|
|
|
|
|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Overview
RealNetworks creates innovative technology products and services that make it easy to connect with and enjoy digital media. We manage our business and report revenue and operating income (loss) in three segments: (1) Consumer Media (2) Mobile Services, and (3) Games.
Within our Consumer Media segment revenue is primarily derived from the software licensing of our video compression, or codec, technology, including our latest technology, RealMedia High Definition, or RMHD. We also generate revenue from the sale of our PC-based RealPlayer products, including RealPlayer Plus and related products. These products and services are delivered directly to consumers and through partners, such as OEMs and mobile device manufacturers.
Our Mobile Services business generates revenue primarily from the sale of subscription services, which includes 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. The loss of these contracts, whether by termination or non-renewal or renegotiation of contract terms that are less favorable to us could result in the loss of future revenues and anticipated profits.
Our Games business, through the GameHouse and Zylom brands, derives revenue from product sales of mobile games, games licenses, games subscription services, player purchases of in-game virtual goods, and from advertising on games sites and social network sites.
We allocate to our reportable segments certain corporate expenses which are directly attributable to supporting our 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 the business, are reported as corporate items. These corporate items also include restructuring charges, lease exit and related charges, and stock compensation expense.
In
2018
, our consolidated revenue declined by
$9.2 million
compared with
2017
, due to decreases of
$4.4 million
in Consumer Media revenue,
$3.7 million
in Games revenue and
$1.1 million
in Mobile Services revenue. See below for further information regarding fluctuations by segment.
As discussed in
Note 3.
Revenue Recognition
, as a result of our transition to Topic 606 effective January 1, 2018, for the year ended December 31, 2018, our net revenues were $1.6 million higher as compared to the revenues which would have been recognized under previous accounting guidance.
As of December 31, 2018, we had
$35.6 million
in unrestricted cash, cash equivalents, and short-term investments, compared to
$60.0 million
as of
December 31, 2017
. The
2018
decrease in cash, cash equivalents, and short-term investments from December 31,
2017
was due to our ongoing cash flows used in operating activities and to the April 2018 acquisition of a Netherlands-based game development studio, as discussed in
Note 4.
Acquisitions and Disposals
.
In light of declines in revenue, we have continued to reduce costs and better align our operating expenses with our revenue profile through various restructuring actions, as described below in Consolidated Operating Expenses. These actions drove the
$2.1 million
decline in our operating expenses during 2018 compared to
2017
.
See
Note 17.
Discontinued Operations
for further information regarding the expiration of our contract with LOEN Entertainment, Co, LTD (LOEN) in 2017 and the reporting of this business as a discontinued operation. Unless otherwise noted, amounts and percentages for all periods discussed below reflect the results of operations and financial condition of our continuing operations.
See
Note 22.
Subsequent Event
for further information regarding our January 18, 2019 acquisition of an additional 42% stake in Napster from our former joint venture partner.
Summary of Results
Consolidated results of operations were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018-2017
Change
|
|
%
Change
|
|
2017-2016
Change
|
|
%
Change
|
|
Total revenue
|
|
$
|
69,510
|
|
|
$
|
78,718
|
|
|
$
|
81,479
|
|
|
$
|
(9,208
|
)
|
|
(12
|
)%
|
|
$
|
(2,761
|
)
|
|
(3
|
)%
|
|
Cost of revenue
|
|
17,727
|
|
|
23,164
|
|
|
27,548
|
|
|
(5,437
|
)
|
|
(23
|
)%
|
|
(4,384
|
)
|
|
(16
|
)%
|
|
Gross profit
|
|
51,783
|
|
|
55,554
|
|
|
53,931
|
|
|
(3,771
|
)
|
|
(7
|
)%
|
|
1,623
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
74
|
%
|
|
71
|
%
|
|
66
|
%
|
|
3
|
%
|
|
|
|
5
|
%
|
|
|
|
Total operating expenses
|
|
74,054
|
|
|
76,185
|
|
|
92,674
|
|
|
(2,131
|
)
|
|
(3
|
)%
|
|
(16,489
|
)
|
|
(18
|
)%
|
|
Operating income (loss)
|
|
$
|
(22,271
|
)
|
|
$
|
(20,631
|
)
|
|
$
|
(38,743
|
)
|
|
$
|
(1,640
|
)
|
|
(8
|
)%
|
|
$
|
18,112
|
|
|
47
|
%
|
2018
compared with
2017
Revenue decreased by
$9.2 million
, or
12%
. The reduction in revenue resulted from declines of
$4.4 million
in our Consumer Media segment,
$3.7 million
in our Games segment and
$1.1 million
in our Mobile Services segment. For further detail regarding the changes, please see the discussions of segment revenues below. Gross margin increased to
74%
from
71%
, driven by margin increases in Games and Mobile Services. See below for further discussion around the fluctuations for each segment, including the impacts of our transition to Topic 606.
Operating expenses decreased by
$2.1 million
as compared to the prior year primarily due to a decrease of $0.9 million in salaries, benefits and professional service costs, $0.4 million in facilities and support services, and $0.2 million in marketing expense. Also contributing to the overall decrease were reduced restructuring costs of $0.7 million and a benefit of $0.5 million in lease exit and related charges, primarily due to the renegotiation of certain leases in the first quarter of 2018. These decreases were offset by certain benefits recorded in the first quarter of 2017: $0.5 million relating to the warrants we received from Napster and a $0.4 million release of previously accrued taxes.
2017
compared with
2016
Revenue decreased by $2.8 million, or 3%. The reduction in revenue resulted from a decline of $2.5 million in our Consumer Media segment, and a decline of $0.5 million in our Mobile Services segment. These declines were offset by an increase of $0.3 million in our Games segment. For further detail regarding the changes, please see the discussions of segment revenues below. Gross margin increased to 71% from 66%, driven by margin increases in Consumer Media and Mobile Services, offset by decreased margin in our games business due to increased app store fees as our mix shifts towards mobile games.
Operating expenses decreased by
$16.5 million
as compared to the prior year as a result of our continuing cost reduction efforts. These efforts were the primary reason for reductions to salaries, benefits and professional services costs of $7.7 million, facilities costs of $4.6 million, marketing expense of $1.8 million and lower lease exit costs of $2.2 million. Further contributing to the decrease year over year was a benefit of $0.5 million relating to warrants received from Napster in the first quarter of 2017, which is discussed further in
Note 6.
Fair Value Measurements
. These decreases were offset by an increase of $1.0 million in restructuring due to increased severance charges.
Segment Operating Results
Consumer Media
Consumer Media segment results of operations were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018-2017
Change
|
|
%
Change
|
|
2017-2016
Change
|
|
%
Change
|
|
Total revenue
|
|
$
|
18,168
|
|
|
$
|
22,569
|
|
|
$
|
25,051
|
|
|
$
|
(4,401
|
)
|
|
(20
|
)%
|
|
$
|
(2,482
|
)
|
|
(10
|
)%
|
|
Cost of revenue
|
|
3,858
|
|
|
4,460
|
|
|
7,074
|
|
|
(602
|
)
|
|
(13
|
)%
|
|
(2,614
|
)
|
|
(37
|
)%
|
|
Gross profit
|
|
14,310
|
|
|
18,109
|
|
|
17,977
|
|
|
(3,799
|
)
|
|
(21
|
)%
|
|
132
|
|
|
1
|
%
|
|
Gross margin
|
|
79
|
%
|
|
80
|
%
|
|
72
|
%
|
|
(1
|
)%
|
|
|
|
8
|
%
|
|
|
|
Total operating expenses
|
|
14,419
|
|
|
14,530
|
|
|
18,399
|
|
|
(111
|
)
|
|
(1
|
)%
|
|
(3,869
|
)
|
|
(21
|
)%
|
|
Operating income (loss)
|
|
$
|
(109
|
)
|
|
$
|
3,579
|
|
|
$
|
(422
|
)
|
|
$
|
(3,688
|
)
|
|
NM
|
|
|
$
|
4,001
|
|
|
NM
|
|
2018
compared with
2017
Total Consumer Media revenue decreased by
$4.4 million
, or
20%
as compared to the prior year, due primarily to decreased software license revenues of $3.7 million, as well as a decrease in our subscription service revenues of $1.0 million. These decreases were offset in part by an increase in advertising and other revenues of $0.4 million.
Software License
For our software license revenues, the year-over-year decrease was related to declining shipments by our customers and the timing of contract renewals, which were offset in part by our transition to Topic 606 that accelerated the recognition of revenue by $1.5 million on certain codec technologies contracts during the year.
Subscription Services
For our subscription services revenues, the decrease of $1.0 million was primarily due continuing declines in our legacy subscriptions products.
Cost of revenue decreased by
$0.6 million
, or
13%
. The decrease to cost of revenue was driven by lower bandwidth and other support costs of $0.6 million, reduced royalties $0.4 million and reduced third party customer service costs of $0.2 million. These decreases were partially offset by an increase of $0.7 million in salaries and benefits, and professional service costs.
Operating expenses decreased by
$0.1 million
compared to the prior year, due to a $0.4 million decrease in salaries, benefits and professional service costs offset by a $0.3 million increase in marketing expenses.
2017
compared with
2016
Total Consumer Media revenue in 2017 decreased by
$2.5 million
, or
10%
as compared to the prior year. Of the decrease, $1.6 million was due to continuing declines in our subscription products, as well as a decrease of $0.6 million from licensing of our codec technologies due to timing of contract renewals.
Cost of revenue decreased by
$2.6 million
, resulting in an increase in gross margin of
8
percentage points. The decrease to cost of revenue was driven by lower bandwidth and other support costs of $1.8 million directly resulting from our ongoing efforts to optimize functionality and increase efficiencies. The decrease was also due to reduced royalties compared to the prior year of $0.3 million and reduced third party customer service costs of $0.3 million.
Operating expenses decreased by
$3.9 million
compared to the prior year, due to lower expenses for facilities and support services of $2.8 million as a result of our ongoing cost reduction efforts, the acceleration of depreciation expense of $0.7 million taken in the first quarter of 2016 related to the obsolescence of e-commerce assets, and lower marketing expense of $0.3 million.
Mobile Services
Mobile Services segment results of operations were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018-2017
Change
|
|
%
Change
|
|
2017-2016
Change
|
|
%
Change
|
|
Total revenue
|
|
$
|
29,670
|
|
|
$
|
30,752
|
|
|
$
|
31,289
|
|
|
$
|
(1,082
|
)
|
|
(4
|
)%
|
|
$
|
(537
|
)
|
|
(2
|
)%
|
|
Cost of revenue
|
|
8,623
|
|
|
10,021
|
|
|
12,606
|
|
|
(1,398
|
)
|
|
(14
|
)%
|
|
(2,585
|
)
|
|
(21
|
)%
|
|
Gross profit
|
|
21,047
|
|
|
20,731
|
|
|
18,683
|
|
|
316
|
|
|
2
|
%
|
|
2,048
|
|
|
11
|
%
|
|
Gross margin
|
|
71
|
%
|
|
67
|
%
|
|
60
|
%
|
|
4
|
%
|
|
|
|
7
|
%
|
|
|
|
Total operating expenses
|
|
28,066
|
|
|
27,970
|
|
|
34,439
|
|
|
96
|
|
|
—
|
%
|
|
(6,469
|
)
|
|
(19
|
)%
|
|
Operating income (loss)
|
|
$
|
(7,019
|
)
|
|
$
|
(7,239
|
)
|
|
$
|
(15,756
|
)
|
|
$
|
220
|
|
|
3
|
%
|
|
$
|
8,517
|
|
|
54
|
%
|
2018
compared with
2017
Mobile Services revenue decreased by
$1.1 million
, or
4%
, and was primarily driven by a decrease of $1.6 million to our subscription services revenue stream, offset by an increase of $0.5 million in our software license revenue stream.
Software license
For our software license revenues, the increase was primarily due to the recognition of $0.6 million in revenues generated by our integrated RealTimes products offered to mobile carriers due in part to our transition to Topic 606 in the first quarter of 2018.
Subscription service
For our subscription services, the $1.6 million decrease was primarily a result of a decrease of $1.4 million in our ringback tones business, driven partially by the recognition of $0.9 million in the first quarter of 2017 following the execution of a long-term contract with our partner in Brazil. Also contributing to the decrease was a $0.2 million reduction in our intercarrier messaging business.
Cost of revenue decreased by
$1.4 million
or
14%
as compared to the prior year, due primarily to lower bandwidth cost of $0.8 million, third-party customer service of $0.2 million, and salaries, professional services fees and benefits of $0.4 million.
2017
compared with
2016
Mobile Services revenue decreased by
$0.5 million
, or
2%
, which was driven by decreases of $0.6 million for system integrations for our carrier partners and $0.6 million in our intercarrier messaging service. These decreases were offset by increases of $0.4 million in our ringback tones business and $0.4 million from our RealTimes platform.
Gross margin improved by
$2.0 million
, or
7
percentage points, as compared to the prior year. The increase was due primarily to our cost reduction efforts, including reductions to salaries and infrastructure costs, as well as reduced bandwidth and customer service costs.
