties that we made and covenants that we agreed to in the asset purchase agreement for certain potential future intellectual property infringement claims brought by third parties against Intel. The amount of any potential liabilities related to our indemnification obligations to Intel will notliability cannot be determined until a claim has been made, but we are obligated to indemnify Intel up to the amount of the gross purchase price that we received in the sale.


reasonably estimated.
19



Note 1712Segment Information
We manage our business and report revenue and operating income (loss) in three3 segments: (1) Consumer Media, which includes licensing of our codec technology and our PC-based RealPlayer products, including RealPlayer Plus and related products and intellectual property licensing;products; (2) Mobile Services, which includes our SaaS services of our low-margin music on demand product, ringback tones, intercarrier messaging services, and our RealTimes® product;integrated RealTimes® platform which is sold to mobile carriers; and (3) Games, which includes all our games-related businesses, including sales of in-game virtual goods, mobile games, sales of games licenses, online games subscription services, and in-game advertising and advertising on games sitesgame sites.
RealNetworks allocates to its Consumer Media, Mobile Services and social network sites, and microtransactions from online games.
We allocateGames reportable segments certain corporate expenses which are directly attributable to supporting ourthese businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities, to our reportable segments.facilities. Remaining expenses, which are not directly attributable to supporting the business,these businesses, are reported as corporate items. Also reportedThese corporate items may also include changes in our corporate segment arethe fair value of the contingent consideration liability, restructuring charges, lease exit and related charges, as well as stock compensation charges.
RealNetworks reports three3 reportable segments based on factors such as how we manage our operations and how ourthe Chief Operating Decision Maker (CODM) reviews results. The CODM reviews financial information presented on both a consolidated basis and on a business segment basis. The accounting policies used to derive segment results are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies, in the 10-K.
Segment results for the quarters and nine months ended September 30, 20172020 and 20162019 (in thousands):
Consumer Media
 Consumer Media
Quarter Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Revenue$2,543 $3,632 $9,197 $8,738 
Cost of revenue593 705 1,723 2,341 
Gross profit1,950 2,927 7,474 6,397 
Operating expenses2,092 2,692 6,754 8,688 
Operating income (loss)$(142)$235 $720 $(2,291)

Mobile ServicesQuarter Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Revenue$6,400 $6,895 $19,551 $20,831 
Cost of revenue1,511 1,721 4,989 5,634 
Gross profit4,889 5,174 14,562 15,197 
Operating expenses5,577 7,143 18,847 22,142 
Operating loss$(688)$(1,969)$(4,285)$(6,945)

 Games
Quarter Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Revenue$7,611 $7,164 $21,713 $18,922 
Cost of revenue1,955 1,934 5,707 5,259 
Gross profit5,656 5,230 16,006 13,663 
Operating expenses5,152 5,151 15,051 15,476 
Operating income (loss)$504 $79 $955 $(1,813)

20


 Quarter Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016
Revenue$4,197
 $6,482
 $16,817
 $18,608
Cost of revenue981
 1,507
 3,545
 5,485
Gross profit3,216
 4,975
 13,272
 13,123
Operating expenses3,217
 4,271
 10,957
 13,940
Operating income (loss)$(1) $704
 $2,315
 $(817)
CorporateQuarter Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Cost of revenue$$(68)$10 $(212)
Operating expenses2,521 3,522 7,852 11,895 
Operating loss$(2,524)$(3,454)$(7,862)$(11,683)

Mobile Services
 Quarter Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016
Revenue$19,123
 $17,683
 $57,434
 $51,445
Cost of revenue13,325
 13,026
 40,668
 36,347
Gross profit5,798
 4,657
 16,766
 15,098
Operating expenses6,437
 8,075
 21,261
 26,653
Operating income (loss)$(639) $(3,418) $(4,495) $(11,555)


Games

 Quarter Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016
Revenue$6,682
 $6,886
 $19,439
 $18,962
Cost of revenue2,226
 2,203
 6,842
 5,865
Gross profit4,456
 4,683
 12,597
 13,097
Operating expenses5,071
 4,649
 15,108
 14,669
Operating income (loss)$(615) $34
 $(2,511) $(1,572)




Corporate
 Quarter Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016
Cost of revenue$2
 $4
 $62
 $(87)
Operating expenses2,948
 5,705
 10,202
 16,948
Operating income (loss)$(2,950) $(5,709) $(10,264) $(16,861)


Our customers consist primarily of consumers and corporations located in the U.S., Europe, Republic of Korea and various foreign countries (Rest of the World). Revenue by geographic region (in thousands):
Quarter Ended
September 30,
 Nine Months Ended
September 30,
Quarter Ended
September 30,
Nine Months Ended
September 30,
2017 2016 2017 2016 2020201920202019
United States$10,084
 $10,642
 $30,713
 $31,379
United States$11,855 $10,588 $32,810 $29,571 
Europe3,337
 3,288
 9,736
 10,002
Europe2,206 2,616 6,840 8,069 
Republic of Korea12,054
 10,582
 37,026
 30,227
Rest of the World4,527
 6,539
 16,214
 17,407
Rest of the World2,493 4,487 10,811 10,851 
Total net revenue$30,002
 $31,051
 $93,689
 $89,015
Total net revenue$16,554 $17,691 $50,461 $48,491 
Long-lived assets (which consist(consisting of goodwill, equipment, software, leasehold improvements, operating lease assets, and other intangible assets, and goodwill)assets) by geographic region (in thousands) are as follows:
September 30,
2020
December 31,
2019
United States$18,889 $20,515 
Europe7,475 7,221 
Rest of the World1,371 1,790 
Total long-lived assets$27,735 $29,526 

21
 September 30,
2017
 December 31,
2016
United States$12,274
 $13,052
Europe3,555
 3,920
Republic of Korea105
 168
Rest of the World1,596
 1,909
Total long-lived assets$17,530
 $19,049




Note 1813Related Party Transactions
 See Note 4, Rhapsody Joint Venture,In December 2016, RealNetworks and the other then-owner of 42% of Napster each entered into an agreement to loan up to $5.0 million to Napster for general operating purposes, which loans were fully funded as of the end of January 2017 for an aggregate of $10.0 million. Included in RealNetworks' January 2019 acquisition of the additional 42% interest in Napster, as described in Note 5, Acquisitions and Dispositions, RealNetworks assumed the seller's $5.0 million note, resulting in RealNetworks holding $10.0 million of notes receivable from Napster.
In May 2019, RealNetworks extended a short-term loan to Napster in the principal amount of $1.1 million. In August 2019, RealNetworks established a two-year term on this short-term loan and, as discussed in Note 8 Debt, loaned Napster an additional $3.9 million and charged Napster for associated fees. As a result, the principal amount on this two-year note is $5.4 million. Both the two-year note and the $10.0 million loan are subordinate to RealNetworks' and Napster's third party debt.
In each of February 2015 and February 2017, Napster issued warrants to purchase shares of its common stock to each of RealNetworks and the other then-owner of 42% of Napster. The warrants have a 10-year contractual term and were issued as compensation for past services provided by these two significant stockholders of Napster. As part of RealNetworks' January 2019 acquisition of the additional 42% interest in Napster, RealNetworks assumed the warrants held by the seller.
Upon RealNetworks' acquisition of a controlling interest in Napster, the notes and warrants were effectively settled and eliminated in our consolidated financial statements as they represent preexisting relationships between RealNetworks and Napster. Additionally, upon the expected close and receipt of proceeds for the sale of Napster to MelodyVR Group PLC in the fourth quarter of 2020, amounts previously loaned to Napster will be considered settled.
In July 2020, Mr. Glaser invested $0.7 million into a RealNetworks subsidiary, Scener. This funding was in addition to $0.8 million that Mr. Glaser had previously directly invested in 2019. In August 2020, this same subsidiary entered into agreements and received $1.4 million in funding from outside investors. The 2020 investments were in the form of SAFEs, as described in Note 6 Fair Value Measurements,Measurements. As of September 30, 2020, RealNetworks owned approximately 82% of the subsidiary's outstanding equity, and we consolidate its financial results into our financial statements. The financial results of the subsidiary are reported in our Consumer Media segment.
In February 2020, we entered into a Series B Preferred Stock Purchase Agreement with Mr. Glaser, pursuant to which Mr. Glaser invested approximately $10.0 million in RealNetworks in exchange for detailsthe issuance to him of 8,064,516 shares of Series B Preferred Stock. The Series B Preferred Stock is non-voting and is convertible into common stock on transactions involving Rhapsody.a one-to-one basis, provided, however, that no conversion is permitted in the event that such conversion would cause Mr. Glaser’s beneficial ownership of our common stock to exceed the 38.5% threshold set forth in our Second Amended and Restated Shareholder Rights Plan dated November 30, 2018. The Series B Preferred Stock has no liquidation preference and no preferred dividend.

