UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


			FORM			10-Q


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

For the Quarterly Period Ended March 31, ~~2020~~2021


¨			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 1-37745

~~RealNetworks, Inc.~~

RealNetworks, Inc.

(Exact name of registrant as specified in its charter)

Washington

91-1628146

(State of incorporation)

(I.R.S. Employer

Identification Number)

1501 First Avenue South, Suite 600

~~Seattle, Washington~~

98134

Seattle

Washington

(Address of principal executive offices)

(Zip Code)

(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 every Interactive Data File required to be submitted 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.

Large accelerated filer

¨☐

Accelerated filer

¨☐

~~Non-accelerated filer~~Non-Accelerated Filer

ý☒

Smaller reporting company

ý☒

Emerging growth company

¨☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.001 per share

RNWK

The NASDAQ Stock Market

Preferred Share Purchase Rights

RNWK

The NASDAQ Stock Market

The number of shares of the registrant’s Common Stock outstanding as of May ~~4, 2020~~10, 2021 was ~~38,235,224.~~46,907,403.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


		March 31, 2020		December 31, 2019			March 31, 2021		December 31, 2020
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	19,046	$	16,805	Cash and cash equivalents	$	17,015	$	23,940

Trade accounts receivable, net of allowances of $650 and $597		26,991		29,507
Trade accounts receivable, net of allowances of $630 and $629						Trade accounts receivable, net of allowances of $630 and $629	12,469		10,229
Deferred costs, current portion	Deferred costs, current portion	865		823		Deferred costs, current portion	262		196
Investments						Investments	5,693		9,965
Prepaid expenses and other current assets						Prepaid expenses and other current assets	3,833		3,480

Prepaid expenses and other current assets		8,873		7,445
Total current assets	Total current assets	55,775		54,580		Total current assets	39,272		47,810
Equipment, software, and leasehold improvements, at cost:	Equipment, software, and leasehold improvements, at cost:					Equipment, software, and leasehold improvements, at cost:
Equipment and software	Equipment and software	30,419		32,167		Equipment and software	30,313		30,726
Leasehold improvements	Leasehold improvements	2,903		3,311		Leasehold improvements	2,745		2,776
Total equipment, software, and leasehold improvements, at cost		33,322		35,478
Total equipment, software, and leasehold improvements						Total equipment, software, and leasehold improvements	33,058		33,502
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	30,801		32,657		Less accumulated depreciation and amortization	31,381		31,631
Net equipment, software, and leasehold improvements	Net equipment, software, and leasehold improvements	2,521		2,821		Net equipment, software, and leasehold improvements	1,677		1,871
Operating lease assets	Operating lease assets	10,961		11,592		Operating lease assets	4,771		7,937
Restricted cash equivalents	Restricted cash equivalents	5,374		5,374		Restricted cash equivalents	1,630		1,630

Other assets	Other assets	1,150		1,891		Other assets	3,792		4,150
Deferred costs, non-current portion	Deferred costs, non-current portion	1,156		1,021		Deferred costs, non-current portion	71		74
Deferred tax assets, net	Deferred tax assets, net	752		761		Deferred tax assets, net	874		909
Other intangible assets, net of accumulated amortization of $66,431 and $67,863		18,016		19,286
Goodwill	Goodwill	62,202		62,428		Goodwill	17,191		17,375

Total assets	Total assets	$	157,907	$	159,754	Total assets	$	69,278	$	81,756

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	4,996	$	4,927	Accounts payable	$	3,448	$	2,750
Accrued royalties, fulfillment and other current liabilities		77,127		77,303
Accrued and other current liabilities						Accrued and other current liabilities	15,230		17,850
Deferred revenue, current portion						Deferred revenue, current portion	2,302		2,122

Deferred revenue, current portion		6,437		6,620
Notes payable		4,797		7,331

Total current liabilities	Total current liabilities	93,357		96,181		Total current liabilities	20,980		22,722
Deferred revenue, non-current portion	Deferred revenue, non-current portion	287		96		Deferred revenue, non-current portion	35		45
Deferred tax liabilities, net	Deferred tax liabilities, net	1,116		1,172		Deferred tax liabilities, net	1,101		1,129
Long-term lease liabilities	Long-term lease liabilities	7,770		8,466		Long-term lease liabilities	6,098		6,837
Long-term debt	Long-term debt	3,900		3,900		Long-term debt	2,902		2,895
Other long-term liabilities	Other long-term liabilities	8,420		11,666		Other long-term liabilities	2,171		2,241

Total liabilities	Total liabilities	114,850		121,481		Total liabilities	33,287		35,869
Commitments and contingencies
Commitments and contingencies (Note 11)						Commitments and contingencies (Note 11)
Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Preferred stock, $0.001 par value:	Preferred stock, $0.001 par value:					Preferred stock, $0.001 par value:
Series A: authorized 200 shares		—		—
Series B: authorized 8,100 shares; issued and outstanding 8,065 shares in 2020 and 0 shares in 2019		8		—
Series A: authorized 200 shares, no shares issued and outstanding						Series A: authorized 200 shares, no shares issued and outstanding	0		0
Series B: authorized 8,100 shares; issued and outstanding 8,065 shares in 2021 and 2020						Series B: authorized 8,100 shares; issued and outstanding 8,065 shares in 2021 and 2020	8		8
Undesignated series: authorized 51,700 shares	Undesignated series: authorized 51,700 shares	—		—		Undesignated series: authorized 51,700 shares	0		0
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 38,231 shares in 2020 and 38,227 shares in 2019		38		38
Common stock, $0.001 par value, authorized 250,000 shares; issued and outstanding 38,653 shares in 2021 and 38,424 shares in 2020						Common stock, $0.001 par value, authorized 250,000 shares; issued and outstanding 38,653 shares in 2021 and 38,424 shares in 2020	38		38
Additional paid-in capital	Additional paid-in capital	654,442		644,070		Additional paid-in capital	656,800		655,606
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(62,230)		(61,323)		Accumulated other comprehensive loss	(61,177)		(60,641)
Retained deficit		(548,652)		(544,010)
Accumulated deficit						Accumulated deficit	(559,310)		(548,862)
Total shareholders’ equity	Total shareholders’ equity	43,606		38,775		Total shareholders’ equity	36,359		46,149
Noncontrolling interests	Noncontrolling interests	(549)		(502)		Noncontrolling interests	(368)		(262)
Total equity	Total equity	43,057		38,273		Total equity	35,991		45,887
Total liabilities and equity	Total liabilities and equity	$	157,907	$	159,754	Total liabilities and equity	$	69,278	$	81,756

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

~~AND COMPREHENSIVE INCOME (LOSS)~~

(In thousands, except per share data)

Quarter Ended
March 31,
2020 2019
Net revenue $ 43,145 $ 39,472
Cost of revenue 24,176 24,870
Gross profit 18,969 14,602
Operating expenses:
Research and development 8,618 8,833
Sales and marketing 8,117 8,142
General and administrative 7,113 8,364
Restructuring and other charges 209 167
Total operating expenses 24,057 25,506
Operating loss (5,088) (10,904)
Other income (expenses):
Interest expense (262) (166)
Interest income 5 77
Gain (loss) on equity investment, net — 12,338
Other income (expenses), net 795 127
Total other income (expenses), net 538 12,376
Income (loss) before income taxes (4,550) 1,472
Income tax expense 139 258
Net income (loss) including noncontrolling interests (4,689) 1,214
Net income (loss) attributable to noncontrolling interests (47) (319)
Net income (loss) attributable to RealNetworks $ (4,642) $ 1,533
Net income (loss) per share attributable to RealNetworks- Basic $ (0.12) $ 0.04
Net income (loss) per share attributable to RealNetworks- Diluted $ (0.12) $ 0.04
Shares used to compute basic net income (loss) per share 38,229 37,820
Shares used to compute diluted net income (loss) per share 38,229 37,912
Comprehensive income (loss):
Foreign currency translation adjustments, net of reclassification adjustments $ (907) $ (87)
Total other comprehensive income (loss) (907) (87)
Net income (loss) including noncontrolling interests (4,689) 1,214
Comprehensive income (loss) including noncontrolling interests (5,596) 1,127
Comprehensive income (loss) attributable to noncontrolling interests (47) (319)
Comprehensive income (loss) attributable to RealNetworks $ (5,549) $ 1,446


	Quarter Ended March 31,
	2021		2020
Net revenue	$	15,888	$	16,822
Cost of revenue	3,679		4,104
Gross profit	12,209		12,718
Operating expenses:
Research and development	6,238		6,606
Sales and marketing	5,137		6,000
General and administrative	4,898		5,161
Fair value adjustments to contingent consideration liability	(1,040)		(300)
Restructuring and other charges	3,171		86
Total operating expenses	18,404		17,553
Operating loss	(6,195)		(4,835)
Other income (expenses):
Interest expense	(95)		0
Interest income	13		6
Loss on equity and other investments, net	(4,272)		0
Other income, net	104		238
Total other income (expenses), net	(4,250)		244
Loss from continuing operations before income taxes	(10,445)		(4,591)
Income tax expense	109		25
Net loss from continuing operations	(10,554)		(4,616)
Net loss from discontinued operations, net of tax	0		(73)
Net loss	(10,554)		(4,689)
Net loss attributable to noncontrolling interests of continuing operations	(106)		(53)
Net income (loss) attributable to noncontrolling interests of discontinued operations	0		6
Net loss attributable to RealNetworks	$	(10,448)	$	(4,642)

Net loss from continuing operations attributable to RealNetworks	$	(10,448)	$	(4,563)
Net loss from discontinued operations attributable to RealNetworks	0		(79)
Net loss attributable to RealNetworks	$	(10,448)	$	(4,642)
Net loss per share attributable to RealNetworks- Basic:
Continuing operations	$	(0.27)	$	(0.12)
Discontinued operations	0		0
Total net loss per share - Basic	$	(0.27)	$	(0.12)
Net loss per share attributable to RealNetworks- Diluted:
Continuing operations	$	(0.27)	$	(0.12)
Discontinued operations	0		0
Total net loss per share - Diluted	$	(0.27)	$	(0.12)
Shares used to compute basic net loss per share	38,502		38,229
Shares used to compute diluted net loss per share	38,502		38,229

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~COMPREHENSIVE LOSS

(In thousands)

Three Months Ended
March 31,
2020 2019
Cash flows from operating activities:
Net income (loss) including noncontrolling interests $ (4,689) $ 1,214
Adjustments to reconcile net income (loss) including noncontrolling interests to net cash used in operating activities:
Depreciation and amortization 1,436 1,482
Stock-based compensation 380 1,384
(Gain) loss on equity investment, net — (12,338)
Foreign currency (gain) loss (767) (151)
Fair value adjustments to contingent consideration liability (300) —
Net change in certain operating assets and liabilities:
Trade accounts receivable 2,256 (143)
Prepaid expenses, operating lease and other assets (535) (1,063)
Accounts payable 149 (259)
Accrued, lease and other liabilities (2,554) 555
Net cash used in operating activities (4,624) (9,319)
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements (94) (482)
Proceeds from sales and maturities of short-term investments — 24
Acquisition, net of cash acquired — 12,260
Net cash (used in) provided by investing activities (94) 11,802
Cash flows from financing activities:
Proceeds from issuance of preferred stock 10,000 —
Tax payments from shares withheld upon vesting of restricted stock — (271)
Proceeds from notes payable and revolving credit facility 8,768 9,733
Repayments of notes payable and revolving credit facility (11,172) (8,437)
Other financing activities — 450
Net cash provided by financing activities 7,596 1,475
Effect of exchange rate changes on cash, cash equivalents and restricted cash (637) (207)
Net increase in cash, cash equivalents and restricted cash 2,241 3,751
Cash, cash equivalents and restricted cash, beginning of period 22,179 37,191
Cash, cash equivalents, and restricted cash end of period $ 24,420 $ 40,942


	Quarter Ended March 31,
	2021		2020
Net loss	$	(10,554)	$	(4,689)
Comprehensive loss:
Foreign currency translation adjustments	(536)		(907)
Total other comprehensive loss	(536)		(907)
Comprehensive loss including noncontrolling interests	(11,090)		(5,596)
Comprehensive loss attributable to noncontrolling interests	(106)		(47)
Comprehensive loss attributable to RealNetworks	$	(10,984)	$	(5,549)

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net loss from continuing operations	$	(10,554)	$	(4,616)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization	204		280
Stock-based compensation	836		380

Loss on equity and other investments, net	4,272		0
Foreign currency gain	(103)		(210)
Fair value adjustments to contingent consideration liability	(1,040)		(300)
Loss on impairment of operating lease assets	2,461		0

Net change in certain operating assets and liabilities:
Trade accounts receivable	(2,319)		(693)
Prepaid expenses, operating lease and other assets	496		(453)
Accounts payable	727		66
Accrued, lease and other liabilities	(1,956)		(377)
Net cash used in operating activities- continuing operations	(6,976)		(5,923)
Net cash provided by operating activities- discontinued operations	0		1,299
Net cash used in operating activities	(6,976)		(4,624)
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements	(56)		(80)



Net cash used in investing activities- continuing operations	(56)		(80)
Net cash used in investing activities- discontinued operations	0		(14)
Net cash used in investing activities	(56)		(94)
Cash flows from financing activities:
Proceeds from issuance of common stock (stock options)	468		0
Proceeds from issuance of preferred stock	0		10,000
Tax payments from shares withheld upon vesting of restricted stock	(110)		0




Net cash provided by financing activities- continuing operations	358		10,000
Net cash used in financing activities- discontinued operations	0		(2,404)
Net cash provided by financing activities	358		7,596
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(251)		(637)
Net (decrease) increase in cash, cash equivalents and restricted cash	(6,925)		2,241
Cash, cash equivalents and restricted cash, beginning of period	25,570		22,179
Cash, cash equivalents and restricted cash end of period	18,645		24,420
Less: Cash, cash equivalents and restricted cash from discontinued operations	0		8,025
Cash, cash equivalents and restricted cash from continuing operations, end of period	$	18,645	$	16,395

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

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

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


	Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Shareholders’ Equity		Noncontrolling Interests		Total Equity
	Shares	Amount		Shares	Amount

Balances, January 1, 2020	0	$	0	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	—	—		4	—		—		—		—		—		—		—
Stock-based compensation	—	—		—	—		380		—		—		380		—		380
Foreign currency translation adjustments	—	—		—	—		—		(907)		—		(907)		—		(907)
Net loss	—	—		—	—		—		—		(4,642)		(4,642)		(47)		(4,689)
Issuance of Preferred B Stock	8,065	8		—	—		9,992		—		—		10,000		—		10,000
Balances, March 31, 2020	8,065	$	8	38,231	$	38	$	654,442	$	(62,230)	$	(548,652)	$	43,606	$	(549)	$	43,057

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

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, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock — — 4 — — — — — — —
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 Stock 8,065 8 — — 9,992 — — 10,000 — 10,000
Balances, March 31, 2020 8,065 $ 8 38,231 $ 38 $ 654,442 $ (62,230) $ (548,652) $ 43,606 $ (549) $ 43,057


	Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Shareholders’ Equity		Noncontrolling Interests		Total Equity
	Shares	Amount		Shares	Amount

Balances, January 1, 2021	8,065	$	8	38,424	$	38	$	655,606	$	(60,641)	$	(548,862)	$	46,149	$	(262)	$	45,887
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	—	—		229	—		358		—		—		358		—		358
Stock-based compensation	—	—		—	—		836		—		—		836		—		836
Foreign currency translation adjustments	—	—		—	—		—		(536)		—		(536)		—		(536)
Net loss	—	—		—	—		—		—		(10,448)		(10,448)		(106)		(10,554)
Balances, March 31, 2021	8,065	$	8	38,653	$	38	$	656,800	$	(61,177)	$	(559,310)	$	36,359	$	(368)	$	35,991

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Quarters Ended March 31, ~~2020~~2021 and ~~2019~~2020


Note 11.			Description of Business and Summary of Significant Accounting Policies

Description of Business. RealNetworks provides digital media software and services to consumers, mobile carriers, device manufacturers, system integrators, and other businesses. Consumers use our digital media products and services to store, organize, play, manage and enjoy their digital media content, either directly from us or through our distribution partners. AsOver time, we have leveraged our technical expertise and access to proprietary data sources to develop a new generation of ~~January 18, 2019, we hold an 84% interest in the Napster music business, which offers a comprehensive set of digital music~~artificial intelligence (AI)-based products and ~~services designed~~solutions. The main two products and key investment initiatives in our AI portfolio are SAFR, our AI-based computer vision platform, and Kontxt, our natural language processing-based message classification and analysis product.