Operating expenses decreased by $
6.5 million
, due to a decrease in salaries and benefits of $3.8 million, reduced expenses for facilities and support services of $1.7 million and a reduction in marketing expense of $0.6 million.
Games
Games segment results of operations were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018-2017
Change
|
|
%
Change
|
|
2017-2016
Change
|
|
%
Change
|
|
Total revenue
|
|
$
|
21,672
|
|
|
$
|
25,397
|
|
|
$
|
25,139
|
|
|
$
|
(3,725
|
)
|
|
(15
|
)%
|
|
$
|
258
|
|
|
1
|
%
|
|
Cost of revenue
|
|
6,123
|
|
|
8,710
|
|
|
7,919
|
|
|
(2,587
|
)
|
|
(30
|
)%
|
|
791
|
|
|
10
|
%
|
|
Gross profit
|
|
15,549
|
|
|
16,687
|
|
|
17,220
|
|
|
(1,138
|
)
|
|
(7
|
)%
|
|
(533
|
)
|
|
(3
|
)%
|
|
Gross margin
|
|
72
|
%
|
|
66
|
%
|
|
68
|
%
|
|
6
|
%
|
|
|
|
(2
|
)%
|
|
|
|
Total operating expenses
|
|
20,324
|
|
|
20,401
|
|
|
19,644
|
|
|
(77
|
)
|
|
—
|
%
|
|
757
|
|
|
4
|
%
|
|
Operating income (loss)
|
|
$
|
(4,775
|
)
|
|
$
|
(3,714
|
)
|
|
$
|
(2,424
|
)
|
|
$
|
(1,061
|
)
|
|
(29
|
)%
|
|
$
|
(1,290
|
)
|
|
(53
|
)%
|
2018
compared with
2017
Games revenue decreased by
$3.7 million
, or
15%
as compared to the prior year due to a decrease of $5.2 million in our product sales revenue stream, offset by an increase of $1.3 million in our advertising and other revenue stream.
Product sales
For our product sales, the decrease of $5.2 million was due primarily to timing of launches and specific games launched within our Original Stories portfolio. There were fewer games launched in 2018 compared to 2017, of which, our 2017 games experienced more comparative success than those titles released in 2018. Additionally in 2018, we launched our first free to play game which offers advertising within our games in lieu of purchasing the game. This model shifts the revenue from product sales to advertising.
Advertising and other
Our advertising and other revenues increased $1.3 million as compared to the prior year primarily as a result of new initiatives to offer in-game advertising within our mobile games and the launch of our first free to play game.
Cost of revenue decreased by
$2.6 million
, or
30%
, as compared to the prior year. We recorded decreased publisher license and service royalties of $1.6 million and decreased app store fees of $1.1 million. These decreases were offset by an increase of $0.2 million in advertising costs. As a result of our April 2018 acquisition of a Netherlands-based game development studio described in
Note 4.
Acquisitions and Disposals
, we no longer pay royalties for this studio; however, operating expenses relating to the ongoing operation of this studio have been incurred as noted in the following paragraph.
Operating expenses decreased by
$0.1 million
, as compared to the prior-year period, due to a decrease of $0.6 million in marketing expense offset by an increase of $0.5 million in people and professional service fees due to increased developer costs. As a result of our April 2018 acquisition of a Netherlands-based game development studio described in
Note 4.
Acquisitions and Disposals
, operating expenses relating to the ongoing operation of this studio have been incurred.
2017
compared with
2016
Games revenue increased by
$0.3 million
, or
1%
as compared to the prior year due to growth in our mobile games business, as the increase of $1.9 million in our mobile games revenues was offset by a decrease of $1.6 million in our other games revenues.
Cost of revenue increased by
$0.8 million
, or
10%
, as compared to the prior year, due to an increase of $0.6 million from increased royalty fees paid to developers, as well as an increase of $0.6 million in app store fees related to our mobile revenue growth in the casual games business. These increases were offset by lower facilities and support service costs as compared to the prior year.
Operating expenses increased by
$0.8 million
, or
4%
as compared to the prior-year period, due to increased salaries, benefits and professional services costs of $1.2 million due to our continued investment in growing our mobile games offering, as well as increased facilities charges of $0.4 million. These increases were offset in part by lower marketing costs of $0.9 million.
Corporate
Corporate segment results of operations were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018-2017
Change
|
|
%
Change
|
|
2017-2016
Change
|
|
%
Change
|
|
Cost of revenue
|
|
$
|
(877
|
)
|
|
$
|
(27
|
)
|
|
$
|
(51
|
)
|
|
$
|
(850
|
)
|
|
NM
|
|
|
$
|
24
|
|
|
(47
|
)%
|
|
Total operating expenses
|
|
11,245
|
|
|
13,284
|
|
|
20,192
|
|
|
(2,039
|
)
|
|
(15
|
)%
|
|
(6,908
|
)
|
|
(34
|
)%
|
|
Operating income (loss)
|
|
$
|
(10,368
|
)
|
|
$
|
(13,257
|
)
|
|
$
|
(20,141
|
)
|
|
$
|
2,889
|
|
|
22
|
%
|
|
$
|
6,884
|
|
|
34
|
%
|
2018
compared with
2017
Cost of revenue decreased by $0.9 million compared to the prior year due to the reversal of certain aged royalty liabilities relating to our legacy music business.
Operating expenses decreased by
$2.0 million
, or
15%
. The decrease was primarily due to a decrease of $1.7 million in salaries, benefits, professional services and facilities costs due to our ongoing cost reduction efforts. Also contributing to the decrease were lower restructuring costs and a benefit in lease exit and related charges partially due to the renegotiation of certain leases, totaling $1.1 million. These decreases were offset by certain benefits recorded in the first quarter of 2017: $0.5 million relating to the warrants received from Napster and a $0.4 million release of previously accrued taxes.
2017
compared with
2016
Operating expenses decreased by
$6.9 million
, or
34%
. The decrease was primarily due to a $4.6 million reduction in salary, benefit and professional service expenses, a reduction of $2.2 million in lease exit and related charges, as well as a benefit of $0.5 million relating to the warrant received from Napster in the first quarter of 2017, which is discussed further in
Note 6.
Fair Value Measurements
, and lower expenses for facilities and support services as a result of our reduction of office space at our corporate headquarters and ongoing cost reduction efforts. These decreases were offset by an increase of $1.0 million relating to increased restructuring charges due to increased severance cost as compared to the prior year.
Consolidated Operating Expenses
Our operating expenses consist primarily of salaries and related personnel costs including stock based compensation, consulting fees associated with product development, sales commissions, amortization of certain intangible assets capitalized in our acquisitions, professional service fees, advertising costs, and restructuring charges. Operating expenses were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018-2017
Change
|
|
%
Change
|
|
2017-2016
Change
|
|
%
Change
|
|
Research and development
|
|
$
|
30,789
|
|
|
$
|
29,710
|
|
|
$
|
29,923
|
|
|
$
|
1,079
|
|
|
4
|
%
|
|
$
|
(213
|
)
|
|
(1
|
)%
|
|
Sales and marketing
|
|
21,140
|
|
|
22,953
|
|
|
31,608
|
|
|
(1,813
|
)
|
|
(8
|
)%
|
|
(8,655
|
)
|
|
(27
|
)%
|
|
General and administrative
|
|
20,706
|
|
|
20,996
|
|
|
27,415
|
|
|
(290
|
)
|
|
(1
|
)%
|
|
(6,419
|
)
|
|
(23
|
)%
|
|
Restructuring and other charges
|
|
1,873
|
|
|
2,526
|
|
|
1,489
|
|
|
(653
|
)
|
|
(26
|
)%
|
|
1,037
|
|
|
70
|
%
|
|
Lease exit and related charges
|
|
(454
|
)
|
|
—
|
|
|
2,239
|
|
|
(454
|
)
|
|
NM
|
|
|
(2,239
|
)
|
|
NM
|
|
|
Total consolidated operating expenses
|
|
$
|
74,054
|
|
|
$
|
76,185
|
|
|
$
|
92,674
|
|
|
$
|
(2,131
|
)
|
|
(3
|
)%
|
|
$
|
(16,489
|
)
|
|
(18
|
)%
|
Research and development expenses increased by
$1.1 million
, or
4%
, in the year ended
2018
as compared to 2017 primarily due to an increase of $1.6 million in professional service expense, reflecting our continued efforts toward our growth initiatives and our April 2018 acquisition of a Netherlands based game development studio described in
Note 4.
Acquisitions and Disposals
. There was also an increase of $0.3 million for facilities and support service costs. These increases were offset by a decrease in salaries and benefits of $0.8 million.
Research and development expenses decreased by
$0.2 million
, or
1%
, in the year ended
2017
as compared to 2016. The decrease was primarily due to lower expenses for facilities and support services of $1.0 million as a result of our ongoing cost reduction efforts. The decrease was also due to the acceleration of depreciation expense of $0.7 million taken in the first quarter of 2016. These decreases were offset in part by an increase of $1.3 million in salaries, benefits and professional services expense due to increased efforts towards our growth initiatives.
Sales and marketing expenses decreased by
$1.8 million
, or
8%
, in the year ended
2018
, compared with
2017
. The decrease was due to reductions of $1.0 million in salaries, benefits and professional services fees, $0.4 million in facilities and support services costs, as well as a $0.3 million in marketing expenses.
Sales and marketing expenses decreased by
$8.7 million
, or
27%
, in the year ended
2017
, compared with
2016
. The decrease was due to reductions of $5.7 million in salaries, benefits and professional services fees, a $1.9 million decrease in marketing expenses, as well as decreased facilities and support services costs of $1.1 million.
General and administrative expenses decreased by
$0.3 million
, or
1%
, in the year ended
2018
, compared with
2017
. The decrease was primarily due to a reduction of $1.2 million in salaries, benefits and professional services fees, and a decrease of $0.3 million related to reduced facilities and support services costs. These decreases were offset by certain benefits recorded in the first quarter of 2017: $0.5 million relating to the warrants received from Napster and a $0.4 million release of previously accrued taxes.
General and administrative expenses decreased by
$6.4 million
, or
23%
, in the year ended
2017
, compared with
2016
. The decrease was primarily due to a reduction of $3.4 million in salaries, benefits and professional services fees, a decrease of $1.8 million related to reduced facilities and support services costs, as well as the first quarter 2017 benefit of $0.5 million relating to warrants we received from Napster, which are discussed further in
Note 6.
Fair Value Measurements
. Also contributing to the decrease was a benefit of $0.4 million in the first quarter of 2017 related to the release of previously accrued taxes.
Restructuring and other charges and Lease exit and related charges consist of costs associated with the ongoing reorganization of our business operations and our ongoing expense re-alignment efforts. The restructuring expense amounts in all years primarily related to severance costs due to workforce reductions. For additional details on these charges see
Note 11.
Restructuring Charges
and
Note 12.
Lease Exit and Related Charges
.
Other Income (Expenses)
Other income (expenses), net was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018-2017
Change
|
|
%
Change
|
|
2017-2016
Change
|
|
%
Change
|
|
Interest income, net
|
|
$
|
344
|
|
|
$
|
436
|
|
|
$
|
449
|
|
|
$
|
(92
|
)
|
|
(21
|
)%
|
|
$
|
(13
|
)
|
|
(3
|
)%
|
|
Gain (loss) on investments, net
|
|
—
|
|
|
4,500
|
|
|
8,473
|
|
|
(4,500
|
)
|
|
(100
|
)%
|
|
(3,973
|
)
|
|
NM
|
|
|
Equity in net loss of Napster
|
|
(757
|
)
|
|
(3,991
|
)
|
|
(6,533
|
)
|
|
3,234
|
|
|
(81
|
)%
|
|
2,542
|
|
|
(39
|
)%
|
|
Other income (expense), net
|
|
(103
|
)
|
|
(506
|
)
|
|
(643
|
)
|
|
403
|
|
|
(80
|
)%
|
|
137
|
|
|
(21
|
)%
|
|
Total other income (expense), net
|
|
$
|
(516
|
)
|
|
$
|
439
|
|
|
$
|
1,746
|
|
|
$
|
(955
|
)
|
|
218
|
%
|
|
$
|
(1,307
|
)
|
|
75
|
%
|
The 2017 Gain (loss) on investment, net, was due to the collection and recognition of the second and final anniversary payment of $4.5 million from our 2015 sale of the Slingo and social casino business, which included an agreed-to additional $0.5 million as a result of the extension of the second anniversary payment from August to December.
The 2016 Gain (loss) on investments, net, was due to the collection and recognition of the first anniversary payment of $4.0 million from our 2015 sale of the Slingo and social casino business, a net gain of $2.5 million from the sale of our remaining J-Stream investment, and a gain of $2.0 million, net of transaction costs, from the sale of a domain name.
As described further in
Note 5.
Napster Joint Venture
, we account for our investment in Napster under the equity method of accounting. The net carrying value of our investment in Napster is not necessarily indicative of the underlying fair value of our investment.
Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes
on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
As a result of the Tax Act and in accordance with SEC Staff Accounting Bulletin 118 ("SAB 118"), we recorded a provisional tax benefit of $3.6 million related to the repeal of corporate AMT in the period ending December 31, 2017. As of December 31, 2018, the Company has completed its analysis on the income tax effects of the Tax Act and has made no adjustments to the provisional amounts recorded during the period ending December 31, 2017. A summary of certain elements of the Tax Act that the Company has completed the accounting under SAB 118 is discussed below.
|
|
|
|
•
|
The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we have recorded a decrease related to deferred tax assets and liabilities, with a corresponding adjustment to the valuation allowance. The impact of the corporate tax rate change was not material and did not change from our provisional adjustments.
|
|
|
|
|
•
|
The Tax Act repeals corporate AMT for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers are refundable beginning in 2018. The Company has approximately $3.6 million of AMT credit carryovers that are expected to be fully refunded by 2022. As there was a valuation allowance against the Company’s AMT credit deferred tax asset, the repeal of corporate AMT resulted in an income tax benefit for the year ended December 31, 2017. The impact of the repeal of corporate AMT did not change materially from our provisional adjustments.
|
|
|
|
|
•
|
The Tax Act provides for a one-time deemed repatriation transition tax on previously untaxed accumulated and current earnings and profits (E&P) of certain foreign subsidiaries. To determine the amount of tax, the Company determined the amount of post-1986 E&P of relevant subsidiaries, which was estimated to be zero. There was no change to this estimate and the Company will not have transition tax.
|
|
|
|
|
•
|
The Tax Act creates a new requirement that certain income (i.e. GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.
Under GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (“the period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (“the deferred method”). We have selected the period cost method, and did not expect to have GILTI inclusion. There was no change to this estimate, and the Company does not have any GILTI inclusion of its foreign subsidiaries in the period ending December 31, 2018.
|
|
|
|
|
•
|
Prior to the Tax Act, the Company had not provided for U.S. income taxes on undistributed earnings and other outside basis differences of its foreign subsidiaries as it was the Company's intention for these tax basis differences to remain indefinitely reinvested. As a result of the Tax Act and other factors in the Company's strategic plan, the Company reevaluated its assertion and no longer intends to indefinitely reinvest substantially all of the Company's non-U.S. current and undistributed earnings in all foreign jurisdictions. As a result of this change, we have recorded deferred taxes of $1.0 million as of December 31, 2018 to reflect local country foreign withholding taxes associated with a future repatriation of such foreign earnings.
|
During the years ended December 31,
2018
,
2017
, and
2016
, we recognized income tax expense of
$2.2 million
, income tax benefit of
$2.8 million
, and income tax expense of
$0.8 million
, respectively, related to U.S. and foreign income taxes.
The income tax expense for the year ended December 31, 2018 was largely the result of foreign withholdings taxes and an additional $1.0 million income tax expense for the accrued tax associated with future repatriations of foreign earnings that are no longer considered to be indefinitely reinvested. The tax benefit for the year ended December 31, 2017 was largely the result of a $3.6 million income tax benefit related to the repeal of corporate AMT under the Tax Act, offset by foreign withholding taxes and income taxes in foreign jurisdictions. The tax expense for the year ended December 31, 2016 was largely the result of foreign withholding taxes and income taxes in foreign jurisdictions.
We assess the likelihood that our deferred tax assets will be recovered based upon our consideration of many factors, including the current economic climate, our expectations of future taxable income, our ability to project such income, and the
appreciation of our investments and other assets. We maintain a partial valuation allowance of $137.2 million for our deferred tax assets due to uncertainty regarding their realization as of December 31, 2018. The net increase in the valuation allowance since December 31, 2017 of $0.1 million was the result of an increase in current year deferred tax assets for which the Company maintains a valuation allowance.
We generate income in a number of foreign jurisdictions, some of which have higher tax rates and some of which have lower tax rates relative to the U.S. federal statutory rate. Changes to the blend of income between jurisdictions with higher or lower effective tax rates than the U.S. federal statutory rate could affect our effective tax rate. For the year ended December 31, 2018, decreases in tax expense from income generated in foreign jurisdictions with lower tax rates in comparison to the U.S. federal statutory rate were 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.
Unrecognized tax benefits remained at $0.4 million as of December 31, 2018 and 2017. The unrecognized tax benefits are due to federal research and development tax credit carryforward risks. As of December 31, 2018, there are no unrecognized tax benefits remaining that would affect our effective tax rate if recognized, as the offset would increase the valuation allowance. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.
We file numerous consolidated and separate income tax returns in the U.S. including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal income tax examinations for tax years before 2013 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.
Liquidity and Capital Resources
The following summarizes working capital, cash, cash equivalents, short-term investments, and restricted cash and investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Working capital
|
|
$
|
33,481
|
|
|
$
|
55,157
|
|
|
Cash, cash equivalents, and short-term investments
|
|
35,585
|
|
|
59,975
|
|
|
Restricted cash and investments
|
|
1,630
|
|
|
2,400
|
|
The decrease in 2018 working capital as compared to December 31, 2017, which includes cash, cash equivalents, and short term investments, was primarily due to our ongoing negative cash flow used in our operations of
$19.2 million
.
The following summarizes cash flow activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cash provided by (used in) operating activities
|
|
$
|
(19,221
|
)
|
|
$
|
(21,350
|
)
|
|
$
|
(24,328
|
)
|
|
Cash provided by (used in) investing activities
|
|
3,798
|
|
|
36,818
|
|
|
11,362
|
|
|
Cash provided by (used in) financing activities
|
|
(62
|
)
|
|
(117
|
)
|
|
(345
|
)
|
Cash used in operating activities consisted of net income (loss) adjusted for certain non-cash items such as depreciation and amortization, as well as the effect of changes in certain operating assets and liabilities.
Cash used in operating activities was
$2.1 million
less in the year ended December 31, 2018 as compared to 2017. Cash used in operations was less due primarily to the net change in operating assets and liabilities during 2018 compared to 2017. In the current year, we used cash of $0.5 million to fund the net change in operating assets and liabilities while in 2017 the net change in operating assets and liabilities used $7.1 million. This improvement was offset in part by the higher operating loss in 2018 compared to 2017.
Cash used in operating activities was $3.0 million less in 2017 as compared to 2016. The decrease in cash used in operating activities was primarily due to a lower operating loss in 2017 as compared to 2016, driven mainly by our ongoing cost reduction efforts, as previously discussed. The effect of the reduced operating loss was offset in part by the net increase in operating assets and liabilities during 2017 as compared to 2016. In 2017 we used cash of $7.1 million to fund the net change in operating assets and liabilities, while in 2016 the net change in operating assets and liabilities used was $1.2 million.
For the year ended
December 31, 2018
, cash provided by investing activities of
$3.8 million
was due to sales and maturities of short-term investments totaling
$8.8 million
. The sales and maturities were offset by our purchase of a
Netherlands-based game development studio in the second quarter of 2018 for net cash consideration of $4.2 million and by purchases of equipment, software and leasehold improvements of
$0.8 million
.
For the year ended
December 31, 2017
, cash provided by investing activities of $36.8 million was due to sales and maturities, net of purchases, of short-term investments totaling $34.6 million, and cash proceeds from the 2015 sale of our Slingo and social casino games business of $4.5 million. These proceeds were offset in part by the advance paid to Napster of $1.5 million and purchases of equipment, software and leasehold improvements of $0.7 million.
For the year ended
December 31, 2016
, cash provided by investing activities of $11.4 million was due to sales and maturities, net of purchases, of short-term investments totaling $8.5 million, cash proceeds from the 2015 sale of our Slingo and social casino games business of $4.0 million, cash proceeds of $3.3 million from the sale of J-Stream, and cash proceeds from the sale of a domain name of $2.1 million. These proceeds were offset in part by the advance paid to Napster of $3.5 million and purchases of equipment, software and leasehold improvements of $2.4 million.
Financing activities for the year ended
December 31, 2018
used cash totaling
$0.1 million
which was from
$0.3 million
for tax payments from shares withheld upon vesting of restricted stock offset in part by proceeds received from the issuance of common stock of
$0.2 million
.
Financing activities for the year ended
December 31, 2017
used cash totaling $0.1 million which was from $0.4 million for tax payments from shares withheld upon vesting of restricted stock offset in part by proceeds received from the issuance of common stock of $0.2 million.
Financing activities for the year ended
December 31, 2016
used cash totaling $0.3 million which was from $0.9 million for tax payments from shares withheld upon vesting of restricted stock offset in part by proceeds received from the issuance of common stock of $0.5 million.
While we currently have no planned significant capital expenditures for 2019 other than those in the ordinary course of business, we do have contractual commitments for future payments related to office leases.
As discussed in more detail in
Note 22.
Subsequent Event
, we acquired a majority voting interest in Napster on January 18, 2019. We will fully consolidate Napster's financial results with ours beginning with our first quarter of 2019 financial statements. This will result in our consolidated balance sheet reflecting Napster's working capital deficit, which we expect will result in a consolidated working capital deficit. Except as noted in
Note 5.
Napster Joint Venture
, however, RealNetworks has no contractual or implied legal obligation to guarantee or provide other such support related to Napster's third party borrowing or other liabilities.
We believe that our unrestricted current cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. For Napster to meet its future liquidity needs, however, Napster will need additional financing to fund its operations and growth. RealNetworks has no contractual or implied legal obligation to provide funding or other financial support to Napster.
In the future, we may seek to raise additional funds through public or private equity financing, or through other sources such as credit facilities. Such sources of funding may or may not be available to us at commercially reasonable terms. The sale of additional equity securities could result in dilution to our shareholders. In addition, in the future, we may enter into cash or stock acquisition transactions or other strategic transactions that could reduce cash available to fund our operations or result in dilution to shareholders.
Our cash equivalents and short-term investments consist of investment-grade securities, as specified in our investment policy guidelines. The policy limits the amount of credit exposure to any one non-U.S. government or non-U.S. agency issue or issuer to a maximum of 5% of the total portfolio. These securities are subject to interest rate risk and will decrease in value if interest rates increase. Because we have historically had the ability to hold our fixed income investments until maturity, we do not expect our operating results or cash flows to be significantly affected by a sudden change in market interest rates in our securities portfolio.
We conduct our operations primarily in three functional currencies: the U.S. dollar, 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
December 31, 2018
, approximately $16.4 million of the $35.6 million of cash, cash equivalents, and short-term investments are held by our foreign subsidiaries outside the U.S. We have reevaluated our historical assertion that undistributed foreign earnings were indefinitely reinvested and for which deferred taxes were not provided. As a result of the enactment of the Tax Act and as of December 31, 2018, we are no longer indefinitely reinvesting substantially all of the
Company's foreign earnings outside of the U.S. As a result of this change, we have recorded deferred taxes of $1.0 million as of December 31, 2018 to reflect local country foreign withholding taxes associated with a future repatriation of such foreign earnings.
Contractual Obligations
Please refer to
Note 18.
Commitments and Contingencies
, for details on our contractual obligations, which consist of operating leases for office facilities. For income tax liabilities for uncertain tax positions we cannot make a reasonably reliable estimate of the amount and period of any related future payments. As of
December 31, 2018
we had
$0.4 million
of gross unrecognized tax benefits for uncertain tax positions.
Off-Balance Sheet Arrangements
We have operating lease obligations for office facility leases with future cash commitments that are not currently required under GAAP to be recorded on our consolidated balance sheet. Accordingly, these operating lease obligations constitute off-balance sheet arrangements. See
Note 2.
Recent Accounting Pronouncements
for details on the new accounting guidance that beginning for our first quarter of 2019, will require us to record right of use assets and related liabilities for our operating lease obligations. In addition, since we do not maintain accruals associated with certain guarantees, as discussed in
Note 19.
Guarantees
, those guarantee obligations also constitute off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Our critical accounting policies and estimates are as follows:
|
|
|
|
•
|
Estimating losses on excess office facilities;
|
|
|
|
|
•
|
Valuation of equity method investments;
|
|
|
|
|
•
|
Valuation of definite-lived assets and goodwill; and
|
|
|
|
|
•
|
Accounting for income taxes.
|
Revenue Recognition.
We recognize revenue from contracts with customers as control of the promised good or service is transferred. Please refer to
Note 3.
Revenue Recognition
for further details regarding our recognition policies.
Estimating losses on excess office facilities.
We make significant estimates in determining the appropriate amount of accrued loss on excess office facilities, including estimates of sublease income expected to be received. If we make different estimates, our loss on excess office facilities could be significantly different from that recorded, which could have a material impact on our operating results.
Valuation of Equity Method Investments.
We use the equity method of accounting for investments in circumstances where we have the ability to exert significant influence, but not control, over an investee or joint venture. We record our percentage interest in the investee's recorded income or loss and changes in the investee's capital under this method, which will increase or decrease the reported value of our investment. See
Note 5.
Napster Joint Venture
, and
Note 22.