22






Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about RealNetworks’ industry, products, management’s beliefs, and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to:

the expected benefits and other consequences of our growth plans, strategic initiatives, and restructurings;
our expected introduction, distribution and related monetization, of new and enhanced products, services and technologies across our businesses;
future revenues, gross profits, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations;
the effects of our past acquisitions, including our January 2019 acquisition of a controlling interest in Napster and the anticipated sale of Napster in the fourth quarter of 2020, and expectations for future acquisitions and divestitures;
plans, strategies and expected opportunities for future growth, increased profitability and innovation;
theour expected financial position, performance, growthincluding liquidity, cash usage and profitability of, and investment in, our businesses andconservation, the availability of resources;funding or other resources, and the potential for forgiveness of certain loans;
the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses;
the continuation and expected nature of certain customer relationships;
impacts of competition and certain customer relationships on the future financial performance and growth of our businesses;
our involvement in potential claims, legal proceedings and government investigations, and the potential outcomes and effects of such potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations;
the effects of U.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and
the effect of economic and market conditions, including global pandemics and financial crises, on our business, prospects, financial condition or results of operations.
These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in Item 1A of Part I in our 2016 10-K entitled “Risk Factors.” RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by RealNetworks from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
23


Overview
Our Segments
RealNetworks creates innovative applicationsinvented the streaming media category in 1995 and continues to build on its foundation of digital media expertise and innovation, creating a new generation of products and services that make it easy to connect withenhance and enjoy digital media.secure our daily lives. We manage our business and report revenue and operating income (loss) in three segments: (1) Consumer Media (2) Mobile Services, and (3) Games. See Note 17Segment Information, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q.
Within our Consumer Media segment, revenue is primarily derived from the software licensing of our video compression, or codec, technology, principally our prior-generation codec RealMedia Variable Bitrate, or RMVB, but also including some early revenue from sales of our latest technology, RealMedia High Definition, or RMHD. We also generate revenue from the sale of our PC-based RealPlayer® products, including RealPlayer Plus and related products, and from the licensing of our intellectual property, primarily our codec technology, including our recently introduced RealMedia High Definition, or RMHD, technology.products. These products and services are delivered directly to consumers and through partners, such as OEMs and mobile device manufacturers.
Our Mobile Services business generates revenue primarily from the sale of SaaSsubscription services, which include our intercarrier messaging service and ringback tones, as well as through software licenses for the integration of our RealTimes®, intercarrier messaging, platform and our low-margin music on demand service.certain system implementations. We generate a significant portion of our revenue from sales within our Mobile Services business to a few mobile telecommunications carriers andcarriers. Our Mobile Services segment also includes our low-margin music on demand customer in Korea. The losscomputer vision platform, SAFR, which includes facial recognition technology that leverages artificial intelligence-based machine learning. To date, our SAFR business has generated a modest level of these contracts or the termination or non-renewal or renegotiation of contract terms that are less favorable to us could result in the loss of future revenues and could result in the loss of anticipated profits. Our contract with our music on demand customer in Korea, LOEN, is set to expire at the end of fiscal year 2017, and we do not


anticipate renewal. As discussed in Note 6 Allowance for Doubtful Accounts Receivable and Sales Returns, our low-margin music on demand business generated revenue of $11.4 million and $33.8 million for the three and nine months ended September 30, 2017, respectively. While non-renewal would result in a material decline in our consolidated revenue in periods after 2017, we would not expect the impact to consolidated Gross profit to be significant as the profitability of this contract has declined over time, currently generating less than three percent of our consolidated Gross profit; or $0.3 million and $0.9 million for the three and nine months ended September 30, 2017, respectively.revenue.
Our Games business generates revenue primarily through the development, publishing, and distribution of casual games under the GameHouse and Zylom brands, derivesbrands. Games are offered via mobile devices, digital downloads, and subscription play. We derive revenue from salesplayer purchases of mobilein-game virtual goods within our free-to-play games games licenses, online games subscription services, and from advertising on games sites. In addition, we derive revenue from the sale of individual games and subscription offerings.
We allocateRealNetworks allocates to its Consumer Media, Mobile Services, and Games reportable segments certain corporate expenses which are directly attributable to supporting ourthese businesses, including but not limited to a portion of finance, IT, legal, human resources and headquarters facilities, to our reportable segments.facilities. Remaining expenses, which are not directly attributable to supporting the business,these businesses, are reported as corporate items. These corporate items may also include restructuring charges lease exit and related charges, as well as stock compensation expense.

As described in Note 5 Acquisitions and Dispositions, RealNetworks acquired an additional 42% interest in Napster on January 18, 2019 bringing our ownership of Napster's outstanding stock to 84%, thus giving us a majority voting interest. For fiscal periods following the closing of the acquisition, we consolidated Napster's financial results into our financial statements, where Napster was reported as a separate segment. On August 25, 2020, RealNetworks entered into a Support Agreement dated August 25, 2020 by and among its 84%-owned subsidiary, Napster, and MelodyVR Group PLC ("MelodyVR"), an English public limited company. The Support Agreement was executed in connection with an Agreement and Plan of Merger by and among Napster, MelodyVR, and their wholly owned subsidiary (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with and into Napster, with Napster surviving and becoming a wholly owned subsidiary of MelodyVR (the “Transaction”). Other than as Securityholder Representative, RealNetworks is not a party to the Merger Agreement.
Pursuant to the merger transaction, the transaction is valued at approximately $70 million as MelodyVR will assume approximately $44 million of Napster's payment obligations, primarily relating to music licensing, and MelodyVR will pay consideration of approximately $26.3 million to certain holders of debt and equity of Napster, comprised of $12.0 million in cash and approximately $11.3 million in the form of ordinary shares of MelodyVR and subject to a $3.0 million 18-month indemnity escrow. The shares of MelodyVR that RealNetworks receives may not be sold or transferred, except in limited circumstances, for a period of one year. At the time of closing, the consideration will be applied to the full repayment of the advance to Napster on the revolving line of credit, as discussed in Note 8 Debt, payment of Napster's transaction expenses, and payment of amounts payable to certain of Napster's common stockholders. The final value to RealNetworks from the transaction is subject to the allocation to recipients of cash and MelodyVR equity, the market value of MelodyVR equity, payment to the party from which a 42% equity interest was acquired in January 2019, transaction expenses, and the eventual payout of the indemnity escrow.
The transaction is currently expected to close in the fourth quarter of 2020. Effective on the execution of the Agreement and Plan of Merger on August 25, 2020, Napster is being treated as a discontinued operation and held-for-sale for accounting and disclosure purposes. As such, Napster’s operating results and financial condition have been recast to conform to this presentation.
COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus that causes COVID-19 to be a global pandemic. As the virus spread throughout the U.S. and the world, authorities implemented numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, business limitations, and
24


shutdowns. In addition to the pandemic's widespread impact on public health and global society, reactions to the pandemic as well as measures taken to contain the virus have caused significant turmoil to the global economy and financial markets. Moreover, similar to other companies, we have taken steps to support the health and well-being of our employees, customers, partners and communities, which include working remotely and learning to operate our businesses in a fundamentally different way.
As the pandemic and containment measures generally evolved throughout 2020, we have had to reevaluate our operating plans, resulting in some significant pivots for our growth initiatives. Moreover, as we continue to operate our businesses as efficiently as possible, we have taken steps to more aggressively reduce costs and reallocate resources. We are unable to predict the impacts that the COVID-19 pandemic will have on our results from operations, financial condition, liquidity and cash flows for the remainder of fiscal 2020 or into fiscal 2021, due to numerous uncertainties, including the duration and severity of the pandemic and containment measures. We will continue to monitor and evaluate the effects to our businesses and adjust our plans as needed.
Financial Results
As of September 30, 2017,2020, we had $59.1$13.2 million in unrestricted cash and cash equivalents, and short-term investments, compared to $77.1$8.5 million as of December 31, 2016.2019. The 2017 decrease of2020 increase in cash and cash equivalents and short-term investmentscompared to the prior year end amount was due to the $10.0 million in cash proceeds from our first quarter of 2020 issuance of Series B Preferred Stock and the proceeds from a promissory note issued in the second quarter of 2020 pursuant to the PPP of the CARES Act, with RealNetworks receiving $2.9 million. A subsidiary of RealNetworks, Scener, also received $2.1 million in the third quarter of 2020, in return for issuing SAFE Notes, as described in Note 6 Fair Value Measurements. These increases were partially offset by our ongoing cash flows used in operating activities, duringwhich totaled $10.0 million for the first nine months of $17.5 million.2020.