Rhapsody International, Inc. (doing business as Napster) was held-for-sale and treated as discontinued operations for accounting and disclosure purposes as of the third quarter of 2020. The sale of Napster was completed during the fourth quarter of 2020. The results of operations and cash flows for our discontinued operations have been segregated from the results of continuing operations and segment results, and Napster’s operating results were recast to ~~provide consumers with broad access~~conform to ~~digital music.~~this presentation in 2020. The notes to the condensed consolidated financial statements, unless otherwise indicated, are on a continuing operations basis. See Note 5. Dispositions for additional details regarding the sale of Napster.

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 and cash flow.

In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc., together with its subsidiaries, is referred to as "RealNetworks," the "Company," "we," "us," or "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 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") and are reflected separately in the Company's financial statements. Intercompany balances and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter ended March 31, ~~2020~~2021 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, ~~2020.~~2021. 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~~The Company continues to incur operating losses from continuing operations, including net operating losses of $6.2 million and $4.8 million for the quarters ended March 31, 2021 and 2020, respectively. The Company had an accumulated deficit of $559.3 million and $548.9 million as of March 31, 2021 and December 31, 2020, respectively. The Company believes that its cash and cash equivalents ~~balance at~~of $17.0 million as of March 31, 2020 was $19.0 million and our operating loss for the quarter ended March 31, 2020 was $5.1 million. We have evaluated our current liquidity position in light of our history of declining revenue and operating losses2021, as well as ~~our near-term expectations~~the unused capacity of ~~net negative cash flows from operating activities. While we currently believe existing unrestricted cash balances along with current availability on our~~its revolving line of credit ~~will be sufficient~~are adequate to ~~allow us to meet our obligations~~fund the Company's operations for at least one year from the ~~next 12 months, our assessment is subject to inherent risks~~date these financial statements were issued. Additionally, in April 2021, we received net proceeds of approximately $20.3 million from the completion of an equity offering, as described in Note 14. Subsequent Events,

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~~Uncertainties. In March 2020, the ~~potential effects~~World Health Organization declared the outbreak of the ~~recent~~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 ~~and related impacts on~~as well as measures taken to contain the virus have caused significant turmoil to the global ~~commerce~~economy and financial markets. ~~These conditions, when evaluated within~~Moreover, similar to other companies, we have taken steps to support the ~~guidance~~health and well-being of ~~ASC 205-40, raise substantial doubt about~~ our ~~ability~~employees, customers, partners and communities, which include working remotely and learning to ~~meet~~operate our ~~obligations over~~businesses in a fundamentally different way.

The COVID-19 pandemic and the ~~12 months~~resultant economic instability and financial market turmoil has added complexity, uncertainty and risk to nearly all aspects of our business. It is difficult 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. In the ~~date~~preparation of ~~this filing and, therefore, to continue as a going concern. Our~~our financial statements, ~~do not include any adjustment relating to the recoverability~~certain estimates and ~~classification of recorded asset amounts or the amounts~~assumptions regarding these impacts have been made, which could change in future periods and ~~classification of liabilities that might be necessary should we be unable to continue as a going concern.~~which could differ from actual outcomes.

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 crisis 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, 2019 (the 10-K).

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


Note 22.			Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In August 2020, the Financial Accounting Standards Board ("FASB") issued new guidance that simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. The guidance enhances 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 use of either the modified retrospective or fully retrospective method of transition. We are in the process of evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures.

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 after December 15, 2022, with early adoption permitted. We do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures.

In 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 aany 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.


Note 33.			Revenue 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 March 31, 2020
Consumer Media Mobile Services Games Napster
Business Line
Software License $ 2,020 $ 831 $ — $ —
Subscription Services 929 5,859 2,770 26,323
Product Sales 222 — 2,978 —
Advertising and Other 324 — 889 —
Total $ 3,495 $ 6,690 $ 6,637 $ 26,323
Quarter Ended March 31, 2019
Consumer Media Mobile Services Games Napster
Business Line
Software License $ 735 $ 599 $ — $ —
Subscription Services 1,088 6,340 2,985 24,337
Product Sales 219 — 1,988 —
Advertising and Other 444 — 737 —
Total $ 2,486 $ 6,939 $ 5,710 $ 24,337


	Quarter Ended March 31, 2021
	Consumer Media			Mobile Services			Games
Business Line
Software License	$	1,875	0	$	1,391	0	$	0
Subscription Services	818		0	4,589		0	2,528
Product Sales	438		0	0		0	3,163
Advertising and Other	178		0	0		0	908
Total	$	3,309		$	5,980		$	6,599

	Quarter Ended March 31, 2020
	Consumer Media			Mobile Services			Games
Business Line
Software License	$	2,020	0	$	831	0	$	0
Subscription Services	929		0	5,859		0	2,770
Product Sales	222		0	0		0	2,978
Advertising and Other	324		0	0		0	889
Total	$	3,495		$	6,690		$	6,637

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


		Quarter Ended March 31, 2020															Quarter Ended March 31, 2021
		Consumer Media		Mobile Services		Games		Napster			Consumer Media		Mobile Services		Games
Sales Channel	Sales Channel									Sales Channel
Business to Business	Business to Business	$	2,343	$	6,584	$	1,095	$	12,851	Business to Business	$	2,053	$	5,885	$	1,061
Direct to Consumer	Direct to Consumer	1,152		106		5,542		13,472		Direct to Consumer	1,256		95		5,538
Total	Total	$	3,495	$	6,690	$	6,637	$	26,323	Total	$	3,309	$	5,980	$	6,599

		Quarter Ended March 31, 2019															Quarter Ended March 31, 2020
		Consumer Media		Mobile Services		Games		Napster			Consumer Media		Mobile Services		Games
Sales Channel	Sales Channel									Sales Channel
Business to Business	Business to Business	$	1,178	$	6,817	$	1,036	$	12,095	Business to Business	$	2,343	$	6,584	$	1,095
Direct to Consumer	Direct to Consumer	1,308		122		4,674		12,242		Direct to Consumer	1,152		106		5,542
Total	Total	$	2,486	$	6,939	$	5,710	$	24,337	Total	$	3,495	$	6,690	$	6,637

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 March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, our balance of long-term accounts receivable was ~~$0.5~~$0.4 million and ~~$0.3~~$0.6 million, respectively, and is included in other long-term assets on our condensed consolidated balance sheets. The ~~increase~~decrease in this balance from December 31, ~~2019~~2020 to March 31, ~~2020~~2021 is primarily due to ~~a contract renewal in~~ the ~~first quarter~~timing of ~~2020.~~expected cash receipts. During the quarter ended March 31, ~~2020,~~2021, we recorded no impairments to our contract assets.

We record deferred revenue when cash payments are received in advance of our completion of the underlying performance obligation. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we had a deferred revenue balance of ~~$6.7~~$2.3 million and $2.2 million, respectively, primarily due to deferred revenue associated with monthly subscriptions.

Judgments and Estimates

Our contracts with customers can include obligations to provide multiple services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together can require significant judgment. For example, certain contracts include the sale of software licenses or subscriptions as well as services to be delivered over time. Judgment is also required to determine the standalone selling price ("SSP") for each distinct performance obligation in these arrangements. We allocate revenue to each performance obligation based on the relative SSP. We determine SSP for performance obligations based on overall pricing objectives, which take into consideration observable prices and market conditions.

For certain of our contracts, we recognize revenues using the sales- and usage-based exception as defined in the licensing guidance of Topic 606. For these contracts, we typically receive reporting of actual usage a quarter in arrears, and as such, we are required to estimate the current quarter's usage. To make these estimates, we utilize historical reporting information, as well as industry trends and interim reporting to quantify total quarterly usage. As actual usage information is received, we record a true-up in the following quarter to reflect any variance from our estimate. In the three months ended March 31, 2021 and 2020, we did not record any material true-ups to our consolidated financial statements.

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 less than one year. These costs are recorded within sales and marketing expense.


Note 44.			Stock-Based Compensation

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

Quarter Ended
March 31,
2020 2019
Total stock-based compensation expense $ 380 $ 1,384


	Quarter Ended March 31,
	2021		2020
Total stock-based compensation expense	$	836	$	380

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

Quarter Ended
March 31,
2020 2019
Expected dividend yield 0 % 0 %
Risk-free interest rate 0.90 % 2.51 %
Expected life (years) 4.0 3.8
Volatility 45 % 41 %


	Quarter Ended March 31,
	2021		2020
Expected dividend yield	0	%	0	%
Risk-free interest rate	0.48	%	0.90	%
Expected life (years)	3.9		4.0
Volatility	71	%	45	%

The total stock-based compensation amounts for ~~2020~~2021 and ~~2019~~2020 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~~ three months ended March 31, ~~2019~~2021 was stock compensation ~~expense~~ recorded ~~in the first quarter of 2019 related to our 2018~~for 2020 incentive bonuses paid in fully vested restricted stock units, which were authorized and granted induring the first quarter of ~~2019. Our 2019 incentive bonuses were paid fully in cash, reducing stock compensation expense in the three months ended March 31, 2020 when compared to the three months ended March 31, 2019.~~2021.

As of March 31, ~~2020, $1.9~~2021, there was $3.0 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 ~~2.8~~three years.


Note 55.			~~Acquisitions~~Dispositions

~~Napster~~

~~On January 18, 2019,~~ RealNetworks, ~~acquired an additional 42% interest in~~Inc. entered into a Support Agreement dated August 25, 2020 by and among its 84%-owned subsidiary, Rhapsody International, Inc. (doing business as Napster) ~~which brought our aggregate ownership~~, and MelodyVR Group PLC, 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 a wholly owned subsidiary of MelodyVR. The transaction was completed on December 30, 2020. Pursuant to ~~84%~~the Merger Agreement, on the closing date, MelodyVR's subsidiary merged 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 the Merger Agreement.

MelodyVR paid consideration of approximately $26 million to certain holders of debt and equity of Napster, comprised of $12 million in cash, shares of MelodyVR, and a $3 million 18-month indemnity escrow. Of the cash consideration, approximately $5.3 million was used to fully repay the advance to Napster on the revolving line of credit, pay Napster's transaction expenses, and pay amounts to certain of Napster's ~~outstanding equity, thus giving RealNetworks a majority voting interest.~~

~~Napster continues to operate as an independent business with its own board of directors, strategy and leadership team.For fiscal periods following the closing~~common stockholders. Additionally, $2.5 million of the cash proceeds were used and 47.8 million MelodyVR shares are to be used by RealNetworks to settle a contingent consideration obligation associated with our January 2019 acquisition ~~we consolidate Napster's financial~~from a third party of both a 42% stake in Napster and a $5 million loan to Napster. Net of these items, RealNetworks retained approximately $4.2 million in cash and 173.3 million shares of MelodyVR, as well as the right to any funds released from the $3 million escrow account. The shares of MelodyVR that RealNetworks received may not be sold or transferred, except in limited circumstances, for a period of approximately one year from the close of the transaction.

In March 2021, MelodyVR changed its name to Napster Group PLC (the "Napster Group") and the stock symbol was changed from MVR to NAPS.

Effective on the execution of the Agreement and Plan of Merger on August 25, 2020, Napster was treated as discontinued operations and held-for-sale for accounting and disclosure purposes and subsequently sold in December 2020. As such, Napster’s operating results into our financial statements, where Napster is reported as a separate segment. Napster, however, remains a distinct legal entity and RealNetworks assumes no ownership or control over the assets or liabilities of Napster.were recast to conform to this presentation.

The ~~16% of Napster that we do not own is accounted~~following table summarizes the loss from discontinued operations for ~~as a noncontrolling interest in our consolidated financial statements. As part of~~ the ~~transaction, we recorded a gain of $12.3 million recognized in Other income (expenses) in the Consolidated statement of operations in the first~~ quarter ~~of 2019.~~ended March 31, 2020:


Revenue	$	26,323
Cost of revenue	20,072
Gross profit	6,251
Operating expenses	6,504
Operating loss	(253)
Other income	294
Income from discontinued operations before income taxes	41
Income tax expense	114
Net loss from discontinued operations	(73)
Noncontrolling interests in net income from discontinued operations	6
Net loss from discontinued operations attributable to RealNetworks	$	(79)

The terms of the transaction included initial cash consideration of $1.0 million and additional contingent consideration. Initial cash consideration of $0.2 million was paid at closing and the remainder of the initial cash consideration18-month indemnity escrow, which is included in ~~accrued royalties, fulfillment and other current liabilities and will be paid with existing cash balances. With regards to contingent consideration, over~~Other assets on the ~~five years following the acquisition, RealNetworks will pay the lesser of the following:~~

~~(a) an additional $14.0~~condensed consolidated balance sheets, was reduced from $3.0 million to ~~seller, or~~

~~(b) if RealNetworks sells~~$2.8 million during the ~~interest to a third party for less than $15.0 million,~~quarter ended March 31, 2021. We are not aware of any additional claims against the ~~actual amount received by RealNetworks, minus the $1.0 million initial payment.~~

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

The fair value of the contingent consideration was estimated using multiple scenarios for each tranche of contingent consideration and then probability weighting each scenario and discounting them to an estimated fair value of $11.6 million at the time of acquisition. The contingent consideration is adjusted quarterly to fair value through earnings. See Note 6 Fair Value Measurements for details on the adjustment to this liability.