Subsequent Event
to the consolidated financial statements included in Item 8 of Part II of this 10-K, for additional information. We initially record our investment based on a fair value analysis of the investment.
We evaluate impairment of an investment valued under the equity method if events and circumstances warrant. An impairment charge would be recorded if a decline in value of an equity investment below its carrying amount were determined to be other than temporary. In determining if a decline is other than temporary, we consider factors such as the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investee or joint venture, the near-term and longer-term operating and financial prospects of the investee or joint venture and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery.
Valuation of Definite-Lived Assets and Goodwill.
Definite-lived assets consist primarily of property, plant and equipment, as well as amortizable intangible assets acquired in business combinations. Definite-lived assets are amortized on a straight line basis over their estimated useful lives. We review definite-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows the assets are expected to generate. If definite-lived
assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value.
We test goodwill for impairment on an annual basis, in our fourth quarter, or more frequently if circumstances indicate reporting unit carrying values may exceed their fair values. As part of this test, we first perform a qualitative assessment to determine if the fair value of a reporting unit is more likely than not less than the reporting unit's carrying amount including goodwill. If this assessment indicates it is more likely than not, we then compare the carrying value of the reporting unit to the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, we then calculate the implied estimated fair value of goodwill for the reporting unit and compare it to the carrying amount of goodwill for the reporting unit. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to implied estimated value.
The impairment analysis of definite-lived assets and goodwill is based upon estimates and assumptions relating to our future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital. Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, and their resulting impact on the estimates and assumptions relating to the value of our definite-lived and goodwill assets could result in the need to perform an impairment analysis in future periods which could result in a material impairment. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary from period to period. Changes in these estimates and assumptions could materially affect the estimate of future cash flows and related fair values of these assets and result in significant impairments, which could have a material adverse effect on our financial condition or results of operations. For further discussion, please see the risk factor entitled, "Any impairment to our goodwill, and definite-lived assets could result in a material charge to our earnings" under Item 1A Risk Factors.
Accounting for Income Taxes.
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred income tax expense and deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities and operating loss and tax credit carryforwards are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are expected to be recovered or settled. We must make assumptions, judgments and estimates to determine the current and deferred provision for income taxes, deferred tax assets and liabilities and any valuation allowance to be recorded against deferred tax assets. Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and future tax audits could materially impact the amounts provided for income taxes in our consolidated financial statements.
Each reporting period we must periodically assess the likelihood that our deferred tax assets will be recovered from future sources of taxable income, and to the extent that recovery is not more likely than not, a valuation allowance must be established. The establishment of a valuation allowance and increases to such an allowance result in either increases to income tax expense or reduction of income tax benefit in the statement of operations and comprehensive income. In certain instances, changes in the valuation allowance may be allocated directly to the related components of shareholders' equity on the consolidated balance sheet. Factors we consider in making such an assessment include, but are not limited to, past performance and our expectation of future taxable income, macroeconomic conditions and issues facing our industry, existing contracts, our ability to project future results and any appreciation of our investments and other assets.
As of
December 31, 2018
, approximately
$16.4 million
of the
$35.6 million
of cash, cash equivalents, and short-term investments are held by our foreign subsidiaries outside the U.S. We have reevaluated our historical assertion that undistributed foreign earnings were indefinitely reinvested and for which deferred taxes were not provided. As a result of the enactment of the Tax Act and as of December 31, 2018, we are no longer indefinitely reinvesting substantially all of the Company's foreign earnings outside of the U.S. As a result of this change, we have recorded deferred taxes of $1.0 million as of December 31, 2018 to reflect local country foreign withholding taxes associated with a future repatriation of such foreign earnings.
Recently Issued Accounting Standards
See
Note 2.
Recent Accounting Pronouncements
.
|
|
|
|
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
REALNETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
35,561
|
|
|
$
|
51,196
|
|
|
Short-term investments
|
24
|
|
|
8,779
|
|
|
Trade accounts receivable, net of allowances
|
11,751
|
|
|
12,689
|
|
|
Deferred costs, current portion
|
331
|
|
|
426
|
|
|
Prepaid expenses and other current assets
|
5,911
|
|
|
3,715
|
|
|
Current assets of discontinued operations
|
—
|
|
|
17,456
|
|
|
Total current assets
|
53,578
|
|
|
94,261
|
|
|
|
|
|
|
|
Equipment and software
|
37,458
|
|
|
46,417
|
|
|
Leasehold improvements
|
3,292
|
|
|
3,536
|
|
|
Total equipment, software, and leasehold improvements
|
40,750
|
|
|
49,953
|
|
|
Less accumulated depreciation and amortization
|
37,996
|
|
|
46,093
|
|
|
Net equipment, software, and leasehold improvements
|
2,754
|
|
|
3,860
|
|
|
Restricted cash equivalents and investments
|
1,630
|
|
|
2,400
|
|
|
Other assets
|
3,997
|
|
|
5,588
|
|
|
Deferred costs, non-current portion
|
528
|
|
|
955
|
|
|
Deferred tax assets, net
|
851
|
|
|
1,047
|
|
|
Other intangible assets, net
|
26
|
|
|
325
|
|
|
Goodwill
|
16,955
|
|
|
13,060
|
|
|
Total assets
|
$
|
80,319
|
|
|
$
|
121,496
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
3,910
|
|
|
$
|
3,785
|
|
|
Accrued and other current liabilities
|
11,312
|
|
|
12,365
|
|
|
Commitment to Napster
|
2,750
|
|
|
2,750
|
|
|
Deferred revenue, current portion
|
2,125
|
|
|
3,097
|
|
|
Current liabilities of discontinued operations
|
—
|
|
|
17,107
|
|
|
Total current liabilities
|
20,097
|
|
|
39,104
|
|
|
Deferred revenue, non-current portion
|
268
|
|
|
443
|
|
|
Deferred rent
|
986
|
|
|
982
|
|
|
Deferred tax liabilities
|
1,168
|
|
|
19
|
|
|
Other long-term liabilities
|
960
|
|
|
1,775
|
|
|
Total liabilities
|
23,479
|
|
|
42,323
|
|
|
Commitments and contingencies
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
Preferred stock, $0.001 par value, no shares issued and outstanding:
|
|
|
|
|
Series A: authorized 200 shares
|
—
|
|
|
—
|
|
|
Undesignated series: authorized 59,800 shares
|
—
|
|
|
—
|
|
|
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 37,728 shares in 2018 and 37,341 shares in 2017
|
37
|
|
|
37
|
|
|
Additional paid-in capital
|
641,930
|
|
|
638,727
|
|
|
Accumulated other comprehensive loss
|
(61,118
|
)
|
|
(59,547
|
)
|
|
Retained deficit
|
(524,009
|
)
|
|
(500,044
|
)
|
|
Total shareholders’ equity
|
56,840
|
|
|
79,173
|
|
|
Total liabilities and shareholders’ equity
|
$
|
80,319
|
|
|
$
|
121,496
|
|
See accompanying notes to consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Net revenue (A)
|
$
|
69,510
|
|
|
$
|
78,718
|
|
|
$
|
81,479
|
|
|
Cost of revenue (B)
|
17,727
|
|
|
23,164
|
|
|
27,548
|
|
|
Gross profit
|
51,783
|
|
|
55,554
|
|
|
53,931
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
30,789
|
|
|
29,710
|
|
|
29,923
|
|
|
Sales and marketing
|
21,140
|
|
|
22,953
|
|
|
31,608
|
|
|
General and administrative
|
20,706
|
|
|
20,996
|
|
|
27,415
|
|
|
Restructuring and other charges
|
1,873
|
|
|
2,526
|
|
|
1,489
|
|
|
Lease exit and related charges
|
(454
|
)
|
|
—
|
|
|
2,239
|
|
|
Total operating expenses
|
74,054
|
|
|
76,185
|
|
|
92,674
|
|
|
Operating income (loss) from continuing operations
|
(22,271
|
)
|
|
(20,631
|
)
|
|
(38,743
|
)
|
|
Other income (expenses):
|
|
|
|
|
|
|
Interest income, net
|
344
|
|
|
436
|
|
|
449
|
|
|
Gain (loss) on sale of equity and other investments, net
|
—
|
|
|
4,500
|
|
|
8,473
|
|
|
Equity in net loss of Napster investment
|
(757
|
)
|
|
(3,991
|
)
|
|
(6,533
|
)
|
|
Other income (expense), net
|
(103
|
)
|
|
(506
|
)
|
|
(643
|
)
|
|
Total other income (expenses), net
|
(516
|
)
|
|
439
|
|
|
1,746
|
|
|
Income (loss) from continuing operations before income taxes
|
(22,787
|
)
|
|
(20,192
|
)
|
|
(36,997
|
)
|
|
Income tax expense (benefit)
|
2,202
|
|
|
(2,778
|
)
|
|
776
|
|
|
Net income (loss) from continuing operations
|
(24,989
|
)
|
|
(17,414
|
)
|
|
(37,773
|
)
|
|
Net income (loss) from discontinued operations, net of tax
|
—
|
|
|
1,109
|
|
|
1,223
|
|
|
Net income (loss)
|
$
|
(24,989
|
)
|
|
$
|
(16,305
|
)
|
|
$
|
(36,550
|
)
|
|
Net income (loss) per share - Basic:
|
|
|
|
|
|
|
Continuing operations
|
(0.66
|
)
|
|
(0.47
|
)
|
|
(1.02
|
)
|
|
Discontinued operations
|
—
|
|
|
0.03
|
|
|
0.03
|
|
|
Net income (loss) per share - Basic
|
$
|
(0.66
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.99
|
)
|
|
Net income (loss) per share - Diluted:
|
|
|
|
|
|
|
Continuing operations
|
(0.66
|
)
|
|
(0.47
|
)
|
|
(1.02
|
)
|
|
Discontinued operations
|
—
|
|
|
0.03
|
|
|
0.03
|
|
|
Net income (loss) per share - Diluted
|
$
|
(0.66
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.99
|
)
|
|
Shares used to compute basic net income (loss) per share
|
37,582
|
|
|
37,163
|
|
|
36,781
|
|
|
Shares used to compute diluted net income (loss) per share
|
37,582
|
|
|
37,163
|
|
|
36,781
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
Unrealized investment holding gains (losses), net of reclassification adjustments
|
$
|
17
|
|
|
$
|
8
|
|
|
$
|
(1,303
|
)
|
|
Foreign currency translation adjustments, net of reclassification adjustments
|
(1,588
|
)
|
|
2,090
|
|
|
(862
|
)
|
|
Total other comprehensive income (loss)
|
(1,571
|
)
|
|
2,098
|
|
|
(2,165
|
)
|
|
Net income (loss)
|
(24,989
|
)
|
|
(16,305
|
)
|
|
(36,550
|
)
|
|
Comprehensive income (loss)
|
$
|
(26,560
|
)
|
|
$
|
(14,207
|
)
|
|
$
|
(38,715
|
)
|
|
(A) Components of net revenue:
|
|
|
|
|
|
|
License and product revenue
|
$
|
22,602
|
|
|
$
|
28,919
|
|
|
$
|
27,846
|
|
|
Service revenue
|
46,908
|
|
|
49,799
|
|
|
53,633
|
|
|
|
$
|
69,510
|
|
|
$
|
78,718
|
|
|
$
|
81,479
|
|
|
(B) Components of cost of revenue:
|
|
|
|
|
|
|
License and product revenue
|
$
|
6,109
|
|
|
$
|
6,663
|
|
|
$
|
6,062
|
|
|
Service revenue
|
11,618
|
|
|
16,501
|
|
|
21,486
|
|
|
|
$
|
17,727
|
|
|
$
|
23,164
|
|
|
$
|
27,548
|
|
See accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALNETWORKS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(24,989
|
)
|
|
$
|
(16,305
|
)
|
|
$
|
(36,550
|
)
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
2,135
|
|
|
2,936
|
|
|
7,057
|
|
|
Stock-based compensation
|
2,508
|
|
|
3,675
|
|
|
5,424
|
|
|
Equity in net loss of Napster
|
757
|
|
|
3,991
|
|
|
6,533
|
|
|
Lease exit and related charges
|
(454
|
)
|
|
—
|
|
|
2,239
|
|
|
Deferred income taxes, net
|
1,170
|
|
|
(3,871
|
)
|
|
130
|
|
|
Loss (gain) on investments, net
|
—
|
|
|
(4,500
|
)
|
|
(8,473
|
)
|
|
Realized translation loss (gain)
|
—
|
|
|
—
|
|
|
272
|
|
|
Fair value of warrants granted in 2015 and 2017, net of subsequent mark to market adjustments in 2018, 2017 and 2016
|
124
|
|
|
(216
|
)
|
|
280
|
|
|
Net change in certain operating assets and liabilities:
|
|
|
|
|
|
|
Trade accounts receivable
|
17,971
|
|
|
(5,845
|
)
|
|
(129
|
)
|
|
Deferred costs, prepaid expenses and other assets
|
(377
|
)
|
|
2,146
|
|
|
964
|
|
|
Accounts payable
|
(15,125
|
)
|
|
(599
|
)
|
|
1,571
|
|
|
Accrued and other liabilities
|
(2,941
|
)
|
|
(2,762
|
)
|
|
(3,646
|
)
|
|
Net cash provided by (used in) operating activities
|
(19,221
|
)
|
|
(21,350
|
)
|
|
(24,328
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Purchases of equipment, software, and leasehold improvements
|
(765
|
)
|
|
(734
|
)
|
|
(2,438
|
)
|
|
Proceeds from sale of equity and other investments
|
—
|
|
|
—
|
|
|
4,967
|
|
|
Purchases of short-term investments
|
—
|
|
|
(13,905
|
)
|
|
(75,766
|
)
|
|
Proceeds from sales and maturities of short-term investments
|
8,755
|
|
|
48,457
|
|
|
84,249
|
|
|
Acquisitions, net of cash acquired
|
(4,192
|
)
|
|
—
|
|
|
(150
|
)
|
|
Advance to Napster
|
—
|
|
|
(1,500
|
)
|
|
(3,500
|
)
|
|
Proceeds from the sale of Slingo and social casino business
|
—
|
|
|
4,500
|
|
|
4,000
|
|
|
Net cash provided by (used in) investing activities
|
3,798
|
|
|
36,818
|
|
|
11,362
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Proceeds from issuance of common stock (stock options and stock purchase plan)
|
199
|
|
|
239
|
|
|
535
|
|
|
Tax payments from shares withheld upon vesting of restricted stock
|
(261
|
)
|
|
(356
|
)
|
|
(880
|
)
|
|
Net cash provided by (used in) financing activities
|
(62
|
)
|
|
(117
|
)
|
|
(345
|
)
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
(920
|
)
|
|
1,824
|
|
|
(473
|
)
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
(16,405
|
)
|
|
17,175
|
|
|
(13,784
|
)
|
|
Cash, cash equivalents, and restricted cash, beginning of year
|
53,596
|
|
|
36,421
|
|
|
50,205
|
|
|
Cash, cash equivalents, and restricted cash, end of year
|
$
|