The following discussion reflects RealNetworks' results from continuing operations. Condensed consolidated results of operations were as follows (dollars in(in thousands):
Quarters ended September 30, Nine months ended September 30, Quarter Ended September 30,Nine months ended September 30,
2017 2016 $ Change % Change 2017 2016 $ Change % Change 20202019$ Change% Change20202019$ Change% Change
Total revenue$30,002
 $31,051
 $(1,049) (3)% $93,689
 $89,015
 $4,674
 5 %Total revenue$16,554 $17,691 $(1,137)(6)%$50,461 $48,491 $1,970 %
Cost of revenue16,534
 16,740
 (206) (1)% 51,117
 47,610
 3,507
 7 %Cost of revenue4,062 4,292 (230)(5)%12,429 13,022 (593)(5)%
Gross profit13,468
 14,311
 (843) (6)% 42,572
 41,405
 1,167
 3 %Gross profit12,492 13,399 (907)(7)%38,032 35,469 2,563 %
Gross margin45% 46%     45% 47%    Gross margin75 %76 %75 %73 %
Operating expenses17,673
 22,700
 (5,027) (22)% 57,528
 72,210
 (14,682) (20)%Operating expenses15,342 18,508 (3,166)(17)%48,504 58,201 (9,697)(17)%
Operating income (loss)$(4,205) $(8,389) $4,184
 50 % $(14,956) $(30,805) $15,849
 51 %
Operating lossOperating loss$(2,850)$(5,109)$2,259 44 %$(10,472)$(22,732)$12,260 54 %
In the third quarter of 2017,2020, our total consolidated revenue decreased $1.0$1.1 million as compared with the year-earlier period. Of this decrease, $2.3 million is attributedFor the third quarter of 2020 compared to the prior year period, our Consumer Media segment, due primarily to timing of shipments by our intellectual property customers. The decrease was offset in part by a $1.4 million increase in ourand Mobile Services segment due primarily to increased low-margin music on demand revenuerevenues decreased by $1.5 million. These decreases were partially offset by an increase in Korea.revenues in our Games segment of $0.4 million. See below for further discussion of our segment results.
Cost of revenuesrevenue decreased by $0.2 million for the quarter ended September 30, 2017,2020 as compared with the year-earlier period, primarily due in part to savings of $0.5 million in our Consumer Media segment. These savings were offset in part by higher costs of $0.3 milliondecreases in our Mobile Services segment.
Operating expenses decreased by $5.0$3.2 million in the quarter ended September 30, 20172020 as compared with the prior yearyear-earlier period, primarily due to savings realized from reductions inlower salaries and benefits and professional service fees and marketing expenses totaling $2.1 million, as described more fully below, lower facilities and support services costs of $1.6 million, as well as a decrease of $1.2 million relating to decreased lease exit and related charges as compared to the prior-year period.$2.2 million.
For the nine months ended September 30, 2017,2020, our total consolidated revenue increased by $4.7$2.0 million as compared with the year-earlier period. RevenuesOur Games and Consumer Media segment revenues increased by $2.8 million and $0.5 million, respectively, and were partially offset by the revenue decline in our Mobile Services segment by $6.0 million due primarily to increased low-margin music on demand revenue in Korea and revenue increased $0.5 million inof $1.3 million. See below for further discussion of our Games segment. These increases were offset in part by a decrease of $1.8 million in our Consumer Media segment.segment results.
Cost of revenues increasedrevenue decreased by $3.5$0.6 million infor the nine months ended September 30, 20172020 as compared with the prior yearyear-earlier period, resulting in a two percentage point decrease in gross margin,primarily due to higher costsa total decrease of $4.3$1.2 million in our Consumer Media and Mobile Services segment, as well assegments, partially offset by a $1.0$0.4 million increase in our Games segment. These increases were offset by savings of $1.9 million in our Consumer Media segment.
Operating expenses decreased $14.7by $9.7 million infor the nine months ended September 30, 20172020 as compared with the prior yearyear-earlier period, primarily due to savings realized from reductions in salaries and benefits of $5.7 million and lower professional service fees and marketing expenses totaling $12.2of $1.5 million, as described more fully below. Further contributing to decreased expense as compared to the prior-year period was the impact of reduced lease exitprimarily driven by Napster acquisition costs of $2.2 million, as well as the benefit recorded following the receipt of warrantsincurred in the first quarter


of 2017 from Rhapsody of $0.5 million and the release of previously accrued taxes of $0.4 million in the first quarter of 2017. These decreases were offset by an increase of $1.0 million relating to increased restructuring costs due to increased severance charges as compared to the prior-yearprior year period.

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Segment Operating Results
Consumer Media
Consumer Media segment results of operations were as follows (dollars in(in thousands):
Quarter Ended September 30,Nine Months Ended September 30,
 Quarters ended September 30, Nine months ended September 30,
 2017 2016 $ Change % Change 2017 2016 $ Change % Change 20202019$ Change% Change20202019$ Change% Change
Revenue $4,197
 $6,482
 $(2,285) (35)% $16,817
 $18,608
 $(1,791) (10)%Revenue$2,543 $3,632 $(1,089)(30)%$9,197 $8,738 $459 %
Cost of revenue 981
 1,507
 (526) (35)% 3,545
 5,485
 (1,940) (35)%Cost of revenue593 705 (112)(16)%1,723 2,341 (618)(26)%
Gross profit 3,216
 4,975
 (1,759) (35)% 13,272
 13,123
 149
 1 %Gross profit1,950 2,927 (977)(33)%7,474 6,397 1,077 17 %
Gross margin 77% 77%     79% 71%    Gross margin77 %81 %81 %73 %
Operating expenses 3,217
 4,271
 (1,054) (25)% 10,957
 13,940
 (2,983) (21)%Operating expenses2,092 2,692 (600)(22)%6,754 8,688 (1,934)(22)%
Operating income (loss) $(1) $704
 $(705) (100)% $2,315
 $(817) $3,132
 383 %Operating income (loss)$(142)$235 $(377)NM$720 $(2,291)$3,011 NM
Total Consumer Media revenue for the quarter ended September 30, 20172020 decreased $2.3$1.1 million as compared to the same quarter in 2016. Intellectual property licensing revenue decreased by $1.7 million for the quarter2019, due primarily to lower software license revenues of $1.3 million and lower subscription services of $0.1 million, partially offset by higher advertising and other revenue of $0.3 million. The overall increase in advertising and other revenue was due to the non-recurring recognition of previously deferred third-party software product distribution revenue in the amount of $0.6 million.
Software License
For our software license revenues, the $1.3 million decrease was primarily due to the recognition of revenue on a contract that was effectuated and recognized in the third quarter of 2019. Also contributing to the decrease was the timing of shipment bycontract renewals and shipments to existing customers. The bulk of these licenses for our customers. Continuingcodec technology are with companies based in China and, in the near term, it is possible we may see continued pressure in pricing and renewals, and declines in sales.
Subscription Services
For our subscription services revenues, the $0.1 million decrease was primarily due to declines in our legacy subscription products, of $0.5 million further contributedwhich will continue to the overall decrease as compared to the prior year period.organically decline.
Cost of revenue decreased by $0.5 million duringfor the quarter ended September 30, 2017,2020 decreased $0.1 million compared with the year-earlier period. The decrease in cost of revenueThis was primarily due to lower bandwidth costs of $0.2 million directly resulting from our ongoing efforts to optimize functionalityreductions in salaries and increase efficiencies.benefits.
Operating expenses decreased by $1.1$0.6 million in the quarter ended September 30, 2017,as compared with the year-earlier period, primarily due to lower expenses for facilities and support services of $0.5 million as a result of our ongoing cost reduction efforts, as well as a decreasereductions in salaries and benefits from headcount reductions and lower professional services fees of $0.6 million.fees.
Total Consumer Media revenue for the nine months ended September 30, 2017 decreased $1.82020 increased $0.5 million as compared to the same period in 2016,prior year, due primarily to higher software license revenues of $0.7 million and higher advertising and other revenue of $0.2 million, partially offset by lower subscription services revenues of $0.4 million, described more fully below.
Software License
For our software license revenues, the $0.7 million increase was primarily due to continuing declines in our subscription productsthe timing of $1.2 millioncontract renewals and a decrease of $0.2 million in related advertising revenue.
Costshipments to existing customers. This increase was partially offset by the recognition of revenue decreased by $1.9 million duringon a contract that was effectuated and recognized in the third quarter of 2019. While we experienced an increase in software license revenues for the nine months ended September 30, 2017, compared2020, the bulk of these licenses for our codec technology are with companies based in China and, in the year-earlier period resultingnear term, it is possible we may see continued pressure in an increasepricing and renewals, and declines in gross margin of 8 percentage points. Thesales.
Subscription Services
For our subscription services revenues, the $0.4 million decrease in cost of revenue was primarily due to lower bandwidth and other support costsdeclines in our legacy subscription products, which will continue to organically decline.
Cost of $1.5 million directly resulting from our ongoing efforts to optimize functionality and increase efficiencies.
Operating expenses decreased by $3.0 million inrevenue for the nine months ended September 30, 2017,2020 decreased $0.6 million compared with the year-earlier period. This was primarily due to reductions in salaries and benefits.
Operating expenses decreased $1.9 million as compared with the year-earlier period, primarily due to lower expenses for facilitiesreductions in salaries and support services of $1.8 million as a result of our ongoing cost reduction efforts, the acceleration of depreciation expense of $0.7 million taken in the first quarter of 2016 related to the obsolescence of e-commerce assets,benefits from headcount reductions, and lower marketing expense of $0.3 million in 2017 compared to 2016.expenses.