~~We recorded intangible assets of $23.7 million, consisting of trade name and 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, including the expected growth in Napster's business to business model and the assembled workforce. Future performance of the Napster business will factor into our intangibles and goodwill impairment analysis.March 31, 2021.

1012


Note 66.			Fair Value Measurements

Items Measured at Fair Value on a Recurring Basis

The following tables present information about our financial assets that have been measured at fair value on a recurring basis as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, and indicates the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands):


		Fair Value Measurements as of																Amortized Cost as of	Fair Value Measurements as of				Amortized Cost as of
		March 31, 2020																March 31, 2020	March 31, 2021				March 31, 2021
		Level 1		Level 2		Level 3		Total					Level 1		Level 2		Level 3		Total
Assets:	Assets:											Assets:
Cash and cash equivalents:
Cash		$	18,460	$	—	$	—	$	18,460	$	18,460
Money market funds		586		—		—		586		586

Total cash and cash equivalents		19,046		—		—		19,046		19,046

Cash and cash equivalents												Cash and cash equivalents	$	17,015	$	0	$	0	$	17,015	$	17,015
Investments												Investments	0		0		5,693		5,693		N/A
Restricted cash equivalents	Restricted cash equivalents	3,500		1,874		—		5,374		5,374		Restricted cash equivalents	1,630		0		0		1,630		1,630

Total assets	Total assets	$	22,546	$	1,874	$	—	$	24,420	$	24,420	Total assets	$	18,645	$	0	$	5,693	$	24,338	N/A
Liabilities:	Liabilities:											Liabilities:
Accrued royalties, fulfillment and other current liabilities
Accrued and other current liabilities												Accrued and other current liabilities
Napster acquisition contingent consideration	Napster acquisition contingent consideration	$	—	$	—	$	5,396	$	5,396	N/A		Napster acquisition contingent consideration	$	0	$	0	$	3,760	$	3,760	N/A
Other long-term liabilities	Other long-term liabilities											Other long-term liabilities
Napster acquisition contingent consideration		—		—		6,904		6,904		N/A
Simple Agreements for Future Equity												Simple Agreements for Future Equity	0		0		2,106		2,106		N/A
Total liabilities	Total liabilities	$	—	$	—	$	12,300	$	12,300	N/A		Total liabilities	$	0	$	0	$	5,866	$	5,866	N/A


		Fair Value Measurements as of																Amortized Cost as of	Fair Value Measurements as of				Amortized Cost as of
		December 31, 2019																December 31, 2019	December 31, 2020				December 31, 2020
		Level 1		Level 2		Level 3		Total					Level 1		Level 2		Level 3		Total
Assets:	Assets:											Assets:
Cash and cash equivalents:
Cash		$	14,887	$	—	$	—	$	14,887	$	14,887
Money market funds		1,918		—		—		1,918		1,918

Total cash and cash equivalents		16,805		—		—		16,805		16,805

Cash and cash equivalents												Cash and cash equivalents	$	23,940	$	0	$	0	$	23,940	$	23,940
Investments												Investments	0		0		9,965		9,965		N/A
Restricted cash equivalents	Restricted cash equivalents	3,500		1,874		—		5,374		5,374		Restricted cash equivalents	1,630		0		0		1,630		1,630

Total assets	Total assets	$	20,305	$	1,874	$	—	$	22,179	$	22,179	Total assets	$	25,570	$	0	$	9,965	$	35,535	N/A
Liabilities:	Liabilities:											Liabilities:
Accrued royalties, fulfillment and other current liabilities
Accrued and other current liabilities												Accrued and other current liabilities
Napster acquisition contingent consideration	Napster acquisition contingent consideration	$	—	$	—	$	2,800	$	2,800	N/A		Napster acquisition contingent consideration	$	0	$	0	$	4,800	$	4,800	N/A
Other long-term liabilities	Other long-term liabilities											Other long-term liabilities
Napster acquisition contingent consideration		—		—		9,800		9,800		N/A
Simple Agreements for Future Equity												Simple Agreements for Future Equity	0		0		2,106		2,106		N/A
Total liabilities	Total liabilities	$	—	$	—	$	12,600	$	12,600	N/A		Total liabilities	$	0	$	0	$	6,906	$	6,906	N/A

Restricted cash equivalents as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 primarily relate to ~~cash pledged as collateral against letters of credit in connection with lease agreements and our Loan and Security Agreement ("Loan Agreement") requires us to maintain~~maintaining a minimum balance of ~~$3.5 million~~ unrestricted cash at the bank. See Note ~~8 Notes Payable and Long-term debt~~8. Debt for additional details.

~~Accrued royalties, fulfillment~~Investments as of March 31, 2021 and December 31, 2020 are comprised of Napster Group ordinary shares received as a portion of the consideration from the Napster disposition, which closed on December 30, 2020. The fair value of these equity securities was calculated using the closing price of the shares as of March 31, 2021 and December 31, 2020 and discounted for a lack of liquidity due to the 12-month contractual restriction on selling or transferring the shares, subject to certain exceptions. The determination of the discount required the use of significant unobservable inputs, such as the lock-up period combined with an estimated equity volatility for the shares, that reflect our own estimates of assumptions that market participants would use. A 10% increase or decrease to the equity volatility rate could result in a $0.1 million decrease or increase, respectively, in the fair value of the stock. For the three months ended March 31, 2021, we recognized unrealized losses of $4.3 million in Loss on equity and other ~~current liabilities~~investments, net on the condensed consolidated statements of operations.

Accrued and ~~Other long-term~~other current liabilities as of March 31, 2021 and December 31, 2020 ~~include~~includes the estimated fair value of the contingent consideration for the Napster acquisition, which was determined using a fair value measurement categorized within Level 3 of the fair value hierarchy. ~~As discussed in Note 5 Acquisitions, this liability is adjusted quarterly to fair value through earnings. During the quarter ended March 31, 2020, we recorded the change in fair value~~The valuation methodology of the contingent consideration at March 31, 2021 and December 31, 2020 was based on RealNetworks' contractual obligation to pay the seller of ~~$0.3 million, as a decrease to~~ the ~~total liability~~Napster interests acquired by RealNetworks in January 2019. In April 2021, the Company and the seller agreed on the ~~consolidated balance sheet and as a reduction~~form of ~~general and administrative expense on~~final payment of the ~~consolidated statement of operations.~~

1113

contingent consideration, resulting in a cash payment of $2.5 million and the transfer of 47.8 million ordinary shares of Napster Group, valued at the December 2020 Napster sale closing date, discounted for a lack of liquidity due to the restriction on selling or transferring the shares. The change in the share price of the Napster Group ordinary shares from the sale closing date to the settlement date resulted in a fair value adjustment to the contingent consideration. During the three months ended March 31, 2021, the Company recognized a gain of $1.0 million in Fair value adjustments to contingent consideration liability on the condensed consolidated statements of operations.

In the third quarter of 2020, Scener, our non-wholly owned subsidiary, received $2.1 million in cash in exchange for the issuance of convertible securities, each a Simple Agreement for Future Equity. The conversion of these securities, or SAFE Notes, is contingent upon the occurrence of specific future capital-raising events by Scener. The future contingent events also contemplate the possibility of Scener having to pay back the original cash investment to each investor. The SAFE Notes are recorded as a liability on our consolidated financial statements within Other long-term liabilities and are required to be recorded at fair value each quarter. The valuation analysis model for the fair value of the SAFE Notes as of March 31, 2021 and December 31, 2020 used significant unobservable inputs that reflect our own estimates of assumptions that market participants would use. There has been no significant change in the estimated fair value since the issuance in the third quarter of 2020. Significant unobservable inputs to the valuation analysis model include the underlying conversion date for the SAFE Notes, Scener's capitalization prior to conversion of the SAFE Notes, an 80% discount rate as defined in the SAFE Note agreements, conversion price, conversion shares and an annual present value rate. All of the inputs are subject to significant judgment. Based on Scener's outstanding shares, without regard to potential dilution by the SAFE Notes or any other convertible securities, RealNetworks owns 82% of Scener. See Note 13. Related Party Transactions for additional discussion of Scener.

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 three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.


Note 77.			Accrued ~~royalties, fulfillment~~ and other current liabilities

Accrued ~~royalties, fulfillment~~ and other current liabilities (in thousands):


		March 31, 2020		December 31, 2019			March 31, 2021		December 31, 2020
Royalties and other fulfillment costs	Royalties and other fulfillment costs	$	54,415	$	55,750	Royalties and other fulfillment costs	$	1,173	$	1,149
Employee compensation, commissions and benefits	Employee compensation, commissions and benefits	5,777		6,858		Employee compensation, commissions and benefits	3,626		4,512

Sales, VAT and other taxes payable	Sales, VAT and other taxes payable	2,319		2,547		Sales, VAT and other taxes payable	1,302		1,231
Operating lease liabilities - current		4,788		4,805
Operating lease liabilities						Operating lease liabilities	3,127		3,373
Napster acquisition contingent consideration						Napster acquisition contingent consideration	3,760		4,800
Other	Other	9,828		7,343		Other	2,242		2,785
Total accrued royalties, fulfillment and other current liabilities		$	77,127	$	77,303
Total accrued and other current liabilities						Total accrued and other current liabilities	$	15,230	$	17,850

Included in royalties and other fulfillment costs are Napster's accrued music royalties totaling $52.9 million and $54.2 million at March 31, 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 royalty 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 holders have allowed 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 musical composition.

While Napster bases its estimates on historical experience and on various assumptions that management believes to 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 $2.2 million and $2.0 million at March 31, 2020 and December 31, 2019, respectively, are included in Prepaid expenses and other current assets on the unaudited condensed consolidated balance sheets. When these amounts are ultimately matched and invoiced to Napster, the prepaid royalty amount and the related accrued royalty liability are offset on the unaudited condensed consolidated balance sheets.


Note 88.			~~Notes Payable and Long-term debt~~Debt

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 a 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 ten-month deferment period starting after the 24-week measurement period, and is eligible for forgiveness pursuant to PPP guidelines. In April 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. We applied for forgiveness in January 2021. No assurance can be given that we will be granted forgiveness for the PPP loan. The PPP loan will be derecognized upon confirmation of forgiveness from the SBA and/or upon repayment of the loan in accordance with its terms.

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 (Revolver) not to exceed $10.0 million in the aggregate. ~~Available advances~~In December 2020, at the time of closing the sale of Napster, as further described in Note 5. Dispositions, certain terms of the Loan Agreement were amended, including the removal of Napster as a party to the lending agreement.

In February 2021, we entered into an amendment with the bank on our Revolver, whereby the ~~revolving line of credit, which will be used for working capital and general corporate purposes, are based on a~~ borrowing base ~~that comprises~~for the Revolver is comprised of accounts receivable and direct to consumer ~~deposits.~~deposits for RealNetworks only. Borrowings ~~under the Loan Agreement~~may not exceed $6.5 million and are ~~secured~~reduced by a ~~first priority security interest~~$1.0 million standby letter of credit entered into with the bank in ~~the assets of RealNetworks and Napster.~~connection with certain lease agreements. 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.~~3.25%. The Revolver matures August 1, 2022. The Loan Agreement contains customary covenants, including financial covenants, minimum EBITDA levels to be updated annually, and maintaining a minimum balance of ~~$3.5~~$1.5 million unrestricted cash at the bank.

AsWe are in the process of ~~March 31, 2020, RealNetworks had $3.9 million outstanding debt from~~negotiating the ~~revolving line of credit, which was loaned~~customary covenants for 2021, and we do not expect the resulting revisions to ~~Napster bearing interest and fees commensurate with our costs. See Note 13 Related Party Transactions for additional details.~~have a material effect on the Loan Agreement.

We paid and capitalized $0.6 million of financing fees to enter into the ~~revolving line of credit,~~Revolver in August 2019, and the financing fees ~~will be~~are being amortized over the term of the ~~debt.~~credit agreement. The ~~current and non-current~~ unamortized fees were ~~$0.3 million and~~ $0.1 million at March 31, ~~2020~~2021 and are included in Deferred costs, current ~~and non-current~~ on our condensed consolidated balance sheets.

In 2017, Napster entered into a Non-Recourse Purchase of Eligible Receivables Agreement (NRP Agreement) with an international bank (Purchaser) in which Napster will sell and assign on a continuing basis its eligible receivables to the Purchaser in return for 90% of the receivables 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. As of March 31, 2020, Napster had $4.8 million borrowings outstanding with an interest rate of 2.25%.


Note 99.			Restructuring Charges

Restructuring and other charges in ~~2020~~2021 and ~~2019~~2020 consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts, which primarily relate to lease impairment and severance costs due to workforce reductions. ~~Included in employee separation costs was restructuring expense of $0.1 million related to and reported in the Napster segment.~~

Restructuring charges are as follows (in thousands):


	Employee Separation and Other Costs		Asset Related and Other Costs		Total
Costs incurred and charged to expense for the three months ended March 31, 2021	$	581	$	2,590	$	3,171
Costs incurred and charged to expense for the three months ended March 31, 2020	$	86	$	0	$	86

During the quarter ended March 31, 2021, we recorded $2.5 million of lease impairment charges for an office space previously vacated.