37,191
|
|
|
$
|
53,596
|
|
|
$
|
36,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALNETWORKS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash received from income tax refunds
|
$
|
308
|
|
|
$
|
420
|
|
|
$
|
534
|
|
|
Cash paid for income taxes
|
$
|
1,198
|
|
|
$
|
1,244
|
|
|
$
|
2,072
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
Increase (decrease) in accrued purchases of equipment, software, and leasehold improvements
|
$
|
10
|
|
|
$
|
(86
|
)
|
|
$
|
26
|
|
See accompanying notes to consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Retained
Earnings
(Deficit)
|
|
Total
Shareholders’
Equity
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2015
|
|
36,298
|
|
|
$
|
36
|
|
|
$
|
627,316
|
|
|
$
|
(59,480
|
)
|
|
$
|
(447,189
|
)
|
|
$
|
120,683
|
|
|
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
|
|
1,203
|
|
|
1
|
|
|
(345
|
)
|
|
—
|
|
|
—
|
|
|
(344
|
)
|
|
Share of Napster equity transactions
|
|
—
|
|
|
—
|
|
|
1,533
|
|
|
—
|
|
|
—
|
|
|
1,533
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
5,424
|
|
|
—
|
|
|
—
|
|
|
5,424
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,165
|
)
|
|
—
|
|
|
(2,165
|
)
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(36,550
|
)
|
|
(36,550
|
)
|
|
Balances, December 31, 2016
|
|
37,501
|
|
|
$
|
37
|
|
|
$
|
633,928
|
|
|
$
|
(61,645
|
)
|
|
$
|
(483,739
|
)
|
|
$
|
88,581
|
|
|
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
|
|
(160
|
)
|
|
—
|
|
|
(117
|
)
|
|
—
|
|
|
—
|
|
|
(117
|
)
|
|
Share of Napster equity transactions
|
|
—
|
|
|
—
|
|
|
1,241
|
|
|
—
|
|
|
—
|
|
|
1,241
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
3,675
|
|
|
—
|
|
|
—
|
|
|
3,675
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,098
|
|
|
—
|
|
|
2,098
|
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,305
|
)
|
|
(16,305
|
)
|
|
Balances, December 31, 2017
|
|
37,341
|
|
|
$
|
37
|
|
|
$
|
638,727
|
|
|
$
|
(59,547
|
)
|
|
$
|
(500,044
|
)
|
|
$
|
79,173
|
|
|
Cumulative effect of revenue recognition accounting change
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,024
|
|
|
1,024
|
|
|
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock
|
|
387
|
|
|
—
|
|
|
(62
|
)
|
|
—
|
|
|
—
|
|
|
(62
|
)
|
|
Share of Napster equity transactions
|
|
—
|
|
|
—
|
|
|
757
|
|
|
—
|
|
|
—
|
|
|
757
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
2,508
|
|
|
—
|
|
|
—
|
|
|
2,508
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,571
|
)
|
|
—
|
|
|
(1,571
|
)
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,989
|
)
|
|
(24,989
|
)
|
|
Balances, December 31, 2018
|
|
37,728
|
|
|
$
|
37
|
|
|
$
|
641,930
|
|
|
$
|
(61,118
|
)
|
|
$
|
(524,009
|
)
|
|
$
|
56,840
|
|
See accompanying notes to consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2018, 2017 and 2016
|
|
|
|
|
|
Note 1.
|
Description of Business and Summary of Significant Accounting Policies
|
Description of Business.
RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play and share digital media. The Company also develops and markets software products and services that enable the creation, distribution and consumption of digital media, including audio and video.
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.
In this Annual Report on Form 10-K for the year ended
December 31, 2018
(10-K), RealNetworks, Inc. and subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”.
Basis of Presentation.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements reflect all 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 year ended
December 31, 2018
are not necessarily indicative of the results that may be expected for any subsequent periods.
See
Note 17.
Discontinued Operations
for further information regarding the expiration of our contract with LOEN Entertainment, Co, LTD (LOEN) in 2017 and the reporting of this business as a discontinued operation. Unless otherwise noted, amounts and percentages for all periods discussed below reflect the results of operations and financial condition of our continuing operations.
Use of Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (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.
Cash and Cash Equivalents and Short-Term Investments.
We consider all short-term investments with a remaining contractual maturity at date of purchase of three months or less to be cash equivalents.
Other short-term investments with remaining contractual maturities of five years or less are classified as short-term because the investments are marketable and highly liquid, and we have the ability to utilize them for current operations. Realized gains and losses and any declines in value judged to be other-than-temporary on short-term investments are included in other income (expense), net. Realized and unrealized gains and losses on short-term investments are determined using the specific identification method.
Trade Accounts Receivable.
Trade accounts receivable consist of amounts due from customers and do not bear interest. The allowance for doubtful accounts and sales returns is our estimate of the amount of probable credit losses and returns in our existing accounts receivable. We determine the allowances based on analysis of historical bad debts, customer concentrations, customer credit-worthiness, return history and current economic trends. We review the allowances for doubtful accounts and sales returns quarterly. Past due balances over 90 days and specified other balances are reviewed individually for collectability. All other balances are reviewed on an aggregate basis. Account balances are written off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance sheet credit exposure related to our customers.
Concentration of Credit Risk.
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, and accounts receivable. Short-term investments consist of U.S. government and government agency securities, corporate notes and bonds, and municipal securities. We derive a portion of our revenue from a large number of individual consumers spread globally. We also derive revenue from several large customers. If the financial condition or results of operations of any one of the large customers deteriorates substantially, our operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. We do not generally require collateral and we maintain an allowance for estimated credit losses on customer accounts when considered necessary.
Depreciation and Amortization.
Depreciation of equipment and software, as well as amortization of leasehold improvements is computed using the straight-line method over the lesser of the estimated useful lives of the assets or the related lease term. The useful life of equipment and software is generally
three
to
five
years.
Depreciation and amortization expense of these assets during the years ended December 31,
2018
,
2017
, and
2016
was
$1.7 million
,
$2.3 million
and
$6.0 million
, respectively.
Equity Method Investment.
We use the equity method in circumstances where we have the ability to exert significant influence, but not control, over an investee or joint venture. We initially record our investment based on a fair value analysis of the investment. We record our percentage interest in the investee's recorded income or loss and changes in the investee's capital under this method, which will increase or decrease the reported value of our investment. See
Note 5.
Napster Joint Venture
and
Note 22.
Subsequent Event
for additional information.
We evaluate impairment of an investment accounted for under the equity method if events and circumstances warrant. An impairment charge would be recorded if a decline in the fair value of an equity investment below its carrying amount were determined to be other than temporary. In determining if a decline is other than temporary, we consider factors such as the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investee or joint venture, the near-term and longer-term operating and financial prospects of the investee or joint venture and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery.
Deferred Costs.
We defer certain costs on projects for service revenues and system sales. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll and related costs for employees and other third parties. Deferred costs are capitalized during the implementation period.
We recognize such costs as a component of cost of revenue, the timing of which is dependent upon the revenue recognition policy by contract. At each balance sheet date, we review deferred costs to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue or if actual deferred costs exceed estimated contractual revenue. Assessing the recoverability of deferred costs is based on significant assumptions and estimates, including future revenue and cost of sales. Significant or sustained decreases in revenue or increases in cost of sales in future periods could result in impairments of deferred project costs and prepaid royalty advances. We cannot accurately predict the amount and timing of any such impairments. Should deferred project costs or prepaid royalty advances become impaired, we would record the appropriate charge, which could have a material adverse effect on our financial condition and results of operations.
Definite-Lived Tangible and Intangible Assets.
Definite-lived tangible assets include equipment, software and leasehold improvements and are carried at cost less accumulated depreciation and amortization. Definite-lived intangible assets consist primarily of the fair value of customer agreements and contracts, and developed technology acquired in business combinations and are amortized over their estimated useful lives.
We review these assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. If the carrying amount of an asset group is not recoverable, an impairment loss is recognized if the carrying amount of the asset group exceeds its estimated fair value, which is generally determined as the present value of estimated future cash flows to a market participant. Our impairment analysis is based on significant assumptions of future results, including operating and cash flow projections. Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, could result in the need to record an impairment charge in future periods.
Goodwill.
We test goodwill for impairment on an annual basis, in our fourth quarter, or more frequently if circumstances indicate reporting unit carrying values may exceed their fair values. Circumstances that may indicate a reporting unit's carrying value exceeds its fair value include, but are not limited to: poor economic performance relative to historical or projected future operating results; significant negative industry, economic or company specific trends; changes in the manner of our use of the assets or the plans for our business; and loss of key personnel.
When evaluating goodwill for impairment, based upon our annual test or due to changes in circumstances described above, we first perform a qualitative assessment to determine if the fair value of a reporting unit is more likely than not less than the reporting unit's carrying amount including goodwill. If this assessment indicates it is more likely than not, we then compare the carrying value of the reporting unit to the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, we then calculate the implied estimated fair value of goodwill for the reporting unit and compare it to the carrying amount of goodwill for the reporting unit. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to implied estimated value. Significant judgment is required in determining the reporting units and assessing fair value of the reporting units.
Fair Value.
Fair value is the price that would be received from selling an asset or paid in transfering a liability in an orderly transaction between market participants at the measurement date. Our fair value measurements consider the principal or
most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
Fair values are determined based on three levels of inputs:
|
|
|
|
•
|
Level 1: Quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
•
|
Level 2: Directly or indirectly observed inputs for the asset or liability, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active
|
|
|
|
|
•
|
Level 3: Significant unobservable inputs that reflect our own estimates of assumptions that market participants would use
|
Research and Development.
Costs incurred in research and development are expensed as incurred. Software development costs are capitalized when a product’s technological feasibility has been established through the date the product is available for general release to customers. Other than internal use software, we have not capitalized any software development costs, as technological feasibility is generally not established until a working model is completed, at which time substantially all development is complete.
Revenue Recognition.
We recognize revenue from contracts with customers as control of the promised good or service is transferred. Please refer to
Note 3.
Revenue Recognition
for further details regarding our recognition policies.
Advertising Expenses.
We expense the cost of advertising and promoting our products as incurred. These costs are included in sales and marketing expense and totaled
$4.3 million
in
2018
,
$4.5 million
in
2017
and
$6.1 million
in
2016
.
Foreign Currency.
The functional currency of the Company’s foreign subsidiaries is generally the currency of the country in which the subsidiary operates. Assets and liabilities of foreign operations are translated into U.S. dollars using rates of exchange in effect at the end of the reporting period. The net gain or loss resulting from translation is shown as translation adjustment and included in Accumulated Other Comprehensive Income (AOCI) in shareholders’ equity. Income and expense accounts are translated into U.S. dollars using average rates of exchange. Gains and losses from foreign currency transactions are included in the consolidated statements of operations.
Accounting for Taxes Collected from Customers.
Our revenues are reported net of sales and other transaction taxes that are collected from customers and remitted to taxing authorities.