26



Mobile Services
Mobile Services segment results of operations were as follows (dollars in(in thousands):
Quarter Ended September 30,Nine Months Ended September 30,
Quarter Ended September 30, Nine months ended September 30,
 2017 2016 $ Change % Change 2017 2016 $ Change % Change 20202019$ Change% Change20202019$ Change% Change
Revenue $19,123
 $17,683
 $1,440
 8 % $57,434
 $51,445
 $5,989
 12 %Revenue$6,400 $6,895 $(495)(7)%$19,551 $20,831 $(1,280)(6)%
Cost of revenue 13,325
 13,026
 299
 2 % 40,668
 36,347
 4,321
 12 %Cost of revenue1,511 1,721 (210)(12)%4,989 5,634 (645)(11)%
Gross profit 5,798
 4,657
 1,141
 25 % 16,766
 15,098
 1,668
 11 %Gross profit4,889 5,174 (285)(6)%14,562 15,197 (635)(4)%
Gross margin 30% 26%     29% 29%    Gross margin76 %75 %74 %73 %
Operating expenses 6,437
 8,075
 (1,638) (20)% 21,261
 26,653
 (5,392) (20)%Operating expenses5,577 7,143 (1,566)(22)%18,847 22,142 (3,295)(15)%
Operating income (loss) $(639) $(3,418) $2,779
 81 % $(4,495) $(11,555) $7,060
 61 %
Operating lossOperating loss$(688)$(1,969)$1,281 65 %$(4,285)$(6,945)$2,660 38 %
Total Mobile Services revenue increaseddecreased by $1.4$0.5 million in the quarter ended September 30, 20172020 compared with the prior-year period whichperiod. The revenue decrease was primarily due to an increase of $1.5 millionlower subscription services revenues in our low-margin music on demand contract in Korea.ringback tones business of $0.6 million.
Cost of revenue increaseddecreased by $0.3$0.2 million in the quarter ended September 30, 20172020 compared with the prior-year period, due primarily to an increase of $1.7 million in our low-margin music on demand business related to higher sales, offset in part by reductions in salaries and benefits of $0.5 million, facilities and support services costs of $0.3 million and third-party customer service of $0.3 million.related to headcount reductions.
Operating expenses decreased by $1.6 million for the quarter ended September 30, 20172020 compared with the year-earlier period primarily due to reductions in salaries and benefits and professional services fees of $0.9$1.1 million and a reduction in our facilitieslower marketing expenses of $0.2 million. Lower professional service fees and support servicesfacility costs of $0.5 million as a result of our ongoing cost reduction efforts.also contributed to the decrease.
Total Mobile Services revenue increaseddecreased by $6.0$1.3 million in the nine months ended September 30, 20172020 compared with the prior-year period. ThisThe revenue decrease was primarily due to lower subscription services revenues of $1.5 million, partially offset by a $0.3 million increase in software license revenues, described more fully below.
Software License
For our software license revenues, the increase was driven by an increaseprimarily due to revenue from sales of $5.9 millionour SAFR product.
Subscription Services
The decline in our low-margin music on demand contract in Korea and an increasesubscription services revenue was due to lower revenue of $0.6$1.9 million in our ringback tones business. These increases werebusiness, partially offset by a decrease of $0.5 millionan increase in our intercarrier messaging service.platform business of $0.4 million.
Cost of revenue increaseddecreased by $4.3$0.6 million in the nine months ended September 30, 20172020 compared with the prior-year period, due primarily to an increase of $6.3 millionreductions in our low-margin music on demand businesssalaries and benefits related to higher sales. The increased cost was offset by reduced spending on third-party customer service of $0.8 million, reduced facilities spend of $0.7 million and lower bandwidth costs of $0.6 million.headcount reductions.
Operating expenses decreased by $5.4$3.3 million for the nine months ended September 30, 20172020 compared with the year-earlier period, due primarily due to reductionsa reduction in salaries and benefits and professional services fees of $3.4$1.6 million, as well as reduced facilities and support services costslower marketing expenses of $1.3 million as a result of our ongoing cost reduction efforts and reduced marketing spendlower facility costs of $0.4 million.
Games
Games segment results of operations were as follows (dollars in(in thousands):
Quarter Ended September 30,Nine Months Ended September 30,
Quarter Ended September 30, Nine months ended September 30,
 2017 2016 $ Change % Change 2017 2016 $ Change % Change 20202019$ Change% Change20202019$ Change% Change
Revenue $6,682
 $6,886
 $(204) (3)% $19,439
 $18,962
 $477
 3 %Revenue$7,611 $7,164 $447 %$21,713 $18,922 $2,791 15 %
Cost of revenue 2,226
 2,203
 23
 1 % 6,842
 5,865
 977
 17 %Cost of revenue1,955 1,934 21 %5,707 5,259 448 %
Gross profit 4,456
 4,683
 (227) (5)% 12,597
 13,097
 (500) (4)%Gross profit5,656 5,230 426 %16,006 13,663 2,343 17 %
Gross margin 67% 68%     65% 69%    Gross margin74 %73 %74 %72 %
Operating expenses 5,071
 4,649
 422
 9 % 15,108
 14,669
 439
 3 %Operating expenses5,152 5,151 — %15,051 15,476 (425)(3)%
Operating income (loss) $(615) $34
 $(649) NM
 $(2,511) $(1,572) $(939) (60)%Operating income (loss)$504 $79 $425 538 %$955 $(1,813)$2,768 NM
Total Games revenue declined slightlyincreased $0.4 million for the quarter ended September 30, 2017,2020 as compared with the year-earlier period due primarily to increases of $0.8 million in product sales revenues, partially offset by a $0.5$0.4 million decrease in our othersubscription services revenues, described more fully below. Our Games segment has shifted its focus toward free-to-play games that offer in-game purchases of virtual goods, the revenue from which is included within product sales, and away from premium mobile games that require a one-time purchase.
Subscription Services
27


Our subscription sales decreased $0.4 million as a result of lower subscribers in the third quarter of 2020.
Product Sales
Our product sales increased $0.8 million as a result of higher in-game purchases of $1.4 million compared to the prior-year period, partially offset by a $0.3lower sales of games of $0.6 million, increase in ouras we have shifted focus toward free-to-play games that offer in-game purchases of virtual goods and away from premium mobile games revenue.that require a one-time purchase.
Advertising and Other
Our advertising and other revenues were flat when compared to the prior year period.
Cost of revenue was flat forwhen compared to the prior year period.
Operating expenses were unchanged in the quarter ended September 30, 20172020 when compared with the prior-year period as higher marketing costs during the period were offset by lower salaries and benefits and professional service fees and development costs.
Total Games revenue increased $2.8 million for the nine months ended September 30, 2020 as compared with the year-earlier period due primarily to increases of $3.3 million in app store fees related to our mobile revenue growth, offset by decreased bandwidthproduct sales revenues and advertising costs.


Operating expenses increased by $0.4 million in advertising and other revenues, partially offset by a $0.9 million decrease in our subscription services revenues.
Subscription Services
Our subscription sales decreased $0.9 million as a result of lower subscribers in 2020.
Product Sales
Our product sales increased $3.3 million as a result of higher in-game purchases of $5.5 million compared to the quarter ended September 30, 2017,prior-year period, partially offset by lower sales of games of $2.1 million, as we have shifted focus toward free-to-play games that offer in-game purchases of virtual goods and away from premium mobile games that require a one-time purchase.
Advertising and Other
Our advertising and other revenues increased $0.4 million as compared withto the prior-year period primarily as a result of increased salaries and benefits costs due tooffering more in-game advertising within our continued investment in growing our mobile games offerings.
Total Games revenue increased by $0.5 million in the nine months ended September 30, 2017, compared with the year-earlier period as a $2.0 million increase in our mobile games revenue was offset by a decrease of $1.5 million in our other games revenue.free-to-play games.
Cost of revenue increased by $1.0 million in the nine months ended September 30, 2017 compared with the prior-year period due to increases in app store fees related to our mobile revenue growth, as well as increased royalty fees paid to developers.
Operating expenses increased by $0.4 million in the nine months ended September 30, 2017,2020 when compared with the prior-year period due primarily to increased salaries and benefit costs due to our continued investment in growing our mobile games offerings,higher app store fees of $1.0 million, partially offset in part by lower marketing costs.
Corporate