Changes to the accrued restructuring liability (which is included in Accrued and other current liabilities) for 2021 are as follows (in thousands):


		Employee Separation ~~and Other~~ Costs
Accrued liability at December 31, 2020		$	346
Costs incurred and charged to expense for the three months ended March 31, ~~2020~~	2021, excluding noncash charges		$362		~~209~~
~~Costs incurred and charged to expense for the three months ended~~Cash payments		(224)
Accrued liability at March 31, ~~2019~~	2021		$	~~167~~484

~~Changes to the accrued restructuring liability (which is included in Accrued royalties, fulfillment and other current liabilities) for 2020 are as follows (in thousands):~~

Employee Separation Costs Asset Related and Other Costs Total
Accrued liability at December 31, 2019 $ 322 $ 174 $ 496
Costs incurred and charged to expense for the three months ended March 31, 2020, excluding noncash charges 239 — 239
Cash payments (341) (174) (515)
Accrued liability at March 31, 2020 $ 220 $ — $ 220


Note 1010.			~~Income (Loss)~~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
March 31,
2020 2019
Net income (loss) attributable to RealNetworks $ (4,642) $ 1,533
Weighted average common shares outstanding used to compute basic EPS 38,229 37,820
Dilutive effect of stock based awards — 92
Weighted average common shares outstanding used to compute diluted EPS 38,229 37,912
Basic EPS attributable to RealNetworks $ (0.12) $ 0.04
Diluted EPS attributable to RealNetworks $ (0.12) $ 0.04


	Quarter Ended March 31,
	2021		2020
Net loss from continuing operations attributable to RealNetworks	$	(10,448)	$	(4,563)
Net loss from discontinued operations attributable to RealNetworks	0		(79)
Net loss attributable to RealNetworks	$	(10,448)	$	(4,642)

Weighted average common shares outstanding used to compute basic EPS	38,502		38,229
Dilutive effect of stock based awards and Series B Preferred Stock	0		0
Weighted average common shares outstanding used to compute diluted EPS	38,502		38,229

Net loss per share attributable to RealNetworks- Basic:
Continuing operations	$	(0.27)	$	(0.12)
Discontinued operations	0		0
Total net loss per share - Basic	$	(0.27)	$	(0.12)
Net loss per share attributable to RealNetworks- Diluted:
Continuing operations	$	(0.27)	$	(0.12)
Discontinued operations	0		0
Total net loss per share - Diluted	$	(0.27)	$	(0.12)

During the quarters ended March 31, 2021 and 2020, ~~and 2019, 7.9~~4.5 million and ~~6.8~~7.9 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. ~~In February~~

During 2020, ~~Mr. Glaser invested~~ approximately ~~$10.0~~8.1 million ~~in RealNetworks in exchange for the issuance to him of 8,064,516~~ shares of Series B Preferred ~~Stock.~~Stock were issued. The Series B Preferred Stock is convertible into common stock on a one-to-one basis subject to the limitation described in Note 1313. Related Party Transactions. During the ~~quarter~~quarters ended March 31, 2021 and 2020, these shares were also excluded from the calculation of diluted EPS because of their antidilutive effect.

1416


Note 1111.			Commitments and Contingencies

We have been in the past and could 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. 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.

~~In March 2016, Napster was notified~~On April 6, 2020, RealNetworks Asia Pacific Co., Ltd. received notice of a ~~putative consumer class action~~civil lawsuit ~~relating to an alleged failure to pay so-called “mechanical royalties” on behalf~~filed by Korean Music Copyright Association (KOMCA) seeking damages of $2.6 million. Also named as a defendant in the lawsuit is Kakao M Corp (formerly known as LOEN Entertainment Corp.), one of the ~~plaintiffs and “other similarly-situated holders~~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 mechanical rights in copyrighted musical works.” On April 7, 2017, the plaintiffs and Napster agreed to settlement terms during a mediation session. The long form Settlement Agreement was executed effective on January 16, 2019. The damages payablemusic licensing fees under the ~~Settlement Agreement will be calculated on a claims-made basis. In May 2019, public notice was posted about~~contract; the settlement informing purported class members that they could make claims or object to the settlement, and the claims period ended on December 31, 2019. The final calculation is not yet complete, but based on preliminary results, the claimed damages are not expected to be material. Valid claims are currently expected to beunderlying music licensing fees were paid by ~~Napster~~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 inherently uncertain and we cannot predict the outcome of this matter. We have not recorded an accrual related to this matter as of March 31, 2021 as it is early in the ~~third quarter of 2020.~~litigation and any potential liability cannot be reasonably estimated.


Note 1212.			Segment Information

We manage our business and report revenue and operating income (loss) in 43 segments: (1) Consumer Media, which includes licensing of our codec technology and our PC-based RealPlayer products, including RealPlayer Plus and related products; (2) Mobile Services, which includes our SaaS services, ~~and~~ our integrated RealTimes® platform which is sold to mobile ~~carriers;~~carriers and our computer vision platform, SAFR (Secure Accurate Facial Recognition); and (3) Games, which includes all our games-related businesses, including sales of in-game virtual goods, mobile games and games licenses, games subscription services, and in-game advertising and advertising on game ~~sites; and (4) Napster, which includes on-demand music streaming and music services.~~sites.

RealNetworks allocates to its Consumer Media, Mobile Services and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items may also include changes in the fair value of the contingent consideration liability, restructuring charges, and stock compensation charges. ~~As stated in Note 5 Acquisitions, Napster operates as an independent company and, therefore, RealNetworks allocates no corporate expenses to the Napster segment.~~

RealNetworks reports ~~four~~3 reportable segments based on factors such as how we manage our operations and how the 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 2020 10-K.

Segment results for the quarters ended March 31, ~~2020~~2021 and ~~2019~~2020 (in thousands):


Consumer Media	Consumer Media	Quarter Ended March 31,							Consumer Media	Quarter Ended March 31,

		2020		2019			2021			2020
Revenue	Revenue	$	3,495	$	2,486	Revenue	$	3,309		$	3,495
Cost of revenue	Cost of revenue	611		833		Cost of revenue	478			611
Gross profit	Gross profit	2,884		1,653		Gross profit	2,831			2,884
Operating expenses	Operating expenses	2,458		3,119		Operating expenses	2,201			2,458
Operating income (loss)		$	426	$	(1,466)
Operating income						Operating income	$	630		$	426

Mobile Services Quarter Ended
March 31,
2020 2019
Revenue $ 6,690 $ 6,939
Cost of revenue 1,696 2,048
Gross profit 4,994 4,891
Operating expenses 7,588 7,561
Operating income (loss) $ (2,594) $ (2,670)


Mobile Services	Quarter Ended March 31,

	2021		2020
Revenue	$	5,980	$	6,690
Cost of revenue	1,492		1,696
Gross profit	4,488		4,994
Operating expenses	6,145		7,588
Operating loss	$	(1,657)	$	(2,594)


Games	Games	Quarter Ended March 31,							Games	Quarter Ended March 31,

		2020		2019			2021			2020
Revenue	Revenue	$	6,637	$	5,710	Revenue	$	6,599		$	6,637
Cost of revenue	Cost of revenue	1,794		1,670		Cost of revenue	1,705			1,794
Gross profit	Gross profit	4,843		4,040		Gross profit	4,894			4,843
Operating expenses	Operating expenses	4,923		5,037		Operating expenses	5,098			4,923
Operating income (loss)		$	(80)	$	(997)
Operating loss						Operating loss	$	(204)		$	(80)

Napster
Quarter Ended
March 31,
2020 2019
Revenue $ 26,323 $ 24,337
Cost of revenue 20,072 20,396
Gross profit 6,251 3,941
Operating expenses 6,461 5,532
Operating income (loss) $ (210) $ (1,591)


Corporate	Corporate	Quarter Ended March 31,							Corporate	Quarter Ended March 31,
		2020		2019			2021			2020
Cost of revenue	Cost of revenue	$	3	$	(77)	Cost of revenue	$	4		$	3
Operating expenses	Operating expenses	2,627		4,257		Operating expenses	4,960			2,584
Operating income (loss)		$	(2,630)	$	(4,180)
Operating loss						Operating loss	$	(4,964)		$	(2,587)

Our customers consist primarily of consumers and corporations located in the U.S., Europe, and various foreign countries (Rest of the World). Revenue by geographic region (in thousands):


		Quarter Ended March 31,							Quarter Ended March 31,
		2020		2019			2021		2020
United States	United States	$	22,420	$	18,970	United States	$	9,932	$	10,214
Europe	Europe	14,838		15,384		Europe	2,230		2,252

Rest of the World	Rest of the World	5,887		5,118		Rest of the World	3,726		4,356
Total net revenue	Total net revenue	$	43,145	$	39,472	Total net revenue	$	15,888	$	16,822

Long-lived assets (consisting of ~~goodwill,~~ equipment, software, leasehold improvements, operating lease assets, and ~~other intangible assets)~~goodwill) by geographic region (in thousands) are as follows:


		March 31, 2020		December 31, 2019			March 31, 2021		December 31, 2020
United States	United States	$	81,524	$	83,342	United States	$	15,426	$	18,318
Europe	Europe	10,220		10,504		Europe	7,159		7,638

Rest of the World	Rest of the World	1,956		2,281		Rest of the World	1,054		1,227
Total long-lived assets	Total long-lived assets	$	93,700	$	96,127	Total long-lived assets	$	23,639	$	27,183


Note 1313.			Related Party Transactions

As described in Note 5 Acquisitions, on January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc., (doing business as Napster), bringing our aggregate ownership interest to 84% of Napster's outstanding equity, thus giving RealNetworks a majority voting interest in Napster. Following this acquisition of a controlling interest, we consolidate Napster's financial results into our financial statements for fiscal periods beginning with our first quarter of 2019. Rhapsody America LLC was initially formed in 2007 as a joint venture between RealNetworks and MTV Networks, a division of Viacom International, Inc., to own and operate a business-to-consumer digital audio music service originally branded as Rhapsody. The ~~service has been significantly expanded and was re-branded in 2016 as Napster.~~

Following certain restructuring transactions effective March 31, 2010, we began accounting for the investment using the equity method of accounting. As part of the 2010 restructuring transactions, RealNetworks contributed $18.0 million in cash, the Rhapsody brand and certain other assets, including content licenses, in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10.0 million preference upon certain liquidation events. Although we now consolidate Napster for reporting purposes, our convertible preferred stock and the related rights remain contractually binding instruments between RealNetworks and Napster.

~~In December 2016, RealNetworks and the other then-owner of 42%~~sale 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 theclosed on December 30, 2020. For additional 42% interest in Napster, RealNetworks assumed the seller's $5.0 million note, resulting in RealNetworks holding $10.0 million of notes receivable from Napster. The terms of the notes were modified subsequent to the original December 2016 execution, including a provision, effective July 2018, that requires repayment at the greater of (a) principal plus accrued interest at an annual rate of 15% or (b) a preference of three times the principal amount.

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 indetails, see Note 8 Notes Payable and Long-term 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. However, the notes and warrants remain contractually binding instruments between RealNetworks and Napster.

In 2019, Mr. Glaser directly invested $0.8 million in one of our subsidiaries in exchange for shares of preferred stock of that entity. The subsidiary is developing a platform that transforms the experience of viewing video entertainment into a social, connected playground. As of March 31, 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.5. Dispositions.

In February 2020, we entered into a Series B Preferred Stock Purchase Agreement with Mr. Glaser, Chairman of the Board and Chief Executive Officer of RealNetworks, pursuant to which Mr. Glaser 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 non-voting and is convertible into common stock on 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.

In July 2020, Mr. Glaser invested $0.7 million into a RealNetworks subsidiary, Scener. Scener is developing a platform that transforms the experience of viewing video entertainment into a social connected playground. The July 2020 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. As of March 31, 2021, 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.


Note 1414.			Subsequent Events

~~The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, established the Paycheck Protection Program (PPP). Through the PPP, loan amounts are forgiven~~In April 2021, we completed an underwritten public offering of 8,250,000 shares of common stock at a price to the ~~extent~~public of $2.70 per share. The aggregate gross proceeds from the offering were $22.3 million. Of these proceeds, we received approximately $20.3 million, after deducting underwriting discounts, commissions, and legal and other fees. The proceeds are expected to be used ~~to cover documented payroll, rent,~~for general corporate purposes and utility costs over an 8-week measurement period following loan funding. In April 2020, RealNetworks issued a promissory note in the principal amount of $2.9 million and in May 2020, Napster issued a promissory note in the principal amount of $1.7 million, both pursuant to the PPP. The notes have a maturity of 2 years, an interest rate of 1.0%, 0 pre-payment penalty, a six-month deferment period, and are eligible for forgiveness pursuant to program guidelines. We cannot provide assurance, however, that all or any portion of the principal and interest on these loans will be forgiven.working capital.

On 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 lawsuit is Kakao M Corp (formerly known as LOEN Entertainment Corp.), one of 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 inherently uncertain and we cannot predict the outcome of this matter. We have not recorded an accrual related to this settlement as of March 31, 2020 as it is early in the litigation and any potential liability cannot be reasonably estimated.

On April 23, 2020, the Company received a letter from the Listing Qualifications Department of the Nasdaq Global Market (Nasdaq) indicating that, based upon the closing bid price of RealNetworks’ 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 April 2020, in response to the unprecedented turmoil in U.S. and world financial markets, Nasdaq tolled the compliance periods for its bid price and market value of publicly held shares requirements through June 30, 2020. As a result of Nasdaq's general grant of this grace period, we have a compliance period of 180 calendar days starting July 1, 2020 and ending December 28, 2020 in which to regain compliance. In order to regain compliance with Nasdaq’s minimum bid price requirement, the Company’s common stock must maintain a minimum closing bid price of $1.00 for at least ten consecutive business days during the compliance period. In the event RealNetworks does not regain compliance by the end of the compliance period, we may be eligible for a second compliance period pursuant to Nasdaq's existing rules.

The letter has no immediate impact on the listing of the RealNetworks’ common stock, which will continue to be listed and traded on Nasdaq during the general grace period and the 180-day compliance period. RealNetworks’ Board will consider the implementation of various measures intended to support compliance, including a reverse split of our common stock in an effort to increase the trading price of the RealNetworks’ shares.

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, and related monetization, of new and enhanced products, services and technologies across our businesses;

•future revenues, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations;

•the effects of our past acquisitions, including our January ~~18,~~ 2019 acquisition of a controlling interest in Napster and subsequent sale of our entire Napster interest in December 2020, and expectations for future acquisitions and divestitures;

•plans, strategies and expected opportunities for future growth, increased profitability and innovation;

•our expected financial position, including liquidity, cash usage and conservation, the availability of funding or other resources, and the potential for forgiveness of certain loans;

•the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses;

•the continuation and expected nature of certain customer relationships;

•impacts of competition and certain customer relationships on the future financial performance and growth of our businesses;

•our involvement in potential claims, legal proceedings and government investigations, and the potential outcomes and effects of such potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations;

•the effects of U.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and

•the effect of economic and market conditions, including global pandemics and financial crises, on our business, prospects, financial condition or results of operations.

These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in Item 1A entitled “Risk Factors.” RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by RealNetworks from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

2120

Overview

Our ~~Segments~~Business

RealNetworks invented the streaming media category in 1995 and continues to build on its foundation of digital media expertise and ~~innovation, creating~~innovation. In recent years, we have leveraged our technical expertise and access to proprietary data sources to develop a new generation of AI-based products and ~~services~~solutions. These products and solutions are designed to help customers be safer and smarter, and for their companies to be more efficient and more successful. The main two products and key investment initiatives in our AI portfolio are SAFR, our AI-based computer vision platform, and Kontxt, our natural language processing-based (NLP) message classification and analysis product.