Income Taxes.
We compute income taxes using the asset and liability method, under which deferred income taxes are provided for temporary differences between financial reporting basis and tax basis of our assets and liabilities and operating loss and tax credit carryforwards. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the appropriate taxing jurisdictions. Adjustments to the valuation allowance could be required in the future if we estimate that the amount of deferred tax assets to be realized is more or less than the net amount we have recorded. Any increase or decrease in the valuation allowance could have the effect of increasing or decreasing the income tax provision in the statement of operations.
Deferred tax assets and liabilities and operating loss and tax credit carryforwards are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are expected to be recovered or settled.
We file numerous consolidated and separate income tax returns in the U.S. including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal income tax examinations for tax years before 2013 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize accrued interest and penalties related to uncertain tax positions as a component of income tax expense.
Stock-Based Compensation.
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. We use the Black-Scholes option-pricing model or other appropriate valuation models such as Monte Carlo simulation to determine the fair value of stock-based option awards. The fair value of restricted stock awards is based on the closing market price of our common stock on the grant date of the award. Generally, we recognize the compensation cost for awards on a straight-line basis for the entire award, over the applicable vesting period. For performance-based awards, expense is recognized when it is probable the
performance goal will be achieved, however if the likelihood becomes improbable, that expense is reversed. For market-based stock options, fair value is measured at the grant date using the Monte Carlo simulation model and we recognize compensation cost for these awards on a straight-line basis over the requisite service period for each separately vesting portion of the awards. For our employee stock purchase plan, compensation expense is measured based on the discount the employee is entitled to upon purchase.
The valuation models for stock-based option awards require various judgmental assumptions including volatility in our common stock price and expected option life. If any of the assumptions used in the valuation models change significantly, stock-based compensation expense for new awards may differ materially in the future from the amounts recorded in the consolidated statements of operations. For all awards, we also estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.
Net Income Per Share.
Basic net income (loss) per share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the weighted average number of common and dilutive potential common shares outstanding during the period.
|
|
|
|
|
|
Note 2.
|
Recent Accounting Pronouncements
|
Recently adopted accounting pronouncements
In May 2014, and subsequently updated and amended in 2015 and 2016, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance (Topic 606), which replaced most existing revenue recognition guidance in U.S. GAAP. The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. Refer to
Note 3.
Revenue Recognition
for further details.
In November 2016, the FASB issued guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. We adopted this guidance on January 1, 2018, and retroactively applied the changes to the Statement of Cash Flows for all periods presented. As a result, we no longer classify changes in restricted cash within the investing section of our Statement of Cash flows, and instead include restricted cash with unrestricted cash as a combined total. The impact of the adoption did not have a material impact on the Consolidated Financial Statements.
Recently issued accounting pronouncements not yet adopted
In February 2016, the FASB issued new guidance related to the accounting for leases. A major change in the new guidance is that lessees will be required to present right-of-use assets and lease liabilities on the balance sheet. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. The new guidance is effective for us on January 1, 2019, including interim periods within 2019. In July 2018 the FASB issued an alternative method that permits application of the new guidance at the beginning of the year of adoption. This is in addition to the method of applying the new guidance retrospectively to each prior reporting period presented. We have elected to apply the new guidance at the beginning of 2019 and not retrospectively. We are finalizing our assessment of the impacts resulting from the new standard, including the impact on our internal controls. As a result of our evaluation, we have modified certain accounting policies and practices and updated certain existing controls. Adoption of the standard is expected to result in the recognition of material additional right-of-use assets and related lease liabilities for our operating leases. The new guidance is not expected to have a material impact on our consolidated statement of operations.
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 beginning on December 15, 2019, with early adoption permitted. We will be evaluating the impact of the guidance, but do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures.
In June 2018, the FASB issued new guidance related to the measurement and classification for share-based awards to non-employees. The new guidance essentially aligns the measurement and classification for these awards with that for share-based awards to employees. The new guidance will be effective for us on January 1, 2019, including interim periods within 2019. We do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures.
|
|
|
|
|
|
Note 3.
|
Revenue Recognition
|
Adoption of New Revenue Standard
On January 1, 2018 we adopted the new revenue recognition standard by applying the modified retrospective approach to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior periods. Consistent with the modified retrospective approach under Topic 606, we also now report the components of net revenue and cost of revenue on the Consolidated Statement of Operations for reporting periods after January 1, 2018 with the same approach related to our disaggregation of revenue by source disclosure.
We recorded a net decrease to opening retained deficit of
$1.0 million
as of January 1, 2018 due to the cumulative impact of adopting the new revenue recognition standard, with the impact primarily related to licensing of our RealPlayer product and full recognition of non-recurring engineering fees which were previously deferred and amortized over the life of the contract. The net impact to revenues as a result of adopting the new standard was an increase of
$1.6 million
for the year ended December 31, 2018.
Performance Obligations
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.
Our software licensing revenue stream generates revenue through the on-premises licensing of our codec technologies and integrated RealTimes platform. We recognize revenue upfront at the point in time when the software is made available to the customer. In cases where a sale or usage-based royalty is promised in exchange for a license of our codec technologies, revenue is recognized as the subsequent usage occurs for the contractual amount owed by the customer for that usage, as is allowed under the licensing of intellectual property section of Topic 606. Software licensing in our Mobile Services segment is invoiced on a monthly basis either based on usage of the respective product, or on a fixed fee basis. Our Consumer Media licensing is invoiced either quarterly or annually based on the usage of the respective product, or on a fixed fee basis. For each of these, the timing of payment generally does not vary significantly from the timing of invoice, however, certain of our long-term Consumer Media licensing contracts have extended payment schedules which may exceed one year.
Our subscription services revenue stream allows customers to use hosted software over the respective contract period without taking possession of the technology. The stream is primarily comprised of our intercarrier messaging service, ringback tones, PC-based and mobile games subscriptions and our RealPlayer and SuperPass services. Revenues related to subscription service products are recognized ratably over the contract period, or as we have the right to invoice as a practical expedient when that amount corresponds directly with the value to the customer of our performance completed to date. Consumer subscription products are paid in advance, typically on a monthly or quarterly basis. Subscription services offered to businesses are invoiced on a monthly basis, generally based upon the amount of usage for the previous month, and the timing of payment generally does not vary significantly from the timing of invoice.
Our product sales revenue stream includes purchases of mobile and wholesale games, as well as our RealPlayer product. Retail purchases are recognized and paid for at the point in time the product is made available to the end user. For games which are sold through third-party application storefronts, we evaluate the transaction for gross or net revenue recognition. As we typically are the primary obligor in our third-party transactions, we recognize revenues gross of any app store fees. We then receive monthly payments from the respective app store for all purchases within the respective month.
Other revenues consist primarily of advertising and the distribution of third-party products, which are recognized and paid on a cost per impression or cost per download basis.
Disaggregation of Revenue
The following table presents our disaggregated revenue by source and segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
Consumer Media
|
|
Mobile Services
|
|
Games
|
|
Business Line
|
|
|
|
|
|
|
|
Software License
|
|
$
|
9,940
|
|
|
$
|
2,838
|
|
|
$
|
—
|
|
|
Subscription Services
|
|
4,895
|
|
|
26,832
|
|
|
11,141
|
|
|
Product Sales
|
|
1,177
|
|
|
—
|
|
|
8,647
|
|
|
Advertising and Other
|
|
2,156
|
|
|
—
|
|
|
1,884
|
|
|
Total
|
|
$
|
18,168
|
|
|
$
|
29,670
|
|
|
$
|
21,672
|
|
The following table presents our disaggregated revenue by sales channel (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
Consumer Media
|
|
Mobile Services
|
|
Games
|
|
Sales Channel
|
|
|
|
|
|
|
|
Business to Business
|
|
$
|
12,096
|
|
|
$
|
29,081
|
|
|
$
|
3,225
|
|
|
Direct to Consumer
|
|
6,072
|
|
|
589
|
|
|
18,447
|
|
|
Total
|
|
$
|
18,168
|
|
|
$
|
29,670
|
|
|
$
|
21,672
|
|
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 December 31, 2018 our balance of long-term accounts receivable was
$0.7 million
, and is included in other long-term assets on our consolidated balance sheets. During the year ended December 31, 2018, we recorded no impairments to our contract assets.
We record deferred revenue when cash payments are received or due in advance of our completion of the underlying performance obligation. As of December 31, 2018 we had a deferred revenue balance of
$2.4 million
, a decrease of
$1.1 million
from December 31, 2017. The decrease is due primarily to our transition to Topic 606, with
$0.8 million
recorded to retained earnings on January 1, 2018.
Significant Estimates
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 year ended December 31, 2018, 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 4.
|
Acquisitions and Disposals
|
As described in our 2016 10-K, on July 24, 2015, we entered into an agreement to sell the Slingo and social casino portion of our games business to Gaming Realms plc. Of the total transaction price of
$18.0 million
,
$10.0 million
was paid in cash at closing on August 10, 2015,
$4.0 million
was paid in cash in August 2016, and the remaining
$4.0 million
was paid in cash in December 2017, along with an additional
$0.5 million
payment related to an agreed-to extension of this final payment, which was originally due in August 2017. We recognized the gain related to both the 2016 and 2017 payments in Gain (loss) on sale of equity and other investments, net, on the statement of operations in 2016 and 2017.
On April 16, 2018 in order to acquire a full workforce, we purchased
100%
of the shares of a small, privately-held Netherlands-based game development studio for net cash consideration of
$4.2 million
. All tangible and intangible assets and liabilities recognized are reported within the Games segment. As a result of our purchase price allocation, we recorded
$0.1 million
of identifiable intangible assets relating to an existing customer contract. We also recorded goodwill of
$4.4 million
, representing the intangible assets that do not qualify for separate recognition for accounting purposes, primarily related to the assembled workforce and expected synergies in development of our Original Stories titles. The goodwill is not deductible for income tax purposes. We did not recognize significant revenue or loss before income taxes from this acquired business from the date of acquisition through December 31, 2018.
|
|
|
|
|
|
Note 5.
|
Napster Joint Venture
|
As of
December 31, 2018
we owned approximately
42%
of the issued and outstanding stock of Rhapsody International, Inc., doing business as Napster, and account for our investment using the equity method of accounting.
Rhapsody America LLC was initially formed in 2007 as a joint venture between RealNetworks and MTV Networks, a division of Viacom International Inc. (MTVN), to own and operate a business-to-consumer digital audio music service originally branded as Rhapsody. The service was re-branded in 2016 as Napster. In this Note, we refer to the business as Napster, although the legal entity in which we hold our investment is Rhapsody International, Inc.
Following certain restructuring transactions effective March 31, 2010, we began accounting for our 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 International, Inc., carrying a
$10.0 million
preference upon certain liquidation events.
We recorded our share of losses of the Napster business of
$0.8 million
,
$4.0 million
, and
$6.5 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
Because of the
$10.0 million
liquidation preference on the preferred stock we hold in Napster, under the equity method of accounting we did not record any share of Napster losses that would reduce the carrying value of our investment, which is impacted by Napster equity transactions, below
$10.0 million
, until Napster's book value was reduced below
$10.0 million
, which occurred in the first quarter of 2015. As of December 31, 2018, the carrying value of our Napster equity investment was
zero
, as we did not have any further commitment to provide future support to Napster, with the exception of the guaranty discussed below. Unless we commit to provide future financial support to Napster, we do not record any further share of Napster losses that would reduce our carrying value of Napster below zero; in accordance with GAAP, we currently track those suspended losses outside of our financial statements.
In December 2016, RealNetworks entered into an agreement to loan up to
$5 million
to Napster for general operating purposes, as did Napster's other
42%
owner. Each entity fully funded its loan, providing
$3.5 million
each in December 2016 and the remaining
$1.5 million
each in January 2017. These loans are subordinate to senior creditors, and bear an interest rate of
10%
per annum, which is added to the outstanding principal balance. At the time of signing the agreement we recognized previously suspended Napster losses, and, consequently, we did not record a receivable related to this loan.
In November 2017, Napster entered into an amendment to its revolving credit facility. In conjunction with the amendment, both RealNetworks and Napster's other
42%
owner entered into an arrangement to guarantee up to
$2.75 million
each of Napster's outstanding indebtedness on the credit facility. As a result of this guaranty, in December 2017, we recognized previously suspended Napster losses up to the full
$2.75 million
guaranty in our consolidated statement of operations and as a Commitment to Napster in our consolidated balance sheets. As of the date of this filing, RealNetworks has not been required to pay any amounts under the guaranty, nor did we purchase the other 42% owner's guaranty as a result of acquiring a majority voting interest in Napster, as further described in
Note 22.
Subsequent Event
.