Corporate segment resultspublisher license and service royalties of operations were as follows (dollars in thousands):
  Quarter Ended September 30,Nine months ended September 30,
  2017 2016 $ Change % Change 2017 2016 $ Change % Change
Cost of revenue 2
 $4
 $(2) 50 % $62
 $(87) $149
 171 %
Operating expenses 2,948
 5,705
 (2,757) (48)% 10,202
 16,948
 (6,746) (40)%
Operating income (loss) $(2,950) $(5,709) $2,759
 48 % $(10,264) $(16,861) $6,597
 39 %
$0.4 million.
Operating expenses decreased by $2.8 million in the quarter ended September 30, 2017 compared with the year-earlier period. The decrease was primarily due to a reduction of $1.2 million in our restructuring costs due to lower lease exit and related charges compared to the prior-year period, a $0.9 million reduction in salary, benefit and professional service expenses, and a $0.7 million reduction in facilities and support services.
Operating expenses decreased by $6.7$0.4 million in the nine months ended September 30, 20172020 when compared with the prior-year period, due to lower salaries and benefits of $1.1 million and professional service fees and development costs of $1.0 million, offset by higher marketing expenses of $1.7 million.
Corporate
Corporate results of operations were as follows (in thousands):
 Quarter Ended September 30,Nine Months Ended September 30,
 20202019$ Change% Change20202019$ Change% Change
Cost of revenue$$(68)$71 NM$10 $(212)$222 NM
Operating expenses2,521 3,522 (1,001)(28)%7,852 11,895 (4,043)(34)%
Operating loss$(2,524)$(3,454)$930 27 %$(7,862)$(11,683)$3,821 33 %
Operating expenses decreased by $1.0 million in the quarter ended September 30, 2020 compared with the year-earlier period. The decrease wasperiod, primarily due to lower restructuring and other charges of $0.4 million and professional service fees of $0.2 million.
Operating expenses decreased by $4.0 million for the nine months ended September 30, 2020 compared with the year-earlier period, primarily due to a $4.5 million reduction in salary, benefitsalaries and benefits of $1.5 million, lower professional service expenses, a reductionfees of $2.2$0.7 million, due toand lower lease exitrestructuring and relatedother charges and a benefit of $0.5 million relating to the warrant received from Rhapsody in the first quarter of 2017, which is discussed further in Note 5 Fair Value Measurements. These decreases were offset by an increase of $1.0 million relating to increased restructuring costs due to increased severance charges as compared to the prior-year period.million.
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Consolidated Operating Expenses
Our operating expenses consist primarily of salaries and related personnel costs including stock basedstock-based compensation, consulting fees associated with product development, sales commissions, amortization of certain intangible assets capitalized in our acquisitions, professional service fees, advertising costs, changes in the fair value of the contingent consideration liability, and restructuring charges and lease exit costs.charges. Operating expenses were as follows (dollars in(in thousands):
 Quarter Ended September 30, Nine months ended September 30,
 2017 2016 $ Change % Change 2017 2016 $ Change % Change
Research and development$7,152
 $6,699
 $453
 7 % $22,085
 $23,185
 $(1,100) (5)%
Sales and marketing4,883
 7,183
 (2,300) (32)% 17,534
 24,157
 (6,623) (27)%
General and administrative5,081
 7,086
 (2,005) (28)% 15,638
 21,380
 (5,742) (27)%
Restructuring and other charges557
 499
 58
 12 % 2,271
 1,297
 974
 75 %
Lease exit and related charges
 1,233
 (1,233) (100)% 
 2,191
 (2,191) (100)%
Total consolidated operating expenses$17,673
 $22,700
 $(5,027) (22)% $57,528
 $72,210
 $(14,682) (20)%



 Quarter Ended September 30,Nine Months Ended September 30,
 20202019$ Change% Change20202019$ Change% Change
Research and development$5,781 $6,931 $(1,150)(17)%$18,375 $21,439 $(3,064)(14)%
Sales and marketing5,130 5,644 (514)(9)%15,969 17,501 (1,532)(9)%
General and administrative4,124 5,242 (1,118)(21)%13,063 17,674 (4,611)(26)%
Restructuring and other charges307 691 (384)(56)%1,097 1,587 (490)(31)%
Total consolidated operating expenses$15,342 $18,508 $(3,166)(17)%$48,504 $58,201 $(9,697)(17)%
Research and development expenses increaseddecreased by $1.2 million in the quarter ended September 30, 2020 as compared with the year-earlier period, primarily due to a reduction in salaries and benefits of $0.7 million and lower professional service fees and development costs of $0.4 million.
Research and development expenses decreased by $3.1 million for the nine months ended September 30, 2020 as compared with the year-earlier period, primarily due to a reduction in salaries and benefits of $1.5 million and lower professional service fees and development costs of $1.3 million.
Sales and marketing expenses decreased $0.5 million in the quarter ended September 30, 2017,2020 as compared with the year-earlier period, primarily due to an increase of $0.6a $0.8 million reduction in salaries and benefits, partially offset by a $0.3 million increase in marketing expense.
Sales and professional services expense, reflecting our increased efforts towards our growth initiatives.
Research and developmentmarketing expenses decreased by $1.1$1.5 million in the nine months ended September 30, 2017,2020 as compared with the year-earlier period. The decrease wasperiod due primarily to the accelerationlower salaries and benefits of depreciation expense of $0.7$2.2 million, taken in the first quarter of 2016 and lower expenses for facilities and support services of $0.8 million as a result of our ongoing cost reduction efforts. These cost reductions werepartially offset in part by an increase of $0.3$0.5 million in salaries, benefits andof professional services expense due to increased efforts toward our growth initiatives.
Salesfees and marketing expense.
General and administrative expenses decreased by $2.3$1.1 million in the quarter ended September 30, 20172020 as compared with the year-earlier period. The decrease wasperiod, primarily due to a $1.8 million reduction in salaries, benefits andlower professional service fees as well as a decrease of $0.3 million from lower facilities and support services.salaries and benefits of $0.2 million.
SalesGeneral and marketingadministrative expenses decreased by $6.6$4.6 million in the nine months ended September 30, 2017 compared with the year-earlier period. The decrease was due to a $4.4 million reduction in salaries, benefits and professional service fees, a decrease of $1.4 million in direct marketing expense and a reduction of $0.8 million from lower facilities and support services.
General and administrative expenses decreased by $2.0 million in the quarter ended September 30, 2017, compared with the year-earlier period, due to an overall decrease in salaries, benefits and professional fees of $0.8 million, and a decrease of $1.1 million related to reduced facilities and support services costs.
General and administrative expenses decreased by $5.7 million in the nine months ended September 30, 2017,2020 as compared with the year-earlier period, primarily due to an overall decreasea reduction in salaries and benefits of $2.0 million and infrastructure costs of $0.6 million. Lower professional service fees also contributed as we incurred $1.1 million of $3.7 million, a decrease of $1.3 million related to reduced facilities and support servicesNapster acquisition costs as well as a first quarter of 2017 benefit of $0.5 million relating to warrants we received from Rhapsody, which are discussed further in Note 5 Fair Value Measurements. Also contributing to the decrease was a benefit of $0.4 million in the first quarter of 2017 related to the release of previously accrued taxes.year-earlier period.
Restructuring and other charges and Lease exit and related charges consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts. Restructuring expense primarily relates to severance costs due to workforce reductions. For additional details on these charges, see Note 10,9 Restructuring Charges and Note 11, Lease Exit and Related Charges.
Other Income (Expenses)(Expense)
Other income (expenses)(expense), net was as follows (dollars in(in thousands):
 Quarters ended September 30, Nine months ended September 30,
 2017 2016 $ Change % Change 2017 2016 $ Change % Change
Interest income, net$116
 $119
 $(3) (3)% $353
 $316
 $37
 12 %
Gain (loss) on investments, net
 6,021
 (6,021) (100)% 
 5,978
 (5,978) (100)%
Equity in net loss of Rhapsody
 (233) 233
 100 % (1,097) (629) (468) (74)%
Other income (expense), net(50) (243) 193
 (79)% (288) (515) 227
 (44)%
Total other income (expense), net$66
 $5,664
 $(5,598) (99)% $(1,032) $5,150
 $(6,182) (120)%

 Quarter Ended September 30,Nine Months Ended September 30,
 20202019$ Change20202019$ Change
Interest expense$(7)$— $(7)$(12)$— $(12)
Interest income— 31 89 (58)
Gain (loss) on equity investment, net(37)— (37)(90)12,338 (12,428)
Other income (expense), net(104)85 (189)63 197 (134)
Total other income (expense), net$(142)$85 $(227)$(8)$12,624 $(12,632)
Gain (loss) on investments,equity investment, net, decreased $6.0 million for the three and nine months ended September 30, 2017, respectively. The decrease is due2019 included a $12.3 million gain in the first quarter of 2019 related to the prior year receipt and recognitionRealNetworks' acquisition of a $4.0 million payment from our 2015 sale of the Slingo and social casino business, and to the receipt of proceeds of $2.0 million, net of transaction costs, from the sale of a domain name.

We account for our investment in Rhapsody under the equity method of accounting,Napster, as described in more detail in Note 4, Rhapsody Joint Venture. 5 Acquisitions and Dispositions.
The net carrying value of our investmentfluctuations in Rhapsody is not necessarily indicative of the underlying fair value of our investment.

Other income (expense) primarily relate to foreign exchange gains and losses.

29


Income Taxes
DuringWe recognized income tax expense of $0.3 million and $0.2 million during the quarters ended September 30, 20172020 and 2016,2019, respectively, related to U.S. and foreign income taxes. During the nine months ended September 30, 2020 and 2019, we recognized income tax expense of $0.2$0.6 million and $0.3$0.5 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 30, 2017, there have been no material changes to RealNetworks’2020, RealNetworks has $0.5 million in uncertain tax positions disclosures as provided in Note 14 of the 2016 10-K. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.positions.
The majority of our tax expense is due to income in our foreign jurisdictions andjurisdictions. In addition, we have not benefittedbenefited from losses in the U.S. and certain foreign jurisdictions inas of the third quarter of 2017.2020. We generate income in a number of foreign jurisdictions, some of which have higher or lower tax rates relative to the U.S. federal statutory rate. Our tax expense could fluctuate significantly on a quarterly basis to the extent income is less than anticipated in countries with lower statutory tax rates and more than anticipated in countries with higher statutory tax rates. For the quarter ended September 30, 2017,2020, decreases in tax expense from income generated in foreign jurisdictions with lower tax rates in comparison to the U.S. federal statutory rate was offset by increases in tax expense from income generated in foreign jurisdictions having comparable, or higher tax rates in comparison to the U.S. federal statutory rate. The effect of differences in foreign tax rates on the Company's tax expense for the third quarter of 20172020 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)%
Europe3,337
 3,288
 49
 1 % 9,736
 10,002
 (266) (3)%
Republic of Korea12,054
 10,582
 1,472
 14 % 37,026
 30,227
 6,799
 22 %
Rest of world4,527
 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 2 Recent Accounting Pronouncements, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q.