SAFR leverages the power of AI to enhance security and ~~secure~~convenience for our ~~daily lives.~~ customers around the globe with fast, accurate, low-biased face recognition and additional person- and object-based AI capabilities. Kontxt is based on AI NLP analysis, allowing our customers to analyze and classify multiple billions of messages monthly in real time in order to protect end consumers from spam and fraud. Our focus on AI-based products and our data science resources allows us to be agile, continuously evolving, and rapidly creating new solutions to solve customers’ problems.

In addition to our AI solutions, our consumer products also feature GameHouse Original Stories, a unique IP portfolio of free-to-play and subscription mobile games, used by millions of players. Our consumer products also include ringback tones, which we sell to consumers through mobile operators, and the renowned RealPlayer, which introduced streaming to the world in 1995 and today provides millions of people worldwide a powerful way to stream, download, store, organize, and experience the rapidly expanding universe of digital media content. We also create video compression and enhancement technology, which we primarily license to OEMs, including manufacturers of mobile devices, smart TVs, and set-top boxes.

Our Segments

We manage our business and report revenue and operating income (loss) in ~~four~~three segments: (1) Consumer Media (2) Mobile Services, and (3) ~~Games, and (4) Napster.~~Games.

Within our Consumer Media segment, revenue is ~~primarily~~ derived from the software licensing of our video compression and enhancement, or codec, ~~technology, principally~~technologies, including primarily from our prior-generation codec RealMedia Variable Bitrate, or RMVB, ~~but also including some early revenue from sales of~~and to a lesser extent our ~~latest~~newer codec technology, RealMedia High Definition, or RMHD. We also generate revenue from the sale of our PC-based RealPlayer products, including RealPlayer Plus and related products. These products and services are delivered directly to consumers and through partners, such as OEMs and mobile device manufacturers.

Our Mobile Services business generates revenue primarily from the sale of subscription services, which include our intercarrier messaging service and ringback tones, as well as through software licenses for the integration of our RealTimes platform and certain system implementations. We generate a significant portion of our revenue from sales within our Mobile Services business to a few mobile carriers. Our Mobile Services segment also includes our ~~computer vision platform,~~AI-based growth initiatives, SAFR ~~which includes facial recognition technology that leverages artificial intelligence-based machine learning. To date, our SAFR business has not generated a significant level of revenue.~~and Kontxt.

Our Games business generates revenue primarily through the development, publishing, and distribution of casual games under the GameHouse and Zylom brands. Games are offered via mobile devices, digital downloads, and subscription play. We derive revenue from player purchases of in-game virtual goods within our free-to-play games and from advertising on games sites. In addition, we derive revenue from the sale of individual games and subscription offerings.

As described in Note 5 Acquisitions, RealNetworks acquired an additional 42% interest in Napster on January 18, 2019 bringing our ownership of Napster's outstanding stock to 84%, thus having a majority voting interest. For fiscal periods following the closing of the acquisition, we consolidate Napster's financial results into our financial statements, where Napster is reported as a separate segment. In connection with the acquisition, we recorded goodwill and definite-lived intangible assets, which we assess for impairment each quarter and which would be negatively impacted if Napster's business were to continue to decline or if it were to suffer significant financial distress.

The Napster segment provides music products and services that enable consumers to access digital music content from a variety of devices. The Napster subscription service offers unlimited access to a catalog of tens of millions of music tracks by way of on-demand streaming and conditional downloads. Napster currently offers music services and generates revenue primarily through subscriptions sold directly to consumers, through distribution partners, or through various music platform services primarily under co-branded arrangements. Napster generates a significant portion of revenue from sales to a few partners.

RealNetworks allocates to its Consumer Media, Mobile Services, and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, IT, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items may also include restructuring charges and stock compensation expense. ~~As stated in Note 5 Acquisitions, Napster operates as an independent company and, therefore, RealNetworks allocates no corporate expenses to the Napster segment.~~

COVID-19

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~~Similar to other companies, at the onset of the pandemic we ~~have taken steps~~implemented measures to support the health and well-being of our employees, customers, partners and communities, ~~which include~~including working remotely and learning to operate our businesses in a fundamentally different way.

~~Even as implications~~The COVID-19 pandemic and the resultant economic instability and financial market turmoil added complexity, uncertainty and risk to nearly all aspects of our business. As a result of the pandemic, and containment measures generally evolved throughout the first quarter of 2020, the impact on our financial results for the first quarter of 2020 was relatively minor. We have, however, had to reevaluatewe reevaluated our operating plans, ~~resulting in~~

causing some significant pivots in 2020 for our growth ~~initiatives.~~initiatives, and we continue to assess our plans as the pandemic environment evolves. Moreover, as we continue to operate our ~~businesses~~business as efficiently as possible, we have taken steps to more aggressively reduce costs and reallocate resources. We are unable to fully predict the ~~near-term and long-term~~ impacts that the COVID-19 pandemic will continue to have on our results from operations, financial condition, liquidity and cash flows for the remainder of fiscal ~~2020~~year 2021, due to the numerous uncertainties, including the

duration and severity of the pandemic and ongoing containment ~~measures, but we~~measures. We will continue to monitor and evaluate the effects to our businesses and adjust our plans as needed.

Financial Results

As of March 31, ~~2020,~~2021, we had ~~$19.0~~$17.0 million in unrestricted cash and cash equivalents, compared to ~~$16.8~~$23.9 million as of December 31, ~~2019.~~2020. The ~~2020 increase~~2021 decrease in cash and cash equivalents compared to the prior year end amount was primarily due to ~~the $10.0 million in cash proceeds from our recent issuance of Series B Preferred Stock, partially offset by~~ our ongoing cash flows used in operating activities, which totaled ~~$4.6~~$7.0 million infor the first three months of 2020, and Napster's net repayment of debt of $2.4 million under the NRP Agreement. In April 2020, RealNetworks issued a promissory note in the principal amount of $2.9 million and in May 2020, Napster issued a promissory note in the principal amount of $1.7 million, both pursuant to the PPP of the CARES Act.2021.

The following discussion reflects RealNetworks' results from continuing operations. Condensed consolidated results ~~of operations~~ were as follows (in thousands):


		Quarter Ended March 31,																			Quarter Ended March 31,
		2020			2019			$ Change		% Change			2021			2020			$ Change		% Change
Total revenue	Total revenue	$	43,145		$	39,472		$	3,673	9	%	Total revenue	$	15,888		$	16,822		$	(934)	(6)	%
Cost of revenue	Cost of revenue	24,176			24,870			(694)		(3)	%	Cost of revenue	3,679			4,104			(425)		(10)	%
Gross profit	Gross profit	18,969			14,602			4,367		30	%	Gross profit	12,209			12,718			(509)		(4)	%
Gross margin	Gross margin	44		%	37		%					Gross margin	77		%	76		%

Operating expenses	Operating expenses	24,057			25,506			(1,449)		(6)	%	Operating expenses	18,404			17,553			851		5	%
Operating loss	Operating loss	$	(5,088)		$	(10,904)		$	5,816	53	%	Operating loss	$	(6,195)		$	(4,835)		$	(1,360)	(28)	%

In the first quarter of ~~2020,~~2021, our total consolidated revenue ~~increased $3.7~~decreased $0.9 million as compared with the year-earlier period. ~~For the first quarter of 2020 compared~~The decrease was due primarily to ~~the prior year period, Napster segment~~lower revenues increased by $2.0 million, primarily due to the inclusion of Napster for the three months ended March 31, 2020, whereas the three months ended March 31, 2019 includes Napster from the acquisition date of January 18, 2019 through the end of the quarter. Our Consumer Media segment revenues increased by $1.0 million and our Games segment revenues increased by $0.9 million, partially offset by the revenue decline in our Mobile Services ~~segment~~and Consumer Media segments of $0.7 million and $0.2 ~~million. See below for further discussion of our segment results.~~million, respectively.

Cost of revenue decreased by ~~$0.7~~$0.4 million for the quarter ended March 31, ~~2020~~2021 as compared with the year-earlier period, primarily due to ~~the savings of $0.4 million~~decreases in our Mobile Services ~~segment, $0.3 million in Napster segment~~ and ~~$0.2 million in our~~ Consumer Media ~~segment, partially offset by $0.1 million increase in our Games segment.~~segments.

Operating expenses ~~decreased~~increased by ~~$1.4~~$0.9 million in the quarter ended March 31, ~~2020~~2021 as compared with the year-earlier ~~period,~~period. The increase was due primarily ~~due~~to restructuring charges of $3.1 million, partially offset by lower salaries and benefits of $1.2 million and lower marketing expenses of $0.3 million. Also contributing to the ~~reductions of $1.8~~offset was a $0.7 million ~~in salaries, benefits and infrastructure expenses. In the first quarter of 2020, we incurred expenses of $0.2 million for costs associated with our acquisition of Napster, compared with $0.8 million~~higher benefit in the first quarter of ~~2019. Operating expenses within Corporate in~~2021 related to the ~~first quarter of 2020 also included the favorable change in~~ fair value adjustment of the ~~Napster~~ contingent consideration liability of $0.3 million. These decreases were partially offset by $0.9 million increase in Napster segment primarily due to the inclusion of a full quarter of expenses in the first quarter of 2020 compared to the prior year.liability.

Segment Operating Results

Consumer Media

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


		Quarter Ended March 31,																					Quarter Ended March 31,

		2020			2019			$ Change		% Change					2021				2020				$ Change			% Change
Revenue	Revenue	$	3,495		$	2,486		$	1,009	41	%		Revenue		$	3,309			$	3,495			$	(186)		(5)		%
Cost of revenue	Cost of revenue	611			833			(222)		(27)	%		Cost of revenue		478				611				(133)			(22)		%
Gross profit	Gross profit	2,884			1,653			1,231		74	%		Gross profit		2,831				2,884				(53)			(2)		%
Gross margin	Gross margin	83		%	66		%						Gross margin		86		%		83		%
Operating expenses	Operating expenses	2,458			3,119			(661)		(21)	%		Operating expenses		2,201				2,458				(257)			(10)		%
Operating income (loss)		$	426		$	(1,466)		$	1,892	NM
Operating income												Operating income		$	630			$	426			$	204		48		%

Total Consumer Media revenue for the quarter ended March 31, ~~2020 increased $1.0~~2021 decreased $0.2 million as compared to the same quarter in ~~2019,~~2020. The decrease was primarily due ~~primarily~~ to ~~higher~~lower software license revenues, ~~of $1.3 million,~~lower advertising and other, and lower subscription services. This was partially offset by ~~lower subscription services revenues of $0.2 million, described more fully below. The overall increase in revenues was also offset by lower~~higher product ~~sales, advertising and other revenues of $0.1 million.~~sales.

Software License

~~For our~~In the quarter ended March 31, 2021, the decrease in software license ~~revenues, the $1.3~~revenue of $0.1 million ~~increase~~ was due primarily ~~due~~ to the timing of contract renewals and shipments to existing customers. The bulk of these licenses for our codec technology are with companies based in China and, in the near term, it is possible we may see continued pressure in pricing and renewals, and declines in sales.renewals.

Subscription Services

For our subscription services revenues, the ~~$0.2~~$0.1 million decrease was primarily due to ~~continuing~~ declines in our ~~legacy~~long-standing subscription products, which ~~will continue~~we expect to ~~organically decline.~~continue.

Product Sales

The increase in product sales of $0.2 million was primarily due to higher RealPlayer Plus sales during the first quarter of 2021.

Cost of revenue for the quarter ended March 31, ~~2020~~2021 decreased ~~$0.2~~$0.1 million compared with the year-earlier period. This was primarily due to reductions in salaries and benefits.

Operating expenses decreased ~~$0.7~~$0.3 million as compared with the year-earlier period, primarily due to reductions in salaries and benefits from headcount reductions and ~~marketing expenses.~~lower professional fees.

Mobile Services

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


		Quarter Ended March 31,																	Quarter Ended March 31,

		2020			2019			$ Change		% Change			2021			2020			$ Change		% Change
Revenue	Revenue	$	6,690		$	6,939		$	(249)	(4)	%	Revenue	$	5,980		$	6,690		$	(710)	(11)	%
Cost of revenue	Cost of revenue	1,696			2,048			(352)		(17)	%	Cost of revenue	1,492			1,696			(204)		(12)	%
Gross profit	Gross profit	4,994			4,891			103		2	%	Gross profit	4,488			4,994			(506)		(10)	%
Gross margin	Gross margin	75		%	70		%					Gross margin	75		%	75		%
Operating expenses	Operating expenses	7,588			7,561			27		—	%	Operating expenses	6,145			7,588			(1,443)		(19)	%
Operating loss	Operating loss	$	(2,594)		$	(2,670)		$	76	3	%	Operating loss	$	(1,657)		$	(2,594)		$	937	36	%

Total Mobile Services revenue decreased by $0.7 million in the quarter ended March 31, 2021 compared with the prior-year period. The revenue decrease was primarily due to lower subscription services revenues of $1.4 million, partially offset by an increase in software license revenues of $0.6 million.

Software License

For our software license revenue, the increase in revenue for the quarter ended March 31, 2021 as compared to the prior-year period was due primarily to higher sales of our SAFR product of $0.5 million.

Subscription Services

The decline in our subscription service revenue of $1.4 million in the quarter ended March 31, 2021 as compared to the prior-year period is due primarily to lower revenues from our ringback tones business of $1.1 million, resulting from terminated contracts and lower subscribers.

Cost of revenue decreased by $0.2 million in the quarter ended March 31, 2020 compared with the prior-year period. The revenue decrease was due to lower subscription services revenues of $0.4 million, partially offset by a $0.2 million increase in software license revenues, described more fully below.

~~Software License~~

~~For our software license revenues, the increase was primarily due to revenue from sales of our SAFR product.~~

~~Subscription Services~~

The decline in our subscription services revenue was due to lower revenue of $0.7 million in our ringback tones business, partially offset by an increase in our messaging platform business of $0.3 million.

~~Cost of revenue decreased by $0.4 million in the quarter ended March 31, 2020~~2021 compared with the prior-year period, due primarily to reductions in salaries and benefits related to headcount ~~reductions and lower third-party customer services fees.~~

reductions.

Operating expenses ~~remained flat~~decreased by $1.4 million for the quarter ended March 31, ~~2020~~2021 compared with the year-earlier ~~period. An increase~~period due to reductions in salaries and benefits related to headcount reductions of ~~$0.5~~$1.4 million ~~was~~and lower marketing expenses of $0.3 million. These decreases were partially offset by ~~lower marketing and infrastructure expenses.~~higher professional fees of $0.3 million.