Summarized financial information for Napster, which represents 100% of their financial information, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2018
|
|
Year ended December 31,
2017
|
|
Year ended December 31,
2016
|
|
Net revenue
|
|
$
|
143,844
|
|
|
$
|
172,391
|
|
|
$
|
208,085
|
|
|
Gross profit
|
|
37,093
|
|
|
27,173
|
|
|
38,407
|
|
|
Operating income (loss)
|
|
16,137
|
|
|
(8,256
|
)
|
|
(12,433
|
)
|
|
Net income (loss)
|
|
10,327
|
|
|
(13,087
|
)
|
|
(14,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
|
Current assets
|
|
$
|
44,821
|
|
|
$
|
43,028
|
|
|
Non-current assets
|
|
17,679
|
|
|
16,874
|
|
|
Current liabilities
|
|
111,332
|
|
|
119,826
|
|
|
Non-current liabilities
|
|
390
|
|
|
1,231
|
|
|
|
|
|
|
|
Note 6.
|
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
December 31, 2018
and
2017
, 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
|
|
|
December 31, 2018
|
|
December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
22,853
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,853
|
|
|
$
|
22,853
|
|
|
Money market funds
|
12,708
|
|
|
—
|
|
|
—
|
|
|
12,708
|
|
|
12,708
|
|
|
Total cash and cash equivalents
|
35,561
|
|
|
—
|
|
|
—
|
|
|
35,561
|
|
|
35,561
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
—
|
|
|
24
|
|
|
—
|
|
|
24
|
|
|
24
|
|
|
Total short-term investments
|
—
|
|
|
24
|
|
|
—
|
|
|
24
|
|
|
24
|
|
|
Restricted cash equivalents and investments
|
—
|
|
|
1,630
|
|
|
—
|
|
|
1,630
|
|
|
1,630
|
|
|
Warrants issued by Napster (included in Other assets)
|
—
|
|
|
—
|
|
|
865
|
|
|
865
|
|
|
—
|
|
|
Total
|
$
|
35,561
|
|
|
$
|
1,654
|
|
|
$
|
865
|
|
|
$
|
38,080
|
|
|
$
|
37,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
Amortized Cost as of
|
|
|
December 31, 2017
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
31,065
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,065
|
|
|
$
|
31,065
|
|
|
Money market funds
|
20,131
|
|
|
—
|
|
|
—
|
|
|
20,131
|
|
|
20,131
|
|
|
Total cash and cash equivalents
|
51,196
|
|
|
—
|
|
|
—
|
|
|
51,196
|
|
|
51,196
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
—
|
|
|
8,779
|
|
|
—
|
|
|
8,779
|
|
|
8,779
|
|
|
Total short-term investments
|
—
|
|
|
8,779
|
|
|
—
|
|
|
8,779
|
|
|
8,779
|
|
|
Restricted cash equivalents and investments
|
—
|
|
|
2,400
|
|
|
—
|
|
|
2,400
|
|
|
2,400
|
|
|
Warrant issued by Napster (included in Other assets)
|
—
|
|
|
—
|
|
|
989
|
|
|
989
|
|
|
—
|
|
|
Total
|
$
|
51,196
|
|
|
$
|
11,179
|
|
|
$
|
989
|
|
|
$
|
63,364
|
|
|
$
|
62,375
|
|
Restricted cash equivalents and investments as of
December 31, 2018
and
2017
relate to cash pledged as collateral against letters of credit in connection with lease agreements.
Realized gains and losses on sales of short-term investment securities for
2018
,
2017
, and
2016
were not significant. Gross unrealized gains and gross unrealized losses on short-term investment securities as of
December 31, 2018
and
2017
were not significant.
In February 2015, Napster issued warrants to purchase Napster common shares to both RealNetworks and Napster's other 42% owner. The warrants were issued as compensation for past services provided by RealNetworks and Napster's other 42% owner, and both warrants covered the same number of underlying shares, with a
10
year contractual term. The exercise price of the warrants was equal to the fair value of the underlying shares on the issuance date, and we used the Black-Scholes option-pricing model to calculate the fair value of the warrant, using an expected term of
5 years
and expected volatility of
55%
. On the date of issuance, we recognized and recorded the
$1.2 million
fair value of the warrant issued to RealNetworks within Other assets in the consolidated balance sheets, and as an expense reduction within General and administrative expense in the consolidated statements of operations. The warrants are free-standing derivatives and as such their fair value is determined each quarter using updated inputs in the Black-Scholes option-pricing model. At December 31, 2017, due to the management change and strategic shift undertaken by Napster, we determined that a change to the expected term was necessary. As a result, we extended the expected term by
3.25 years
, resulting in a total expected term for the warrant of
8.25 years
. During the
year ended December 31, 2018
the decrease in the fair value of the warrants was approximately
$0.1 million
.
In February 2017, Napster issued additional warrants to purchase Napster common shares to both RealNetworks and Napster's other 42% owner. Consistent with the warrants issued in 2015, the 2017 warrants were issued as compensation for past services provided by RealNetworks and Napster's other 42% owner, and both warrants covered the same number of underlying shares, with a
10
year contractual term. The exercise price of the warrants exceeded the fair value of the underlying shares on the issuance date, and we used the Black-Scholes option-pricing model to calculate the fair value of the warrant, using an expected term of
5 years
and expected volatility of
55%
, resulting in a recognized fair value of
$0.5 million
in Other assets in the consolidated balance sheets, and as an expense reduction within General and administrative expense in the consolidated statements of operations. At December 31, 2017, due to the management change and strategic shift undertaken by Napster, we determined that a change to the expected term was necessary. As a result, we extended the expected term by
1
year, resulting in a total expected term for the warrant of
6 years
. During the
year ended December 31, 2018
the decrease in fair value of the warrants was insignificant.
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). We did not record any impairments on those assets required to be measured at fair value on a non-recurring basis in
2018
,
2017
or
2016
.
See
Note 12.
Lease Exit and Related Charges
, for a discussion of the losses related to reductions in the use of RealNetworks' office space, which were recorded at the estimated fair value of remaining lease obligations, less expected sub-lease income.
|
|
|
|
|
|
Note 7.
|
Allowance for Doubtful Accounts Receivable and Sales Returns
|
Activity in the allowance for doubtful accounts receivable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Balance, beginning of year
|
|
$
|
725
|
|
|
$
|
633
|
|
|
$
|
765
|
|
|
Addition (reduction) to allowance
|
|
(224
|
)
|
|
(14
|
)
|
|
36
|
|
|
Amounts written off
|
|
—
|
|
|
—
|
|
|
(152
|
)
|
|
Effects of foreign currency translation
|
|
(26
|
)
|
|
106
|
|
|
(16
|
)
|
|
Balance, end of year
|
|
$
|
475
|
|
|
$
|
725
|
|
|
$
|
633
|
|
Activity in the allowance for sales returns (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Balance, beginning of year
|
|
$
|
212
|
|
|
$
|
169
|
|
|
$
|
158
|
|
|
Addition (reduction) to allowance
|
|
(126
|
)
|
|
55
|
|
|
15
|
|
|
Amounts written off
|
|
—
|
|
|
(11
|
)
|
|
(3
|
)
|
|
Effects of foreign currency translation
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
Balance, end of year
|
|
$
|
85
|
|
|
$
|
212
|
|
|
$
|
169
|
|
|
Total, Allowance for Doubtful Accounts Receivable and Sales Returns
|
|
$
|
560
|
|
|
$
|
937
|
|
|
$
|
802
|
|
Three
customers individually comprised more than
10%
of trade accounts receivable at
December 31, 2018
, with the customers accounting for
23%
,
11%
and
10%
each.
One
customer accounted for
20%
of our trade accounts receivable as of December 31,
2017
.
One
customer accounted for
11%
, or
$7.7 million
, of consolidated revenue during the year ended
December 31, 2018
, in our Mobile Services segment.
One
customer accounted for
10%
, or
$8.0 million
, of consolidated revenue during the year ended December 31,
2017
, which was reflected in our Mobile Services segment.
One
customer accounted for
11%
, or
$9.1 million
, of our consolidated revenue during the year ended December 31, 2016, in our Mobile Services segment.
|
|
|
|
|
|
Note 8.
|
Other Intangible Assets
|
Other intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
30,993
|
|
|
$
|
30,993
|
|
|
$
|
—
|
|
|
$
|
32,286
|
|
|
$
|
31,997
|
|
|
$
|
289
|
|
|
|
Developed technology
|
|
24,446
|
|
|
24,446
|
|
|
—
|
|
|
25,177
|
|
|
25,177
|
|
|
—
|
|
|
|
Patents, trademarks and tradenames
|
|
3,765
|
|
|
3,765
|
|
|
—
|
|
|
3,932
|
|
|
3,896
|
|
|
36
|
|
|
|
Service contracts
|
|
5,538
|
|
|
5,512
|
|
|
26
|
|
|
5,576
|
|
|
5,576
|
|
|
—
|
|
|
|
Total
|
|
$
|
64,742
|
|
|
$
|
64,716
|
|
|
$
|
26
|
|
|
$
|
66,971
|
|
|
$
|
66,646
|
|
|
$
|
325
|
|
In conjunction with our acquisition of a Netherlands-based game development studio in the second quarter of 2018, we recorded
$0.1 million
in intangibles. Refer to
Note 4.
Acquisitions and Disposals
for further details about the acquisition.
In the third quarter of 2016 we recognized a gain of
$2.0 million
, net of transaction costs, to Gain (loss) on sale of equity and other investments, net, as the result of a sale of a domain name with no book value to a third party.
Amortization expense related to other intangible assets during the years ended December 31,
2018
,
2017
, and
2016
was
$0.4 million
,
$0.7 million
, and
$1.0 million
, respectively.
Estimated future amortization of other intangible assets (in thousands):
No
impairments of other intangible assets were recognized in
2018
,
2017
or
2016
.
Changes in goodwill (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Balance, beginning of year
|
|
|
|
|
|
Goodwill
|
|
$
|
323,713
|
|
|
$
|
323,510
|
|
|
Accumulated impairment losses
|
|
(310,653
|
)
|
|
(310,653
|
)
|
|
|
|
13,060
|
|
|
12,857
|
|
|
|
|
|
|
|
|
Increases (decreases) due to current year acquisitions (disposals)
|
|
4,367
|
|
|
—
|
|
|
Effects of foreign currency translation
|
|
(472
|
)
|
|
203
|
|
|
|
|
3,895
|
|
|
203
|
|
|
Balance, end of year
|
|
|
|
|
|
Goodwill
|
|
327,608
|
|
|
323,713
|
|
|
Accumulated impairment losses
|
|
(310,653
|
)
|
|
(310,653
|
)
|
|
|
|
$
|
16,955
|
|
|
$
|
13,060
|
|
On April 16, 2018 in order to acquire a full workforce, we purchased
100%
of the shares of a small, privately-held Netherlands-based game development studio for net cash consideration of
$4.2 million
. See
Note 4.
Acquisitions and Disposals
, for details on this acquisition.
Goodwill by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Consumer Media
|
|
$
|
580
|
|
|
$
|
580
|
|
|
Mobile Services
|
|
2,040
|
|
|
2,182
|
|
|
Games
|
|
14,335
|
|
|
10,298
|
|
|
Total goodwill
|
|
$
|
16,955
|
|
|
$
|
13,060
|
|
No impairments of goodwill were recorded in
2018
,
2017
, or
2016
.
|
|
|
|
|
|
Note 10.
|
Accrued and Other Current Liabilities
|
Accrued and other current liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Royalties and other fulfillment costs
|
$
|
1,989
|
|
|
$
|
2,965
|
|
|
Employee compensation, commissions and benefits
|
4,444
|
|
|
4,384
|
|
|
Sales, VAT and other taxes payable
|
785
|
|
|
1,782
|
|
|
Other
|
4,094
|
|
|
3,234
|
|
|
Total accrued and other current liabilities
|
$
|
11,312
|
|
|
$
|
12,365
|
|
|
|
|
|
|
|
Note 11.
|
Restructuring Charges
|
Restructuring and other charges in
2018
,
2017
and
2016
consist of costs associated with the ongoing reorganization of our business operations and our ongoing expense re-alignment efforts. The expense amounts in all three years primarily relate to severance costs due to workforce reductions.
Restructuring charges are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Employee Separation Costs
|
|
Costs incurred and charged to expense for the year ended December 31, 2018
|
$
|
1,873
|
|
|
Costs incurred and charged to expense for the year ended December 31, 2017
|
$
|
2,526
|
|
|
Costs incurred and charged to expense for the year ended December 31, 2016
|
$
|
1,489
|
|
Changes to the accrued restructuring liability (which is included in Accrued and other current liabilities) for
2018
,
2017
and
2016
, (in thousands):
|
|
|
|
|
|
|
|
|
Employee Separation Costs
|
|
Accrued liability as of December 31, 2015
|
$
|
1,404
|
|
|
Costs incurred and charged to expense for the year ended December 31, 2016
|
1,489
|
|
|
Cash payments
|
(2,684
|
)
|
|
Accrued liability as of December 31, 2016
|
209
|
|
|
Costs incurred and charged to expense for the year ended December 31, 2017
|
2,526
|
|
|
Cash payments
|
(2,491
|
)
|
|
Accrued liability as of December 31, 2017
|
244
|
|
|
Costs incurred and charged to expense for the year ended December 31, 2018
|
1,873
|
|
|
Cash payments
|
(1,362
|
)
|
|
Accrued liability as of December 31, 2018
|
$
|
755
|
|
|
|
|
|
|
|
Note 12.
|
Lease Exit and Related Charges
|
As a result of the reduction in use of RealNetworks' office space, lease exit and related charges have been recognized representing rent and contractual operating expenses over the remaining life of the leases, including estimates of sublease income expected to be received. In the first quarter of 2018, we renegotiated the lease for our Seattle headquarters, reducing our total leased space by
15%
and recorded a reduction to our lease loss accrual to reflect our reduced future obligations.