Liquidity and Capital Resources
The following summarizes working capital, cash and cash equivalents, short-term investments, and restricted cash (in thousands):
September 30, 2020December 31, 2019
Working capital$(4,696)$2,664 
Cash and cash equivalents13,245 8,472 
Restricted cash equivalents4,630 4,880 
 September 30, 2017 December 31, 2016
Working capital$56,295
 $66,304
Cash, cash equivalents, and short-term investments59,079
 77,052
Restricted cash equivalents and investments2,400
 2,700

The 2017 decrease of cash,Cash and cash equivalents and short-term investmentsincreased from December 31, 20162019 due to the $10.0 million in cash proceeds from the first quarter 2020 issuance of Series B Preferred Stock. the cash proceeds of $2.9 million from the PPP promissory note issued in the second quarter of 2020, as described in Note 8 Debt and $2.1 million in cash received by Scener, a subsidiary of RealNetworks, during the third quarter of 2020 in return for issuing rights to investors for certain shares of Scener's capital stock through the SAFE Notes, as described in Note 6 Fair Value Measurements. The increase was due primarily topartially offset by our ongoing negative cash flows used in operating activities, which totaled $17.5$10.0 million in the first nine months of 2017.2020.
The following summarizes cash flow activity (in thousands):
 Nine months ended September 30,
 2017 2016
Cash provided by (used in) operating activities$(17,543) $(22,294)
Cash provided by (used in) investing activities28,108
 13,490
Cash provided by (used in) financing activities(208) (677)
 Nine Months Ended September 30,
 20202019
Cash used in operating activities$(10,033)$(18,309)
Cash (used in) provided by investing activities(261)11,453 
Cash provided by financing activities14,970 4,086 
Cash used in operating activities consisted of net income (loss) from continuing operations adjusted for certain non-cash items such as depreciation and amortization, stock-based compensation, (gain) loss on equity investments, fair value adjustments to contingent consideration liability and the effect of changes in certain operating assets and liabilities.
Cash used in operating activities was $4.8$8.3 million lesslower in the nine months ended September 30, 20172020 as compared to the same period in 2016. Cash used in operations2019. This improvement was lessprimarily due primarily to aour lower operating loss recorded for 2017 than the same period in the prior year, driven mainly 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.


For the nine months ended September 30, 2017, cash provided by investing activities of $28.1 million was due2020 compared to sales and maturities, net of purchases, of short-term investments, which totaled $29.8 million. The increase was offset in part by our advance paid to Rhapsody of $1.5 million, as discussed further in Note 4Rhapsody Joint Venture, and fixed asset purchases of $0.5 million.the prior year period.
For the nine months ended September 30, 2016,2020, cash used by investing activities consisted of fixed asset purchases of $0.3 million.
For the nine months ended September 30, 2019, cash provided by investing activities of $13.5$11.5 million was primarily due to salesour acquisition of Napster on January 18, 2019. Our initial cash consideration paid at closing of $0.2 million was offset by
30


the cash, cash equivalents and maturities, net ofrestricted cash on Napster's balance sheet at that date. The increase was offset in part by fixed asset 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 occurred in the third quarter of 2016. These increases were partially offset by purchases of equipment, software and leasehold improvements of $2.0$0.8 million.
Cash used inprovided by financing activities for the nine months ended September 30, 20172020 was $0.2$15.0 million. This cash outflowinflow was primarily due mainly to tax payments on shares withheld upon vestingthe $10.0 million in cash proceeds from the first quarter 2020 issuance of restricted stock.Series B Preferred Stock, and the PPP promissory note proceeds of $2.9 million issued in the second quarter of 2020. Additionally, Scener, a subsidiary of RealNetworks, received $2.1 million in funds in the third quarter of 2020 from the issuance of SAFE Notes. See Note 6 Fair Value Measurements, Note 8 Debt, and Note 13 Related Party Transactions for additional details.
Cash used inprovided by financing activities for the nine months ended September 30, 20162019 was $0.7$4.1 million. This cash outflowinflow was primarily due to tax paymentsproceeds from borrowing on shares withheld upon vestingour revolving credit facility of restricted stock.$3.9 million. See Note 8 Debt for additional details.
Two customers accounted for more than 10% of trade accounts receivable as of September 30, 2020, with the customers accounting for 26% and 14% each. Two customers individually comprised more than 10% of trade accounts receivable at December 31, 2019, with the customers accounting for 26% and 11% each. Two customers accounted for 26% of consolidated revenue, or $13.3 million, during the nine months ended September 30, 2020. One customer accounted for 14% of consolidated revenue, or $6.6 million, during the nine months ended September 30, 2019.
While we currently have no planned significant capital expenditures for the remainder of 20172020 other than those in the ordinary course of business, we do have contractual commitments for future payments related to office leases.
As discussed in Note 5 Acquisitions and Dispositions, we acquired a controlling interest in Napster on January 18, 2019, and, as part of the purchase, we paid initial cash consideration of $0.2 million in the first quarter of 2019. Subsequent to RealNetworks’ January 18, 2019 acquisition, Napster has continued to operate as an independent business with its own board of directors, strategy and leadership team.
On August 25, 2020, we entered into a transaction with MelodyVR to sell our controlling interest in Napster, and the transaction is expected to close in the fourth quarter of 2020. The transaction is valued at approximately $70 million as MelodyVR will assume approximately $44 million of Napster's payment obligations, primarily relating to music licensing, and MelodyVR will pay consideration of approximately $26.3 million to certain holders of debt and equity of Napster, comprised of $12.0 million in cash and approximately $11.3 million in the form of ordinary shares of MelodyVR and subject to a $3.0 million 18-month indemnity escrow. The shares of MelodyVR that RealNetworks receives may not be sold or transferred, except in limited circumstances, for a period of one year. At the time of closing, the consideration will be applied to the full repayment of the advance to Napster on the revolving line of credit, as discussed in Note 8 Debt, payment of Napster's transaction expenses, and payment of amounts payable to certain of Napster's common stockholders. The final value to RealNetworks from the transaction is subject to the allocation to recipients of cash and MelodyVR equity, the market value of MelodyVR equity, payment to the party from which a 42% equity interest was acquired in January 2019, transaction expenses, and the eventual payout of the indemnity escrow.
As of September 30, 2020, the estimated fair value of the contingent consideration, associated with the January 2019 purchase of the controlling interest in Napster, was $12.4 million. The fair value of the contingent consideration is included in RealNetworks' current liabilities in the consolidated balance sheet. Any future amounts RealNetworks pays for contingent consideration could vary materially from the estimated amounts we have accrued as of September 30, 2020.
In August 2019, RealNetworks and Napster entered into the Loan Agreement with a third-party financial institution. Under the terms of the Agreement, which are further described in Note 8 Debt, the bank extended a two-year revolving line of credit not to exceed $10.0 million in the aggregate. As of September 30, 2020, $3.9 million had been drawn on the revolving line of credit. As discussed above, we expect to make a full repayment on this line of credit at the time of closing on the sale of our controlling interest in Napster to MelodyVR. Any future advances are expected to be used for working capital and general corporate purposes.
We believe thathave evaluated our current liquidity position in light of our history of declining revenue and operating losses as well as our near-term expectations of net negative cash flows from operating activities. We currently believe existing unrestricted cash cash equivalents, and short-term investmentsbalances, along with current availability on our revolving line of credit, will be sufficient to allow us to meet our anticipated cash needsobligations for working capital and capital expenditures for at least the next 12 months. However, our assessment is subject to inherent risks and uncertainties. Moreover, our operating forecast is partly dependent on factors that are outside of our control. Compounding these risks, uncertainties, and other factors are the potential effects of the recent coronavirus pandemic and related impacts on global commerce and financial markets. These conditions, when evaluated within the guidance of ASC 205-40, raise substantial doubt about our ability to meet our obligations over the ensuing 12 months and, therefore, to continue as a going concern.
We have active plans to mitigate these conditions. Specifically, we plan to reduce negative cash flow through operating expense reductions, as well as through the deferral of certain obligations where we believe that we have the legal basis to do so. In addition, we are evaluating various strategic opportunities, which may include selling certain businesses or product lines,
31


soliciting external investment into certain of our businesses, or seeking other strategic partnerships. Our plans are subject to inherent risks and uncertainties, which are accentuated by the effects of the pandemic and related financial impacts. Accordingly, there can be no assurance that our plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.
In the future, we may seek to raise additional funds through public or private equity financing or through other sources such as credit facilities.sources. Such sources of funding may or may not be available to us aton 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 declineOur revenue and expenses are primarily denominated in its business or financial condition, or if we provide financial support to or increaseU.S. dollars. For our investmentforeign operations, the majority of our revenues and expenses are denominated 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,other currencies, such 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 in market interest rates in our securities portfolio.
We conduct our operations primarily in five functional currencies: the U.S. dollar, the Korean won, the Japanese yen, the British poundeuro, Brazilian real, 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 30, 2017,2020, approximately $19.6$8.4 million of unrestrictedthe $13.2 million of cash and cash equivalents and short-term investments was held by our foreign subsidiaries. If these funds are needed for our operations insubsidiaries outside 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 16,19 Guarantees, to the unaudited condensed consolidated financial statements included in Item 18 of Part III of this 10-Q, thoseour 2019 10-K. Thus, these guarantee obligations also constitute off-balance sheet arrangements.

Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Our critical accounting policies and estimates are as follows:discussed in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year ended December 31, 2019.
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;
Valuation of definite-lived assets;
Valuation of goodwill;
Stock-based compensation; and
Accounting for income taxes.
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Physical products are considered deliveredDue to the customer once they havecoronavirus pandemic, there has been shippeduncertainty and titledisruption in the global economy 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.
financial markets. We recognize revenue on a gross or net basis. In most arrangements, we contract directly with end user customers, 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 advertising 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, 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,aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise 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 may impact the


amount and timingcarrying value of our expense for any period if management made different judgmentsassets or utilized different estimates. Under copyright law, weliabilities. These estimates may be required to pay licensing fees for digital sound recordingschange as new events occur and compositions we have delivered. Copyright law generally does not specify the rate and terms of the licenses, which are determined by voluntary negotiations among the parties or, for certain compulsory licenses where voluntary negotiations are unsuccessful, by arbitration. Our estimates are based on contracted or statutory rates, when established, or management’s best estimates based on facts and circumstances regarding the specific music services and agreements in similar geographies or with similar agencies. While we have based our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, actualadditional information is obtained. Actual results maycould differ materially from these estimates under different assumptions or conditions.
Estimating Recoverability of Deferred Costs. We defer costs on projects for service revenue and system sales. Deferred costs consist primarily of direct and incremental costs 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 our employees and other third parties. We recognize such costs as a component of cost of revenue, 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 term 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.
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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 periods could result in impairments of deferred project costs. We cannot accurately predict the amount and timing of any such impairments. Should the value of deferred project costs become impaired, we would record the appropriate charge, which could have a material adverse effect on our financial condition or results of operations.

Estimating Allowances for Doubtful Accounts 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.
Valuation of Equity Method Investments. We use the equity method of accounting for investments 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 fair value analysis 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 which the fair value of the investment has been less than the carrying amount of the investee or joint venture, the near-term and longer-term operating and 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.
Valuation of Definite-Lived Assets. Definite-lived assets consist primarily of property, plant and equipment, as well as amortizable intangible assets acquired in business combinations. 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 manner 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 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 and estimates are required in determining the reporting units and assessing the fair value of the reporting units. 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 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 on the award’s fair value 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 used in the valuation models change significantly, stock-based compensation expense for new awards may differ materially in the future from the amounts recorded in our consolidated statement of operations. For all awards, we are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures.
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
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 consistRealNetworks and Napster's notes payable and current debt. Certain of investment grade debt securities as specified in our investment policy. Investments in both fixedRealNetworks and Napster's borrowing arrangements have floating rate instruments carryinterest 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 expectedrisk, 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,the outstanding notes payable and restricted cash equivalentscurrent debt as of September 30, 2017,2020, a hypothetical 10% increase/decrease in interest rates would not increase/decrease our annual interest incomeexpense 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 and euros. AHowever, a hypothetical 10% increase or decrease in the Korean won and eurocash balances denominated in foreign currencies relative to the U.S. dollar as of September 30, 2017 would not result in a material impact on our financial position, results of operations or cash flows.flows as of September 30, 2020.
Item 4.Controls and Procedures
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 30, 2017.2020. 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 30, 2017,2020, our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
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 quarter of 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Item 1.   Legal Proceedings
See Note 15,5 Acquisitions and Dispositions and Note 11 Commitments and Contingencies, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q.
Item 1A.
Item 1A.   Risk Factors