Games

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


		Quarter Ended March 31,																			Quarter Ended March 31,

		2020			2019			$ Change		% Change			2021			2020			$ Change		% Change
Revenue	Revenue	$	6,637		$	5,710		$	927	16	%	Revenue	$	6,599		$	6,637		$	(38)	(1)	%
Cost of revenue	Cost of revenue	1,794			1,670			124		7	%	Cost of revenue	1,705			1,794			(89)		(5)	%
Gross profit	Gross profit	4,843			4,040			803		20	%	Gross profit	4,894			4,843			51		1	%
Gross margin	Gross margin	73		%	71		%					Gross margin	74		%	73		%
Operating expenses	Operating expenses	4,923			5,037			(114)		(2)	%	Operating expenses	5,098			4,923			175		4	%
Operating income (loss)		$	(80)		$	(997)		$	917	92	%
Operating loss												Operating loss	$	(204)		$	(80)		$	(124)	155	%

Total Games revenue ~~increased $0.9 million~~decreased slightly for the quarter ended March 31, ~~2020~~2021 as compared with the year-earlier period due primarily to ~~increases~~a decrease of ~~$1.0~~$0.2 million in ~~product sales~~subscription services revenues, ~~and $0.1 million in advertising and other revenues, partially~~ offset by a $0.2 million ~~decrease~~increase in our ~~subscription services~~product sales revenues, described more fully below. Our Games segment continues to shift its focus toward free-to-play games that offer in-game purchases of virtual goods, the revenue from which is included within product sales, and away from premium mobile games that require a one-time purchase.

Subscription Services

Our subscription sales decreased $0.2 million as a result of lower subscribers in the first quarter of ~~2020.~~2021.

Product Sales

Our product sales increased ~~$1.0~~$0.2 million as a result of higher in-game purchases of ~~$1.6~~$0.4 million compared to the prior-year period, partially offset by lower sales of games of ~~$0.6 million as we continue to shift toward free-to-play games that offer in-game purchases of virtual goods and away from premium mobile games that require a one-time purchase.~~

~~Advertising and Other~~

~~Our advertising and other revenues increased $0.1 million as compared to the prior-year period primarily as a result of offering more in-game advertising within our free-to-play games.~~$0.2 million.

Cost of revenue increased $0.1 million in the quarter ended March 31, 2020 when compared with the prior-year period due to higher app store fees of $0.3 million, partially offset by lower publisher license and service royalties of $0.2 million.

~~Operating expenses~~ decreased $0.1 million in the quarter ended March 31, ~~2020~~2021 when compared to the prior year period due to lower publisher license and service royalties.

Operating expenses increased $0.2 million in the quarter ended March 31, 2021 when compared with the prior-year period due primarily to ~~lower~~higher professional ~~services fees of $0.3 million and salaries and benefits of $0.3 million, partially offset by higher marketing expenses of $0.5 million.~~

~~Napster~~

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

Quarter Ended March 31,
2020 2019 $ Change % Change
Revenue $ 26,323 $ 24,337 $ 1,986 8 %
Cost of revenue 20,072 20,396 (324) (2) %
Gross profit 6,251 3,941 2,310 59 %
Gross margin 24 % 16 %
Operating expenses 6,461 5,532 929 17 %
Operating loss $ (210) $ (1,591) $ 1,381 87 %

~~As described in Note 5 Acquisitions, we acquired control and began consolidating Napster effective January 18, 2019. Our consolidated results include Napster from the acquisition date forward.~~

~~Subscription Services~~

Napster's subscription revenues for the quarter ended March 31, 2020 increased $2.0 million compared to the same quarter of 2019 due to a $1.3 million increase in direct to consumer revenues and a $0.7 million increase in sales through

distribution partners. The increase was primarily due to the inclusion of a full quarter of revenues and an early termination fee from a platform partner in the first quarter of 2020, offset in part by lower subscribers. Direct to consumer revenue was reduced in the first quarter of 2019 by $0.6 million due to a fair value reduction in deferred revenue at the time of acquisition.

Cost of revenues primarily consist of content royalties related to music label and publishing rights for the domestic and international music streaming services. These costs can vary materially from period to period due to the significant judgments, assumptions, and estimates of the amounts to be paid. Napster's cost of revenues for the quarter ended March 31, 2020 decreased $0.3 million primarily due to lower royalties, partially offset by the inclusion of a full quarter of cost of revenues in the first quarter of 2020 compared to the prior year period.

Operating expenses increased by $0.9 million in the quarter ended March 31, 2020 primarily due to the inclusion of a full quarter of expenses in the first quarter of 2020 compared to the prior year period.service fees.

Corporate

Corporate results of operations were as follows (in thousands):


		Quarter Ended March 31,															Quarter Ended March 31,

		2020		2019		$ Change		% Change			2021		2020		$ Change		% Change
Cost of revenue	Cost of revenue	$	3	$	(77)	$	80	NM		Cost of revenue	$	4	$	3	$	1	33	%

Operating expenses	Operating expenses	2,627		4,257		(1,630)		(38)	%	Operating expenses	4,960		2,584		2,376		92	%
Operating loss	Operating loss	$	(2,630)	$	(4,180)	$	1,550	37	%	Operating loss	$	(4,964)	$	(2,587)	$	(2,377)	(92)	%

Operating expenses ~~decreased~~increased by ~~$1.6~~$2.4 million in the quarter ended March 31, ~~2020~~2021 compared with the year-earlier period, primarily due to higher restructuring and stock compensation expenses of $3.1 million and $0.5 million, respectively. These increases were partially offset by a ~~reduction in salaries and benefits~~$0.7 million higher benefit in the first quarter of ~~2020. The overall change was also impacted by lower Napster acquisition costs of $0.4 million and a favorable change in~~2021 related to the fair value adjustment of the ~~Napster~~ contingent consideration liability, ~~of $0.3 million,~~ as further discussed in Note 66. Fair Value ~~Measurements.~~Measurements, and lower professional fees of $0.4 million.

2624

Consolidated Operating Expenses

Our operating expenses consist primarily of salaries and related personnel costs including stock-based compensation, consulting fees associated with product development, sales commissions, ~~amortization of certain intangible assets capitalized in our acquisitions,~~ professional service fees, advertising costs, changes in the fair value of the contingent consideration liability, and restructuring charges. Operating expenses were as follows (in thousands):


		Quarter Ended March 31,															Quarter Ended March 31,
		2020		2019		$ Change		% Change			2021		2020		$ Change		% Change
Research and development	Research and development	$	8,618	$	8,833	$	(215)	(2)	%	Research and development	$	6,238	$	6,606	$	(368)	(6)	%
Sales and marketing	Sales and marketing	8,117		8,142		(25)		—	%	Sales and marketing	5,137		6,000		(863)		(14)	%
General and administrative	General and administrative	7,113		8,364		(1,251)		(15)	%	General and administrative	4,898		5,161		(263)		(5)	%
Fair value adjustments to contingent consideration liability										Fair value adjustments to contingent consideration liability	(1,040)		(300)		(740)		247	%
Restructuring and other charges	Restructuring and other charges	209		167		42		25	%	Restructuring and other charges	3,171		86		3,085		3,587	%

Total consolidated operating expenses	Total consolidated operating expenses	$	24,057	$	25,506	$	(1,449)	(6)	%	Total consolidated operating expenses	$	18,404	$	17,553	$	851	5	%

Research and development expenses decreased by ~~$0.2~~$0.4 million in the quarter ended March 31, ~~2020~~2021 as compared with the year-earlier period, primarily due to a reduction in salaries and people related costs of $0.8 million, partially offset by higher professional service fees of $0.2 million and higher infrastructure costs of $0.1 million.

Sales and marketing expenses decreased $0.9 million in the quarter ended March 31, 2021 as compared with the year-earlier period, primarily due to a $0.7 million reduction in salaries and people related costs and lower marketing expenses of $0.3 million, partially offset by a $0.2 million increase in professional service fees.

General and administrative expenses decreased by $0.3 million in the quarter ended March 31, 2021 as compared with the year-earlier period, primarily due to lower professional service fees of $0.4 million and lower infrastructure expenses of ~~$0.3 million.~~

~~Sales and marketing expenses remained flat in the quarter ended March 31, 2020 as compared with the year-earlier period In the first quarter of 2020, a $0.7~~$0.1 million, ~~reduction in salaries and benefits was~~ partially offset by ~~a $0.4 million increase in marketing expenses, primarily due~~higher stock compensation expense.

The fair value adjustments to ~~increased efforts towards free-to-play games, and $0.2 million increase in professional services fees.~~

~~General and administrative expenses decreased~~the contingent consideration liability changed by ~~$1.3~~$0.7 million in the quarter ended March 31, ~~2020~~2021 as compared with the ~~year-earlier period. In the first quarter of 2020, we incurred expenses of $0.2 million for costs associated with our acquisition of Napster, compared with $0.8 million~~same period in the first quarter of 2019. The overall decrease was also impacted by lower salaries and benefits of $0.5 million and a favorable change in the fair value of the Napster contingent consideration liability of $0.3 million, as further discussed in2020. See Note 66. Fair Value ~~Measurements.~~Measurements for additional information.

Restructuring and other charges consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment ~~efforts.~~efforts and the $2.5 million of lease impairment charges for office space previously vacated. For additional details on these charges, see Note 99. Restructuring Charges.

Other Income (Expense)

Other income (expense), net was as follows (in thousands):


		Quarter Ended March 31,											Quarter Ended March 31,
		2020		2019		$ Change			2021		2020		$ Change
Interest expense	Interest expense	$	(262)	$	(166)	$	(96)	Interest expense	$	(95)	$	—	$	(95)
Interest income	Interest income	5		77		(72)		Interest income	13		6		7
Gain (loss) on equity investment, net		—		12,338		(12,338)
Other income (expense), net		795		127		668
Loss on equity and other investments, net								Loss on equity and other investments, net	(4,272)		—		(4,272)
Other income, net								Other income, net	104		238		(134)
Total other income (expense), net	Total other income (expense), net	$	538	$	12,376	$	(11,838)	Total other income (expense), net	$	(4,250)	$	244	$	(4,494)

~~Interest expense relates to RealNetworks and Napster's notes payable and long-term debt, described in detail in Note 8 Notes Payable and Long-term debt.~~

~~Gain (loss) on equity investment, net, for~~As of the quarter ended March 31, ~~2019, included a $12.3~~2021, the Loss on equity and other investments, net, of $4.3 million ~~gain related to RealNetworks' consolidation~~reflects the unrealized losses on equity securities. We acquired these shares from the sale of Napster in December 2020, as ~~described in more detail~~further discussed in Note ~~5 Acquisitions.~~5. Dispositions.

The fluctuations in Other income ~~increased $0.7 million~~ primarily ~~due~~relate to foreign exchange ~~gains.~~

gains and losses.

2825

Income Taxes

We recognized income tax expense of $0.1 million ~~and $0.3 million~~ during the ~~quarters~~quarter ended March 31, ~~2020 and 2019, respectively,~~2021 related to U.S. and foreign income taxes. For the same period in 2020, income tax expense was insignificant.

As of March 31, ~~2020,~~2021, RealNetworks has ~~$5.0~~$0.7 million in uncertain tax positions. ~~We currently anticipate the expiration of the statute of limitations within the next twelve months that may decrease the Company's total unrecognized tax benefit by an amount up to $1.3 million.~~

The majority of our tax expense is due to income in our foreign jurisdictions. In addition, we have not benefited from losses in the U.S. and certain foreign jurisdictions inas of the first quarter of ~~2020.~~2021. 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 March 31, ~~2020,~~2021, 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 first quarter of ~~2020~~2021 was minimal.

We file numerous consolidated and separate income tax returns in the U.S., including federal, state and local returns, as well as in foreign jurisdictions. With few exceptions, we are no longer subject to United States federal income tax examinations for tax years prior to 2013 or state, local or foreign income tax examinations for years prior to 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.

New Accounting Pronouncements

See Note 22. Recent Accounting Pronouncements, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q.

Liquidity and Capital Resources

The following summarizes working capital, cash and cash equivalents, and restricted cash (in thousands):


		March 31, 2020		December 31, 2019			March 31, 2021		December 31, 2020
Working capital		$	(37,582)	$	(41,601)
Working capital, excluding cash and cash equivalents						Working capital, excluding cash and cash equivalents	$	1,277	$	1,148
Cash and cash equivalents	Cash and cash equivalents	19,046		16,805		Cash and cash equivalents	17,015		23,940
Restricted cash equivalents	Restricted cash equivalents	5,374		5,374		Restricted cash equivalents	1,630		1,630

Cash and cash equivalents ~~increased~~decreased from December 31, ~~2019~~2020 due primarily to ~~the $10.0 million in~~ cash ~~proceeds from the issuance of Series B Preferred Stock, partially offset by our ongoing cash flows~~ used in operating activities, which totaled ~~$4.6~~$7.0 million in the first three months of ~~2020,~~2021.

As of March 31, 2021, approximately $7.9 million of the $17.0 million of cash and ~~Napster's net repayment of debt of $2.4 million.~~cash equivalents was held by our foreign subsidiaries outside the U.S.

The following summarizes cash flow activity from continuing operations (in thousands):


		Three Months Ended March 31,							Three Months Ended March 31,
		2020		2019			2021		2020
Cash used in operating activities	Cash used in operating activities	$	(4,624)	$	(9,319)	Cash used in operating activities	$	(6,976)	$	(5,923)
Cash (used in) provided by investing activities		(94)		11,802
Cash used in investing activities						Cash used in investing activities	(56)		(80)
Cash provided by financing activities	Cash provided by financing activities	7,596		1,475		Cash provided by financing activities	358		10,000

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

Cash used in operating activities from continuing operations was ~~$4.7~~$1.1 million ~~lower~~higher in the three months ended March 31, ~~2020~~2021 as compared to the same period in ~~2019. This improvement was~~2020, primarily due to ~~our lower operating loss recorded for~~the incremental cash used to fund the net change in working capital.

In each of the three months ended March 31, ~~2020 compared to the prior year period.~~

~~For the three months ended March 31,~~2021 and 2020, cash used by investing activities consisted of fixed asset purchases of $0.1 million.

~~For~~Cash provided by financing activities for the three months ended March 31, ~~2019,~~2021 was $0.4 million. This cash ~~provided by investing activities of $11.8 million~~inflow was ~~primarily~~ due to ~~our acquisition~~proceeds from the issuance of ~~Napster on January 18, 2019. Our initial cash consideration paid at closing~~common stock related to exercising of ~~$0.2 million was~~stock options, partially offset by ~~the cash, cash equivalents and~~tax payments for shares withheld upon vesting of restricted ~~cash on Napster's balance sheet at that date. The increase was offset in part by fixed asset purchases of $0.5 million.~~

stock.

Cash provided by financing activities for the three months ended March 31, 2020 was ~~$7.6~~$10.0 million. This cash inflow was ~~primarily~~ due to the $10.0 million in cash proceeds from the first quarter 2020 issuance of Series B Preferred ~~Stock, offset by Napster's net repayment of debt of $2.4 million. See Note 8 Notes Payable and Long-term debt and Note 13 Related Party Transactions for additional details.~~Stock..

Cash provided by financing activities for the three months ended March 31, 2019 was $1.5 million. This cash inflow was primarily due to net proceeds from Napster's borrowing activities of $1.3 million. See Note 8 Notes Payable and Long-term debt for additional details.

Three customers accounted for more than 10% of trade accounts receivable as of March 31, ~~2020,~~2021, with the customers accounting for ~~19%~~21% , ~~13%~~11%, and ~~13%~~10% each. ~~Three~~Two customers individually comprised more than 10% of trade accounts receivable at December 31, ~~2019,~~2020, with the customers accounting for ~~31%, 11%~~19% and 10% each. ~~One customer in our Napster segment~~Three customers accounted for ~~12%~~45% of consolidated revenue, or ~~$5.4~~$7.3 million, during the three months ended March 31, ~~2020.~~2021. Two customers ~~in our Napster segment~~ accounted for ~~14%~~26% of consolidated revenue, or ~~$5.5~~$4.4 million, ~~and 12%, or $4.5 million, respectively,~~ during the three months ended March 31, ~~2019.~~2020.

While we currently have no planned significant capital expenditures for the remainder of ~~2020~~2021 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,~~6. Fair Value Measurements, in April 2021, we ~~acquired a controlling interest in Napster~~agreed with the seller on ~~January 18, 2019. We paid initial cash consideration~~the form of $0.2 million in the first quarter of 2019 and the remaining $0.8 million of initial cash consideration is accrued as a current liability. We also have recognized a liability for the estimated fair valuefinal payment of the contingent consideration ~~related to~~associated with the ~~acquisition. As discussed~~Napster interests acquired by RealNetworks in ~~Note 5 Acquisitions, this~~January 2019. The payment included cash of $2.5 million and the transfer of 47.8 million ordinary shares of Napster Group, valued at the December 2020 Napster sale closing date. The fair value ~~amount was estimated using multiple scenarios for each tranche~~ of ~~contingent consideration, probability weighting each scenario, and discounting to arrive at an estimated fair value. This fair value calculation is directly impacted by~~RealNetworks' investment in the ~~total estimated enterprise value~~ordinary shares of ~~Napster. The contingent consideration will be adjusted quarterly to fair value through earnings, and~~Napster Group as of March 31, ~~2020, the estimated fair value~~2021 was $5.7 million, inclusive of the ~~contingent consideration was $12.3 million, with $5.4 million recognized as~~shares to be transferred to the seller.

RealNetworks is a ~~current liability and $6.9 million as~~party to a ~~long-term liability. Any future amounts RealNetworks pays for contingent consideration could vary materially from the estimated amounts we have accrued as of March 31, 2020.~~

~~In August 2019, RealNetworks and Napster entered into the~~ Loan Agreement with a third-party financial ~~institution.~~institution, as discussed in Note 8. Debt. Under the ~~terms~~Agreement, as amended, borrowings may not exceed $6.5 million and are reduced by a $1.0 million standby letter of ~~the Agreement, which are further described in Note 8 Notes Payable and Long-term debt,~~credit entered into with the bank ~~extended a two-year revolving line of credit not to exceed $10.0 million~~ in ~~the aggregate. As of~~connection with certain lease agreements. At March 31, ~~2020, $3.9 million~~2021, we had ~~been drawn~~no outstanding draws on the revolving line of ~~credit,~~credit.

In April 2021, we completed an underwritten public offering of 8,250,000 shares of our common stock at a price to the public of $2.70 per share. The aggregate gross proceeds from the offering were $22.3 million. Of these proceeds, we received approximately $20.3 million, after deducting underwriting discounts, commissions, and ~~any further advances will~~legal and other fees. The proceeds are expected to be used for ~~working capital and~~ general corporate ~~purposes.~~purposes and working capital.

In ~~April 2020, RealNetworks issued a promissory note in~~ the ~~principal amount of $2.9 million pursuant~~near term, we expect to the Paycheck Protection Program of the CARES Act. In May 2020, Napster issued its own promissory note in the principal amount of $1.7 million pursuant to the program. Each note, as further described in Note 14 Subsequent Events, has a maturity of 2 years, an interest rate of 1.0%, and is eligible for forgiveness pursuant to the terms of the program. We cannot provide assurance, however, that all or any portion of the principal and interest on these loans will be forgiven.

~~We have evaluated our current liquidity position in light of our history of declining revenue and operating losses as well as our near-term expectations of~~see continued net negative cash ~~flows~~flow from operating activities. We ~~currently~~ believe ~~existing~~that our unrestricted current cash ~~balances, along with current availability~~and cash equivalents and unused capacity on our revolving line of credit will be sufficient to ~~allow us to~~ meet our ~~obligations~~anticipated cash needs for working capital and capital expenditures for at least the next 12 months. ~~However, our assessment is subject~~Notwithstanding this availability of cash and access to ~~inherent risks~~additional funding, management has considered and ~~uncertainties. Moreover, our operating forecast is partly dependent on factors that are outside~~will continue to evaluate implementation of ~~our control. Compounding these risks, uncertainties, and other factors are the potential effects~~a variety of the recent coronavirus pandemic and related impacts on global commerce and financial markets. These conditions, when evaluated within the guidance of ASC 205-40, raise substantial doubt about our ability to meet our obligations over the ensuing 12 months and, therefore, to continue as a going concern.

~~We have active plans to mitigate these conditions. Specifically, we plan to reduce negative~~ cash flow through operating expense reductions, as well as through the deferral of certain obligations where we believe that we have the legal basis to do so. In addition, we are evaluating various strategic opportunities, which may include selling certain businesses or product lines, soliciting external investment into certain of our businesses, or seeking other strategic partnerships. Our plans are subject to inherent risks and uncertainties, which are accentuated by the effects of the current pandemic and related financial crisis. Accordingly, there can be no assurance that our plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.

Napster will also require outside funding in order to meet its anticipated cash needs over the next 12 months. RealNetworks has no contractual or implied legal obligation to provide funding or other financial support to Napster, and any funding to Napster under the Loan Agreement must be effectuated by RealNetworks. Significant financial distress at Napster could have negative implications in our assessment of goodwill and long-lived assets on RealNetworks' balance sheet.conservation measures.

In the future, we may seek to raise additional funds through public or private equity financing or through other sources. Such sources of funding may or may not be available to us on commercially reasonable terms. The sale of additional equity

securities could result in dilution to our shareholders. In addition, in the future, we may enter into cash or stock acquisition transactions or other strategic transactions that could reduce cash available to fund our operations or result in dilution to shareholders.

~~Our cash equivalents consist of money market funds.~~

We conduct our operations primarily in four functional currencies: the U.S. dollar, Brazilian real, the euro and the Chinese yuan. We currently do not actively hedge our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations. We are exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. Our exposure to foreign exchange rate fluctuations also arises from intercompany payables and receivables to and from our foreign subsidiaries.

~~As of March 31, 2020, approximately $11.5 million of the $19.0 million of cash and cash equivalents was held by our foreign subsidiaries outside the U.S.~~

Off-Balance Sheet Arrangements

We do not maintain accruals associated with certain guarantees, as discussed in Note 1917 Guarantees, to the consolidated financial statements included in Item 8 of Part II of our ~~2019~~2020 10-K. Thus, these guarantee obligations constitute off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Our critical accounting estimates are discussed in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Due to the coronavirus pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk. Our exposure to interest rate risk from changes in market interest rates relates primarily to ~~RealNetworks and Napster's notes payable and long-term debt. RealNetworks and Napster's~~RealNetworks' revolving line of credit. RealNetworks' borrowing ~~arrangements have~~arrangement has floating rate interest payments and thus ~~have~~has a degree of interest rate risk, if interest rates increase. Based on the ~~outstanding notes payable and long-term debt as of March 31, 2020,~~available balance, a hypothetical 10% increase/decrease in interest rates would not increase/decrease our annual interest expense or cash flows by more than a nominal amount.

Investment Risk. As of March 31, 2021, we had an equity investment in common shares of a foreign publicly traded technology company. These common shares were acquired as a portion of the proceeds received in the sale of Napster. The equity investment is subject to fluctuation in the market price as well as being exposed to changes in foreign currency exchange rates. A hypothetical 10% increase/decrease in the common share price and foreign currency exchange rate would result in an increase/decrease of the value of the equity investment of approximately $1.2 million.

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

Our exposure to foreign exchange rate fluctuations arise in part from: (1) translation of the financial results of foreign subsidiaries into U.S. dollars in consolidation; (2) the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes; and (3) non-U.S. dollar denominated sales to foreign customers.

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

~~We have cash balances denominated in~~ For our foreign ~~currencies which are subject to foreign currency fluctuation risk. The~~operations, the majority of our revenues and expenses are denominated in other currencies, such as the euro. We currently do not actively hedge our foreign currency ~~denominated cash is held in euro, Chinese yuan~~exposures and ~~Japanese yen.~~ are therefore subject to the risk of exchange rate fluctuations.

A hypothetical 10% increase or decrease in those currencies relative to the U.S. dollar as of March 31, ~~2020~~2021 would not result in a material impact on our financial position, results of operations or cash flows.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, ~~2020.~~2021. 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 March 31, ~~2020,~~2021, 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 first quarter of ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 1111. Commitments and Contingencies, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q.

Item 1A. Risk Factors

You should carefully consider the risks described below together with all of the other information included in this Form 10-Q. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occurs, our business, financial condition or operating results, and the trading price of our common stock, could be materially harmed.

Risks Related to the COVID-19 Pandemic

Our operating plans and financial condition ~~and stock price~~ have been adversely affected by the various impacts of the COVID-19 pandemic, and we ~~could~~expect to experience ~~more severe~~continued adverse ~~affects~~effects in future ~~periods.~~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 2020, across 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~~initially caused significant turmoil to the global economy and financial markets. ~~Moreover, similar to other companies,~~To address the public health and safety concerns, we ~~have taken~~took steps to support the health and well-being of our employees, customers, partners and communities, ~~which include~~including 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 and, in particular, to our growth initiatives. ~~We have also been~~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 of 2020. We also reduced expenditures throughout 2020 in an effort to efficiently manage our businesses in the restricted and ~~otherwise reduce current expenditures.~~uncertain climate. We continue to face risk, however, related to fixed facilities costs given the uncertain post-pandemic future of the use of physical office space. In addition, the ~~severe~~initial turmoil in financial markets ~~has~~ contributed to ~~a decline~~significant downward pressure on our stock price early in the ~~trading price of our common stock, resulting in our current noncompliance with the continued listing requirements of the The Nasdaq Stock Market.~~pandemic. We cannot provide assurance that ~~these~~the actions we have taken will be sufficient, or that conditions will improve ~~or continue~~ as the pandemic, and reactions thereto, continue to evolve.

The COVID-19 pandemic and the resultant economic instability and financial market turmoil ~~has~~ added ~~a layer of~~complexity, uncertainty and risk to nearly all aspects of our business. We are unable to fully 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~~2021 or beyond.

Risks Related to our Strategy

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,~~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 potential impact of macroeconomic pressures and global pandemics. In particular, ~~we expect that~~ progress with our growth initiatives ~~will be~~was 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. InMoreover, our acceptance of outside funding for any of our growth businesses, such ~~case,~~as our April 2021 public offering and Scener's 2020 fundraising, exposes us to new risks and potential liabilities, including possible payment obligations and securities liability. Our business would suffer, and our operational results and financial ~~results~~outlook would be negatively impacted to a significant ~~degree.~~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~~Following the ~~terms~~December 2020 sale of ~~that~~Napster to MelodyVR, the loan agreement was amended to remove Napster as a co-borrower and, among other modifications, to reduce the ~~bank extended a~~amount available under the revolving line of credit ~~not~~ to ~~exceed $10.0 million in the aggregate.~~a maximum of $6.5 million. The loan agreement, as amended, matures August 1, 2022 and contains customary covenants, including financial

covenants, minimum EBITDA levels, and maintaining ana minimum unrestricted cash ~~balance of $3.5 million.~~balance. We have not had a debt facility ~~in place~~ in our recent past, therefore the entry into this facility ~~introduces~~has introduced 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, following an assessment of eligibility and upon approval by our Board of Directors, RealNetworks issued a promissory note in the principal amount of $2.9 million pursuant to the Paycheck Protection Program, or PPP, of the CARES Act. In May 2020, Napster, then-majority owned by RealNetworks though it maintained distinct legal status and control, issued its own promissory note in the principal amount of $1.7 million pursuant to the ~~program.~~PPP. On April 23, 2020, the Small Business Administration issued new guidance that ~~questioned~~introduced some uncertainty as to whether a public company with substantial market value and access to capital markets would qualify ~~to participate~~for participation in the PPP. Subsequently, on April 28, 2020 the Secretary of the Treasury and Small Business ~~Administrator~~Administration announced that the government ~~will~~would review all PPP loans of more than $2 million for which the borrower ~~applies~~applied for forgiveness. While we believe that RealNetworks ~~believes we~~and Napster fully ~~qualify~~qualified for the ~~loan,~~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. RealNetworks applied for forgiveness of its PPP loan in January 2021; Napster applied for forgiveness of its PPP loan in December 2020. If wean audit were to be ~~audited~~conducted and ~~receive~~ an adverse finding ~~in such audit, we~~received, all or a portion of the PPP loan could be required to ~~return the full amount of the PPP loan,~~be returned, which ~~could~~would reduce our liquidity and potentially ~~subject us to~~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~~need to raise funds through other means, could negatively impact our ~~going concern assessment or~~liquidity and ability to invest in our growth initiatives. Moreover, we could be compelled to consider funding that would impact our governance ~~structure in the future. The occurrence~~structure. Our pursuit of ~~these~~debt or ~~any~~other sources of ~~the risks described above would~~liquidity could impair our financial results and ~~stock price.~~

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

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

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

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

As discussed in Note 5 Acquisitions, at the time of acquiring 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.

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.~~partners, establishing new sales channels, and managing new supply chains. 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.

Our growth initiatives are highly dependent on the performance of mobile telecommunications carriers, distributors, and resellers. We distribute our messaging platform services, such as Kontxt, through a limited number of mobile telecommunications carriers. Our SAFR sales channel includes distributors and resellers, as well as sales directly to end users. The financial condition, performance, and demand of our products and services through these mobile telecommunications carriers, distributors, and resellers could deteriorate, weakening our ability to sell our products and services, causing a material negative impact on our financial results.