Our operations and financial results are subject to various risks and uncertainties. ReadersYou should carefully consider the risk factorsrisks described below together with all of the other information included in Part I, Item 1A, "Risk Factors" in our Annual Report onthis 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 Commissionbelow are not the only risksones 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 operating plans, financial condition, and stock price have been adversely affected by the COVID-19 pandemic, and we expect to experience continued and possibly more severe adverse affects in future periods in connection with the ongoing public health and safety, governmental, and economic implications.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus that causes COVID-19 to be a global pandemic. As the virus spread throughout the U.S. and the world, authorities implemented numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, business limitations, and shutdowns. In addition to the pandemic's widespread impact on public health and global society, reactions to the pandemic as well as measures taken to contain the virus have caused significant turmoil to the global economy and financial markets. Moreover, similar to other companies, we have taken steps to support the health and well-being of our employees, customers, partners and communities, which include working remotely and learning to operate our businesses in a fundamentally different way.
To date, we have had to change certain strategy and product plans in order to address implications of the pandemic to our businesses, in particular, to our growth initiatives. Although forced to furlough some employees in the early days of the pandemic, we were able to bring those employees back to work during the second quarter. We have also reduced current expenditures in an effort to efficiently manage our businesses in the current climate. In addition, the severe turmoil in financial markets has contributed to volatility in the trading price of our common stock. We cannot provide assurance that the actions we have taken will be sufficient, or that conditions will improve as the pandemic, and reactions thereto, continue to evolve.
The COVID-19 pandemic and the resultant economic instability and financial market turmoil has added complexity, uncertainty and risk to nearly all aspects of our business. We are unable to predict the near-term and long-term impacts that the pandemic will have on our results from operations, financial condition, liquidity and cash flows for the remainder of fiscal 2020 or beyond.
Our growth initiatives could take longer than planned, be unsuccessful, or deplete our cash resources, any of which would have a material adverse effect on the performance of our businesses and financial results, and could cause us to pursue additional debt or other funding sources.
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. Our financial sustainability is largely dependent on the success of our growth initiatives, and there are many risks to that success, some of which are internal to our Company, including our ability to develop and monetize our products and services, and some of which are externally driven and outside of our control, such as the impact of macroeconomic pressures and global pandemics. In particular, we expect that progress with our growth initiatives will be negatively impacted by various reactions to the recent global outbreak of the coronavirus that causes COVID-19, such as travel restrictions, community lockdowns, tightening of corporate budgets, reduction in consumer confidence, and significant instability in financial markets. We cannot predict the duration or severity of these reactions or impacts to our business and, if prolonged, our cash reserves may prove insufficient, requiring us to pursue additional debt or other funding sources.
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. Moreover, our acceptance of outside funding for any of our growth businesses, such as Scener's 2020 fundraising, exposes us to new risks and potential liabilities, including the obligation to repay funds raised through debt instruments or securities liability in the case of equity financings. Our business would suffer, and our operational and financial results would be negatively impacted to a significant degree in the event that any of our growth initiatives fail.
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 extended a revolving line of credit not to exceed $10.0 million in the aggregate. The loan
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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.
In April 2020, RealNetworks, following an assessment of eligibility and upon approval by our Board of Directors, issued a promissory note in the principal amount of $2.9 million pursuant to the PPP of the CARES Act. In May 2020, Napster, majority owned by RealNetworks but maintaining distinct legal status and control, issued its own promissory note in the principal amount of $1.7 million pursuant to the program. On April 23, 2020, the Small Business Administration issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify for participation in the PPP. Subsequently, on April 28, 2020 the Secretary of the Treasury and Small Business Administration announced that the government will review all PPP loans of more than $2 million for which the borrower applies for forgiveness. While we believe that each of RealNetworks and Napster fully qualify for the loans, should we be audited or reviewed by the U.S. Department of the Treasury as a result of filing an application for forgiveness or otherwise, such audit or review could result in the diversion of management’s time and attention and legal and reputational costs. If we and/or Napster were to be audited and receive an adverse finding in such audit, we and/or Napster could be required to return the full amount of our/its respective PPP loan, which would reduce liquidity, and potentially result in fines and penalties.
The inability to obtain additional debt, whether through draws on our current line of credit or through a new debt facility, or the raising of funds through other means, could negatively impact our going concern assessment or our governance structure in the future. The occurrence of these or any of the risks described above would impair our financial results and stock price.
Our 84% equity interest in Napster, if the pending sale transaction does not close, 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 5 Acquisitions and Dispositions for additional information. We also now have the right to nominate directors constituting a majority of the Napster board of directors, however, Napster continues to operate as an independent business with its own board of directors, strategy, and leadership team. Napster's separate legal existence is further supported by each company's ongoing compliance with corporate formalities, the independent direction of Napster's activities, and the consistent treatment of each of RealNetworks and Napster as distinct organizations. 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 5 Acquisitions and Dispositions, at the time of acquiring an additional interest in Napster, we recorded contingent consideration, which involves the application of judgments and estimates, including but not limited to, the estimation of expected future cash flows and related discount rates. Also due to the acquisition of the controlling interest in Napster, beginning with the first quarter of 2019, we consolidate Napster’s financial results into the RealNetworks financial statements. Accordingly, we must receive Napster’s quarterly financial statements and related information in a timely manner in order to 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.
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In August 2020, we announced that Napster had entered into an agreement to be acquired by a publicly traded company in the U.K., MelodyVR Group PLC. Although the transaction is expected to close in the fourth quarter of 2020, the closing is subject to specific and customary conditions that may fail to be met, in which case the risks described above would continue to exist. If the transaction closes, there is risk that the expected benefits of the transactions, including the expected proceeds to RealNetworks, are less favorable to us than anticipated.
We need to successfully monetize our new products and services in order to sustain and grow our businesses, and manage our constrained 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, the effectiveness of our distribution channels, and significant global crises. 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, and could cause an unsustainable depletion of our cash resources.
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, deeper and more expansive market penetration, 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 or are seeking to develop and market. 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 onto their devices. Our ability to sustain or grow this business, which has recently experienced
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some downward pressure, 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 decline as it has in the recent past or on a more accelerated basis.
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 to continue to materially impact our operating results in this business. We also compete with a wide variety of companies, as small startups and well established, heavily resourced global companies continue to develop technologies and launch products in the facial recognition market. The success of this newly launched business is highly dependent on our ability to differentiate our product offering within this competitive environment.
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. Moreover, continued growth in our Games business is in part dependent on the availability of funds to invest in marketing, which availability cannot be assured.
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 customer creditworthiness or the terms in our contracts with third parties could materially harm our operating results, financial condition, and cash flow.
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, which could, in turn, jeopardize our ability to comply with Nasdaq's continued listing requirements threatening the continued listing of our common stock.
The trading price for our common stock has been steadily declining. In addition, 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 continued weakness or volatility of our stock price. Moreover, the general difficulty in forecasting our operating results and identifying meaningful performance metrics, especially when factoring in our growth initiatives, could result in actual results that differ materially from expected results, again causing continued weakness and volatility in our stock price. Compounding these internal factors, external factors such as
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the significant recent instability in global financial markets caused in part by a global pandemic, are impacting our operating results and stock price, potentially driving our stock price to record lows.
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.
Further, because our common stock is listed on the Nasdaq Global Market, we must meet Nasdaq's continued listing requirements, in particular, financial requirements that include maintaining a minimum bid price of at least $1.00. In April 2020, we received a letter from the Listing Qualifications Department of the Nasdaq Global Market indicating that, based upon the closing bid price of our common stock for the 30 consecutive business day period between March 11, 2020 through April 23, 2020, we did not meet the minimum bid price of $1.00 per share required for continued listing on Nasdaq. In June 2020, we received a second letter from Nasdaq Staff indicating that we had regained compliance with Nasdaq Listing Rule 5450(a)(1) based on its determination that the closing bid price of our common stock had been at $1.00 per share or greater for the 10 business days from May 15 to May 29, 2020. Although we are currently in compliance with all applicable continued listing requirements, further volatility in the stock market could cause our common stock price to again fall below the $1.00 minimum. We continually monitor our compliance with Nasdaq's continued listing requirements and, as necessary, our Board will consider the implementation of various measures intended to support continued compliance.
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 unanticipated, impact on our financial results. At the time of acquiring a controlling stake in Napster, we recorded goodwill and definite-lived intangibles that totaled $69.2 million. See Note 5 Acquisitions and Dispositions, for further information related to Napster. The total carrying value of our goodwill and definite-lived intangible assets, excluding Napster's intangible assets, which are recorded within discontinued operations, as of September 30, 2020 was $17.1 million.
Continued loss of revenue from our subscription services is likely to cause further harm to 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.
Given our declining revenue and operating losses, compounded by the COVID-19 pandemic and related impacts to global financial markets, management has concluded that substantial doubt exists concerning our ability to continue as a going concern.
Our unrestricted cash and cash equivalents balance at September 30, 2020 was $13.2 million, $8.4 million of which was held by our foreign subsidiaries, and our operating loss for the nine months ended September 30, 2020 was $10.5 million . As further discussed in Part II, Item 8, “Note 1—Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements in our Form 10-K, due to our history of declining revenue and operating losses, as well as our near-term expectations of net negative cash flows from operating activities, compounded by the COVID-19 pandemic and severe impacts to global financial markets, management has concluded that substantial doubt is deemed to exist about the company’s ability to continue as a going concern through the next 12 months. Our financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern will require us to improve cash flow by implementing some combination of the following: reduce operating expenses; improve working capital; defer certain obligations where we believe we have the legal basis to do so; draw upon our line of credit; sell businesses, product lines or assets; effectuate strategic alliances; efficiently repatriate cash; or obtain outside investment. Our limited cash resources and our potential inability to continue as a going concern may materially adversely affect our share price, inhibit our ability to obtain outside investment or strategic alliances.
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.
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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 variety of new compliance obligations, with significant penalties for noncompliance. Moreover, in the U.S., certain states have and more states may impose stricter privacy laws that may impact accepted business practices. 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. Moreover, the voluntary development of norms, standards, and best practices by companies providing facial recognition and similar technology could require modifications to our technology or practices that may be costly or incompatible with our financial model. Moreover, as we pursue sales of our SAFR product to governmental agencies, such as the Small Business Innovation Research, or SIBR, contracts with the U.S. Air Force that we announced in the second quarter, we may become subject to more extensive contracting rules and standards.
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 cash, 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;
potential implications resulting from the outbreak of disease on a global scale or localized in countries in which we do business or have employees; and
difficulties in managing a global enterprise, including staffing, collecting accounts receivable, and managing suppliers, distributors and representatives.
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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, cultural differences, local economic conditions, outbreak of diseases, 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. As another example, the COVID-19 pandemic has resulted in travel and work restrictions globally, and may significantly disrupt our ability to produce and sell products. We are monitoring the impacts of the pandemic to our business, as well as rapidly evolving expectations regarding its severity and duration. We are unable to predict the full effects of this pandemic on our operations and financial results.
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.
Difficulty recruiting and retaining key personnel could significantly impair our operations or jeopardize our ability to meet our growth objectives.
Our success depends substantially on the contributions and abilities of certain key personnel, and we cannot provide assurance that we will be able to retain them in the near term or recruit them in the future. We recently experienced an increase in executive-level turnover, as we have experienced in the past, which could impact our ability to retain key personnel. Also, 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. Further, repeated restructuring of our businesses and related cost-reduction efforts, as well as declines in our stock price, have caused instability in our workforce that makes it more difficult to retain and recruit key personnel. Given these factors, 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.
These risks also apply to our material subsidiaries, most notably Napster, which has experienced a high level of turnover in recent periods.
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.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.
For example, our January 18, 2019 acquisition of a controlling interest in Napster represents a significant acquisition for RealNetworks. We incurred significant transaction-related costs to effectuate the acquisition, which were recorded throughout fiscal year 2019 and in the first quarter of 2020. Furthermore, although Napster will continue to operate independently and its business will not be integrated into our businesses, we still face risks related to the acquisition such as the consolidation of Napster's financial results into our financial statements. Moreover, in August 2020 Napster entered into a definitive agreement
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to be acquired by a publicly traded company in the U.K. As an 84% stockholder of Napster, significant resources of ours, both in terms of personnel and transaction costs, were required and we expect further costs to be incurred in connection with the closing of the merger and post-closing accounting for the transaction.
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. With regard to Napster, the goodwill that we recorded in connection with the January 2019 acquisition could be deemed impaired in the event that Napster's cash position or profitability further deteriorates, or upon the effectuation of certain strategic events.
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 or misappropriation of 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. 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
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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. 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.
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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 38.5% of our common 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 38.5% 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.
Furthermore, on February 10, 2020, we entered into a Series B Preferred Stock Purchase Agreement with Mr. Glaser pursuant to which Mr. Glaser invested approximately $10.0 million in RealNetworks in exchange for the issuance to him of approximately 8.0 million shares of our Series B Preferred Stock, par value $0.001 per share. The rights, preferences, limitations, and powers of the Series B Preferred Stock are set forth in and governed by the designation of rights and preferences of Series B Preferred Stock filed with the Secretary of State of the State of Washington. Those rights, preferences, limitations, and powers include the right to proportional adjustment and the right to any dividends or distributions declared with regard to our common stock, but the Series B Preferred Stock has no voting or consent rights, has no liquidation preference, has no preferred dividend, and has limitations on transferability. Each share of Series B Preferred Stock is convertible into one share of our common stock, however no conversion is permitted in the event that it would cause Mr. Glaser’s beneficial ownership of our common stock to exceed the 38.5% threshold set forth in our shareholder rights plan dated November 30, 2018.
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 November 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
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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, even though Napster operates as an independent business with its own board of directors, strategy, and leadership team. These risks and uncertainties include 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 systems of 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 has not historically been subject to public reporting requirements or the level of visibility and scrutiny that accompanies public reporting. In the event that Napster’s system of
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internal controls, particularly relating to its music royalty accrual, is found to be ineffective, it would likely have significant implications to Napster’s financial results and, therefore, to our consolidated financial results.
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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3.
Item 3.   Default Upon Senior Securities
None
None
Item 4.Mine Safety Disclosures
Item 4.   Mine Safety Disclosures
Not applicable
Item 5.
Item 5.   Other Information
None.
None
Item 6.Exhibits
Item 6.   Exhibits
See Index to Exhibits below.




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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 BakerJudd Lee
Cary BakerJudd Lee
Title:Senior Vice President, Chief Financial Officer and Treasurer (Principal
(Principal
Financial and Accounting Officer)




Dated: November 2, 2017

4, 2020

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INDEX TO EXHIBITS
 






33
48