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~~both longstanding and new products/~~services~~solutions some of which are 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 that we currently develop and market or ~~are seeking~~seek 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 ~~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 in this business to continue to materially impact our operating results in this business. ~~We also~~Our Mobile Services growth initiatives compete with a wide variety of companies, as small startups and well established, heavily resourced global companies ~~continue~~race to develop AI-based technologies and launch products in the ~~facial recognition~~computer vision market. The success of ~~this newly launched business~~these initiatives is highly dependent on our ability to differentiate our product offering within this highly 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~~as our competitors ~~may be able to offer~~increasingly focus on free-to-play 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~~Issues with the use 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 expensesartificial intelligence, or AI, 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 allocationofferings could result in ~~us bearing higher expenses~~reputational harm or ~~achieving weaker performance than~~liability.

Certain of our growth initiatives are centered around AI-based products and solutions, and we ~~had anticipated from the relationship.~~

~~In addition, although~~expect these initiatives to comprise an increasing percentage of our ~~contracts~~go-forward business. We envision a future in which our AI-based products and solutions help our customers live safer, smarter, more efficiently, and more successfully. As with ~~third parties are typically for a fixed duration, they~~many disruptive innovations, AI presents risks and challenges that could ~~be terminated early;~~affect its adoption, and ~~they~~therefore our business. AI algorithms may be ~~renegotiated on less favorable terms~~flawed. Datasets may be insufficient 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 continuecontain biased information. Inappropriate 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~~controversial data practices by us, our distribution network, our end users, or others could impair the acceptance of AI solutions. These deficiencies could undermine the decisions, predictions, or analysis AI applications produce, subjecting us to ~~indemnify the~~competitive harm, legal liability, and brand or reputational harm. Some AI scenarios present ethical issues. If we enable or offer AI solutions that are controversial because of their impact on privacy, employment, or 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 whichsocial issues, we may ~~be obligated to defend others pursuant~~experience brand or reputational harm.

Risks Related to our ~~contracts could in the future result in payments that could materially harm our business and financial results.~~Operations

Our operating results are difficult to predict and may fluctuate, which may contribute to ~~continued~~ weakness or volatility 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.~~price.

The trading price for our common stock has been ~~steadily declining.~~in steady decline for many years, though, particularly more recently, has also been vulnerable to significant volatility caused by general market conditions or unusual stock-specific trading activity. There can be no assurance that our common stock will not experience additional, and potentially more significant, volatility in the future caused by unpredictable external factors. 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 ofin 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 are external factors, such as the significant ~~recent~~ instability in global financial markets ~~caused in part by a global pandemic,~~experienced over the past year, that will impact our operating results and stock price, potentially driving our stock price to record ~~lows.~~lows as occurred in 2020 or to significant activity levels as occurred in early 2021.

The difficulty in forecasting our operating results may also cause ~~over~~over- or ~~under investment~~under-investment in certain growth initiatives, as such investment is often planned based on expected financial ~~results, thus causing~~results. This over-/under-investment could cause 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 Select Market, we must meet Nasdaq's continued listing ~~requirements. On~~requirements, in particular, financial requirements that include maintaining a minimum bid price of at least $1.00. In April ~~23,~~ 2020, ~~the Company~~we received a letter from the Listing Qualifications Department of the Nasdaq Global Select Market indicating that, based upon the closing bid price of our common stock for the 30 consecutive business day period ~~between~~from March 11, 2020 ~~through~~to April 23, 2020, we did not meet the minimum bid price of $1.00 per share required for continued listing on Nasdaq. In ~~April~~June 2020, ~~in response to the unprecedented turmoil in U.S. and world financial markets,~~we received a second letter from Nasdaq ~~tolled the compliance periods for its bid price and market value of publicly held shares requirements through June 30, 2020. As a result of Nasdaq's general grant of this grace period,~~Staff indicating that we ~~have a compliance period of 180 calendar days starting July 1, 2020 and ending December 28, 2020 in which to regain compliance. In order to regain~~had regained compliance with ~~Nasdaq’s minimum~~

~~bid price requirement, our common stock must maintain a minimum~~Nasdaq Listing Rule 5450(a)(1) based on its determination that the closing bid price of $1.00 for at least ten consecutive business days prior to December 28, 2020. In the event that we do not regain compliance by this date, we may be eligible for a second compliance period pursuant to Nasdaq's existing rules.

~~The letter has no immediate impact on the listing of~~ our common stock ~~which will continue~~had been at $1.00 per share or greater for the 10 business days from May 15 to ~~be listed~~May 29, 2020. Although we are currently in compliance with all applicable continued listing requirements and ~~traded on~~have received no contradictory notification from Nasdaq, ~~during~~our stock price could again fall below the $1.00 minimum as a result of valuation pressure, stock-specific trading activity or general ~~grace period~~declines in the stock market. We regularly monitor our compliance with Nasdaq's continued listing requirements, and, ~~the 180-day compliance period. Our~~as necessary, our Board ~~of Directors~~ will consider the implementation of various measures intended to support ~~compliance, including a reverse split of our common stock in an effort to increase the trading price of such shares.~~

Although we expect to restore our compliance with the listing requirements, we can provide no assurance that any action taken by us would be successful, or that any such action would stabilize the market price or improve the liquidity of our common stock. Should a delisting occur, a shareholder would likely find it significantly more difficult to dispose of our common stock, or to obtain accurate quotations as to the value of our common stock, and our ability to raise future capital through the sale of our common stock could be severely limited.continued compliance.

Any impairment to our goodwill, definite-lived, and ~~definite-lived~~right-of-use operating lease 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 and operating lease 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, for further information related to Napster. The total carrying value of our goodwill and definite-lived intangible assets as of March 31, 2020 was $80.2 million. Continued significant financial distress at Napster would likely have negative implications in our assessment of goodwill and definite-lived intangible assets on RealNetworks' balance sheet.

Continued loss of revenue from our subscription services is likely to cause further harm to our operating ~~results.~~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~~Difficulty recruiting and retaining key personnel could significantly impair 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~~operations or jeopardize our ability to ~~continue as a going concern.~~meet our growth objectives.

Our ~~unrestricted cash~~success depends substantially on the contributions and ~~cash equivalents balance at March 31,~~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. In 2020, ~~was $19.0 million, $11.5 million~~we experienced a significant level of executive turnover, as we have experienced in the past and could experience in the future, which ~~was held by~~could impact our ~~foreign subsidiaries,~~ability to retain key personnel. Also, qualified individuals are in high demand and competition for such qualified personnel in our ~~operating loss for~~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 ~~quarter ended March 31, 2020 was $5.1 million. As further discussed in Part II, Item 8, “Note 1—Description~~U.S. or other jurisdictions that make it more difficult to hire and retain key talent, or to assign individuals to any of ~~Business~~our locations as needed to meet business needs, could adversely affect our ability to attract key talent or deploy individuals as needed, and ~~Summary~~thereby adversely affect our business and financial results. Further,

repeated restructuring of ~~Significant Accounting Policies” to~~ our ~~Consolidated Financial Statements in this Annual Report on Form 10-K, due to our history of declining revenue~~businesses and ~~operating losses,~~related cost-reduction efforts, as well as declines and volatility in our ~~near-term expectations of net negative cash flows from operating activities, compounded by~~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 ~~COVID-19 pandemic~~key personnel necessary to sustain our business or support future growth.

Acquisitions and ~~severe impacts to global financial markets, management has concluded~~divestitures involve costs and risks 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 recoverabilitycould harm our business 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, inhibitimpair our ability to ~~obtain outside investment~~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 ~~strategic alliances.~~operational experience, which may increase the risks associated with completing acquisitions.

For example, our January 18, 2019 acquisition of a controlling interest in Napster represented a significant acquisition for RealNetworks. To effectuate the acquisition and incorporate Napster's financial results into our financial statements, we incurred significant transaction-related costs throughout fiscal year 2019 and early in 2020. Moreover, the 2020 sale of our Napster stake in connection with the merger of Napster and MelodyVR resulted in further significant transaction-related expenses, certain ongoing indemnification obligations, and the payment of a portion of proceeds to a third party.

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 incurring charges for the impairment of goodwill and other intangible assets, which are reflected in our operating expenses. New acquisitions and any potential additional future impairment of the value of purchased assets, including goodwill, could have a material negative impact on our future operating results. In compliance with GAAP, we evaluate these assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that our goodwill or definite-lived assets may not be recoverable, include reduced future revenue and cash flow estimates due to changes in our forecasts, and unfavorable changes to valuation multiples and discount rates due to changes in the market. If we were to conclude that any of these assets were impaired, we would have to recognize an impairment charge that could materially impact our financial results.

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

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

• retaining key management or employees of the acquired company;

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

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

• diversion of management time and other resources from existing operations;

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

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

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

Risks Related to Regulations and Other External Factors

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

We are subject to regulations and laws specific to the marketing, sale and delivery of goods and services. These laws and regulations, which continue to evolve, cover taxation, user privacy, data collection and protection, copyrights, electronic contracts, sales procedures, automatic subscription renewals, credit card processing procedures, consumer protections, digital games distribution, broadband Internet access and content restrictions. We cannot guarantee that we have been or will be fully

compliant in every jurisdiction, as it is not entirely clear how existing laws and regulations governing issues such as privacy, taxation and consumer protection apply or will be enforced with respect to the products and services we sell. Moreover, as Internet commerce continues to evolve, increasing regulation and/or enforcement efforts by federal, state and foreign agencies and the prospects for private litigation claims related to our data collection, privacy policies or other e-commerce practices become more likely. In addition, the adoption of any laws or regulations or the imposition of other legal requirements that adversely affect our ability to market, sell, and deliver our products and services could decrease our ability to offer or customer demand for our service offerings, resulting in lower revenue. ~~For example, the European Union's General Data Protection Regulation (GDPR), effective in May 2018, created a 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.

As we pursue further sales of our SAFR product to governmental agencies, such as the Small Business Innovation Research (SBIR) contracts with the U.S. Air Force in 2020, we may become subject to more extensive contracting rules, standards, and audits.

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.

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~~further disrupt our ability to produce and sell products. We ~~are monitoring~~continue to monitor 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. Executive-level turnover, as we have experienced in the past and could experience in the future, 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.

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.

•~~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 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~~a 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, and the acquisition method of accounting and its related estimated fair value ~~amounts, stock-based compensation, music publisher and royalty accruals, and intangible asset valuations.~~amounts. Changes in accounting standards or practices, or in our judgments and estimates underlying accounting standards and practices, could harm and/or materially impact 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.

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.

Risks Related to our Governance and Capital Structure

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~~8 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 in December 1998, 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 discouraging a third party from attempting to acquire, control of us. These provisions may therefore have the effect of limiting the price that investors might be willing to pay in the future for our common stock.

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

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

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

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

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

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

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

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

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

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

Underlying the complexity and risk involved in Napster’s ability to determine its music royalty liabilities, is the reliability of its 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 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, and could be implicated in our required testing of internal controls pursuant to the Sarbanes-Oxley Act of 2002.

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

(a) Not applicable

(b) Not applicable

Item 3. Default Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

On May 5, 2020, Rhapsody International, Inc., which does business as Napster, executed a promissory note in favor of Bank of America, NA in the principal amount of $1.7 million, with an interest rate of 1.0% per annum, a two-year maturity, no pre-payment penalty, and a deferment period of six months. The note was issued pursuant to the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security, or CARES, Act of 2020. The note is subject to customary events of default and is eligible for forgiveness pursuant to program guidelines.None

Item 6. Exhibits

See Index to Exhibits ~~below~~below.

4437

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/ ~~Judd Lee~~Christine Chambers

~~Judd Lee~~Christine Chambers

Title:

Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

Dated: May ~~7, 2020~~13, 2021

4538

INDEX TO EXHIBITS


Exhibit Number	Description







~~31.1~~
10.1	O ffer letter dated January 15, 2021 between RealNetworks, Inc. and Christine Chambers

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

31.2		Certification of ~~Judd Lee,~~Christine Chambers, Chief Financial Officer of RealNetworks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.2		Certification of ~~Judd Lee,~~Christine Cham bers , Chief Financial Officer of RealNetworks, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

* Portions of the exhibit have been omitted.

4639


			~~Page~~

Part I. Financial Information			3
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			32
Part II. Other Information			33
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 3. Default Upon Senior Securities			44
Item 4. Mine Safety Disclosures			44
Item 5. Other Information			44
Item 6. Exhibits			44
Signature			45
Index to Exhibits			46


	Three Months Ended March 31,
	2020		2019
Cash flows from operating activities:
Net income (loss) including noncontrolling interests	$	(4,689)	$	1,214
Adjustments to reconcile net income (loss) including noncontrolling interests to net cash used in operating activities:
Depreciation and amortization	1,436		1,482
Stock-based compensation	380		1,384







(Gain) loss on equity investment, net	—		(12,338)
Foreign currency (gain) loss	(767)		(151)

Fair value adjustments to contingent consideration liability	(300)		—




Net change in certain operating assets and liabilities:
Trade accounts receivable	2,256		(143)
Prepaid expenses, operating lease and other assets	(535)		(1,063)
Accounts payable	149		(259)
Accrued, lease and other liabilities	(2,554)		555
Net cash used in operating activities	(4,624)		(9,319)
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements	(94)		(482)



Proceeds from sales and maturities of short-term investments	—		24

Acquisition, net of cash acquired	—		12,260




Net cash (used in) provided by investing activities	(94)		11,802
Cash flows from financing activities:
Proceeds from issuance of preferred stock	10,000		—
Tax payments from shares withheld upon vesting of restricted stock	—		(271)
Proceeds from notes payable and revolving credit facility	8,768		9,733
Repayments of notes payable and revolving credit facility	(11,172)		(8,437)


Other financing activities	—		450

Net cash provided by financing activities	7,596		1,475
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(637)		(207)
Net increase in cash, cash equivalents and restricted cash	2,241		3,751
Cash, cash equivalents and restricted cash, beginning of period	22,179		37,191
Cash, cash equivalents, and restricted cash end of period	$	24,420	$	40,942


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

Balances, January 1, 2019	37,728	$	37	$	641,930	$	(61,118)	$	(524,009)	$	56,840	$	—	$	56,840

Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	190	—		(271)		—		—		(271)		—		(271)
Napster acquisition	—	—		(1,346)		—		—		(1,346)		570		(776)
Stock-based compensation	—	—		1,384		—		—		1,384		—		1,384

Foreign currency translation adjustments	—	—		—		(87)		—		(87)		—		(87)
Net income (loss)	—	—		—		—		1,533		1,533		(319)		1,214
Other equity transactions	—	—		362		—		—		362		88		450
Balances, March 31, 2019	37,918	$	37	$	642,059	$	(61,205)	$	(522,476)	$	58,415	$	339	$	58,754


	Employee Separation Costs		Asset Related and Other Costs		Total
Accrued liability at December 31, 2019	$	322	$	174	$	496
Costs incurred and charged to expense for the three months ended March 31, 2020, excluding noncash charges	239		—		239
Cash payments	(341)		(174)		(515)
Accrued liability at March 31, 2020	$	220	$	—	$	220