We continue to regularly evaluate the market for office space. If the market for such space changes further in future periods, or if our contractual subleases change, we may have to revise our estimates which may result in future adjustments to expense for excess office facilities.
Changes to accrued lease exit and related charges are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Accrued loss, beginning of year
|
|
$
|
2,058
|
|
|
$
|
3,186
|
|
|
$
|
2,595
|
|
|
Additions and adjustments to the lease loss accrual, including estimated sublease income
|
|
(454
|
)
|
|
—
|
|
|
2,428
|
|
|
Less amounts paid, net of sublease income
|
|
(382
|
)
|
|
(1,128
|
)
|
|
(1,837
|
)
|
|
Accrued loss, end of year
|
|
1,222
|
|
|
2,058
|
|
|
3,186
|
|
|
Less current portion (included in Accrued and other current liabilities)
|
|
(346
|
)
|
|
(341
|
)
|
|
(1,024
|
)
|
|
Accrued loss, non-current portion (included in Other long term liabilities)
|
|
$
|
876
|
|
|
$
|
1,717
|
|
|
$
|
2,162
|
|
|
|
|
|
|
|
Note 13.
|
Shareholders’ Equity
|
Accumulated Other Comprehensive Loss
Changes in components of accumulated other comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Investments
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), beginning of period
|
|
$
|
2
|
|
|
$
|
(6
|
)
|
|
$
|
1,297
|
|
|
|
Unrealized gains (losses), net of tax effects of $18, $4, and $10
|
|
17
|
|
|
8
|
|
|
1,647
|
|
|
|
Reclassification adjustments for losses (gains) included in other income (expense), net of tax effects of $0, $0, and $0
|
|
—
|
|
|
—
|
|
|
(2,950
|
)
|
|
|
Net current period other comprehensive income (loss)
|
|
17
|
|
|
8
|
|
|
(1,303
|
)
|
|
|
Accumulated other comprehensive income (loss) balance, end of period
|
|
$
|
19
|
|
|
$
|
2
|
|
|
$
|
(6
|
)
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, beginning of period
|
|
$
|
(59,549
|
)
|
|
$
|
(61,639
|
)
|
|
$
|
(60,777
|
)
|
|
|
Translation adjustments
|
|
(1,588
|
)
|
|
2,090
|
|
|
(1,134
|
)
|
|
|
Reclassification adjustments for losses (gains) included in other income (expense)
|
|
—
|
|
|
—
|
|
|
272
|
|
|
|
Net current period other comprehensive income (loss)
|
|
(1,588
|
)
|
|
2,090
|
|
|
(862
|
)
|
|
|
Accumulated other comprehensive loss balance, end of period
|
|
$
|
(61,137
|
)
|
|
$
|
(59,549
|
)
|
|
$
|
(61,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss, end of period
|
|
$
|
(61,118
|
)
|
|
$
|
(59,547
|
)
|
|
$
|
(61,645
|
)
|
Preferred Stock.
Each share of Series A preferred stock entitles the holder to
one thousand
votes and dividends equal to
one thousand
times the aggregate per share amount of dividends declared on the common stock. There are no shares of Series A preferred stock outstanding.
Undesignated preferred stock will have rights and preferences that are determinable by the Board of Directors if and when determination of a new series of preferred stock has been established.
|
|
|
|
|
|
Note 14.
|
Employee Stock and Benefit Plans
|
Equity Compensation Plans.
Under our equity incentive plans we may grant various types of equity awards to employees and Directors. We have granted time-vest and performance-vest stock options and time-vest and performance-vest restricted stock. Generally, options vest based on continuous employment, over a
four
-year period. The options generally expire
seven
years from the date of grant and are exercisable at the market value of the common stock at the grant date. Time-vest restricted stock awards generally vest based on continuous employment over a
two
or
four
-year period. Performance-based awards vest if the specified performance targets are met and the grantee remains employed over the required period. The performance targets for these awards are generally based on the achievement of company-specific financial results. For these performance-based awards, expense is recognized when it is probable the performance goal will be achieved. We have also issued market-based performance stock options to certain employees. These awards vest if the market condition is met and the grantee remains employed over the requisite service period.
We issue new shares of common stock upon exercise of stock options and the vesting of restricted stock. As of December 31,
2018
there were
3.2 million
shares of common stock authorized for future equity awards. Each restricted stock unit granted reduces and each restricted stock unit forfeited or canceled increases the shares available for future grant by a factor of
1.6
shares. Each stock option granted reduces and each stock option forfeited or canceled increases the shares available for future grant by a factor of one share. We also have an employee stock purchase plan, under which
0.2 million
shares of common stock are authorized for future issuance as of December 31,
2018
.
Stock-based compensation expense recognized in our consolidated statements of operations includes amounts related to stock options, restricted stock, and employee stock purchase plans and was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Total stock-based compensation expense
|
|
$
|
2,508
|
|
|
$
|
3,675
|
|
|
$
|
5,424
|
|
The total stock-based compensation amounts disclosed above are recorded in the respective line items within operating expenses in the consolidated statement of operations. Included in the expense for 2018, 2017 and 2016 was stock compensation recorded for 2017, 2016 and 2015, respectively, incentive bonuses paid in fully vested restricted stock units which were authorized and granted in the first quarter of 2018, 2017 and 2016, respectively. No stock-based compensation was capitalized as part of the cost of an asset as of December 31,
2018
,
2017
, or
2016
. As of December 31,
2018
, we had
$3.4 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
3.4
years.
As discussed in
Note 1.
Description of Business and Summary of Significant Accounting Policies
, the valuation models for stock option awards require various highly judgmental assumptions. The assumption for the expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, including the contractual terms, vesting schedules, and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of our common stock for the related expected term. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to the expected term of the stock options. The dividend yield is estimated at zero because we do not currently anticipate paying dividends in the foreseeable future.
The fair value of options granted, excluding the options related to the 2016 Exchange described below, used the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
2.71
|
%
|
|
1.99
|
%
|
|
1.59
|
%
|
|
Expected term (years)
|
|
4.3
|
|
|
5.3
|
|
|
5.1
|
|
|
Volatility
|
|
35
|
%
|
|
36
|
%
|
|
35
|
%
|
Restricted stock unit and award activity was as follows (shares are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted Average Grant Date Fair Value Per Share
|
Total Grant Date Fair Value of Vested Awards (000's)
|
|
Nonvested shares, December 31, 2015
|
324
|
|
$
|
5.94
|
|
|
|
Granted
|
832
|
|
3.75
|
|
|
|
Vested
|
(802
|
)
|
3.83
|
|
$
|
3,069
|
|
|
Forfeited/Canceled
|
(22
|
)
|
5.61
|
|
|
|
Nonvested shares, December 31, 2016
|
332
|
|
$
|
5.59
|
|
|
|
Granted
|
230
|
|
4.66
|
|
|
|
Vested
|
(347
|
)
|
5.64
|
|
$
|
1,957
|
|
|
Forfeited/Canceled
|
(23
|
)
|
4.38
|
|
|
|
Nonvested shares, December 31, 2017
|
192
|
|
$
|
4.53
|
|
|
|
Granted
|
943
|
|
2.56
|
|
|
|
Vested
|
(402
|
)
|
3.18
|
|
$
|
1,278
|
|
|
Forfeited/Canceled
|
(35
|
)
|
4.69
|
|
|
|
Nonvested shares, December 31, 2018
|
698
|
|
$
|
2.63
|
|
|
At December 31,
2018
the aggregate intrinsic value of restricted stock awards was
$1.6 million
and the weighted average remaining contractual term was approximately
1 year
.
Stock option activity (shares are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted Average Grant Date Fair Value
|
|
Number
of Shares
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding, December 31, 2015
|
|
|
5,517
|
|
|
$
|
7.58
|
|
|
|
|
Options granted at common stock price
|
|
|
1,230
|
|
|
4.50
|
|
|
$
|
1.51
|
|
|
Options cancelled as part of stock option exchange
|
|
|
(1,961
|
)
|
|
8.11
|
|
|
|
|
Options granted as part of stock option exchange
|
|
|
1,961
|
|
|
4.73
|
|
|
$
|
0.74
|
|
|
Options exercised
|
|
|
(90
|
)
|
|
3.69
|
|
|
|
|
Options cancelled
|
|
|
(796
|
)
|
|
8.81
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
5,861
|
|
|
$
|
5.73
|
|
|
|
|
Options granted at common stock price
|
|
|
993
|
|
|
4.29
|
|
|
$
|
1.51
|
|
|
Options exercised
|
|
|
(21
|
)
|
|
3.51
|
|
|
|
|
Options cancelled
|
|
|
(757
|
)
|
|
6.00
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
6,076
|
|
|
$
|
5.47
|
|
|
|
|
Options granted at common stock price
|
|
|
2,339
|
|
|
3.17
|
|
|
$
|
1.01
|
|
|
Options exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
Options cancelled
|
|
|
(1,087
|
)
|
|
6.68
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
7,328
|
|
|
$
|
4.56
|
|
|
|
|
Exercisable, December 31, 2018
|
|
|
4,078
|
|
|
$
|
5.35
|
|
|
|
|
Vested and expected to vest, December 31, 2018
|
|
|
6,260
|
|
|
$
|
4.73
|
|
|
|
In 2016 and 2015 we granted
400,000
and
200,000
market-based stock options, which are included in the stock option tables above.
As of
December 31, 2018
, the weighted average remaining contractual life of the options was as follows: outstanding options
5.0
years; exercisable options
4.2
years; and vested and expected to vest options
4.8
years. As of
December 31, 2018
, there was no significant aggregate intrinsic value for our outstanding, exercisable or vested and expected to vest options.
The aggregate intrinsic value of stock options exercised in
2018
was
zero
, and for
2017
and
2016
was insignificant.
Employee Stock Purchase Plan.
Our Employee Stock Purchase Plan (ESPP) allows an eligible employee to purchase shares of our common stock at a price equal to
85
percent of the fair market value of the common stock at the end of the semi-annual offering periods, subject to certain limitations. Under the ESPP,
79,200
,
49,700
and
53,600
shares were purchased during the years ended December 31,
2018
,
2017
and
2016
, respectively.
Retirement Savings Plan.
We have a salary deferral plan (401(k) Plan) that covers substantially all employees. Eligible employees may contribute a portion of their eligible compensation to the plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. During the years ended December 31,
2018
,
2017
, and
2016
, we matched
50%
of the first
three
percent of participating employees’ contributions, and contributed
$0.2 million
,
$0.3 million
, and
$0.3 million
, respectively, in matching contributions. We can terminate the matching contributions at our discretion. We have no other post-employment or post-retirement benefit plans.
Stock Option Exchange.
In September 2016, our shareholders approved amendments to our stock plans to allow for an option exchange program.
The program, which launched on November 3, 2016, offered eligible employees and certain other service providers an opportunity to exchange certain outstanding options, with a per share exercise price in excess of
$4.33
(the "Eligible Options"), for new awards. The Company granted these new options on December 6, 2016, with an exercise price of
$4.73
, the fair market price of the Company's common stock as quoted on the Nasdaq Global Select Market at the close of business on that day. Members of the Company's Board of Directors, including our CEO, were not eligible for this program. In connection with the program, options to purchase
2.0 million
shares of the Company's common stock were exchanged, representing
58%
of total shares of common stock underlying the Eligible Options. As a result of the exchange, an additional
$1.5 million
, gross of estimated forfeitures, will be recognized over approximately
2 years
, or the remaining average vesting period.
Components of income (loss) before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
United States operations
|
|
$
|
(16,144
|
)
|
|
$
|
(15,731
|
)
|
|
$
|
(34,100
|
)
|
|
Foreign operations
|
|
(6,643
|
)
|
|
(4,461
|
)
|
|
(2,897
|
)
|
|
Income (loss) before income taxes
|
|
$
|
(22,787
|
)
|
|
$
|
(20,192
|
)
|
|
$
|
(36,997
|
)
|
Components of income tax expense (benefit) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
United States federal
|
|
$
|
612
|
|
|
$
|
683
|
|
|
$
|
712
|
|
|
State and local
|
|
53
|
|
|
42
|
|
|
59
|
|
|
Foreign
|
|
367
|
|
|
368
|
|
|
(125
|
)
|
|
Total current
|
|
1,032
|
|
|
1,093
|
|
|
646
|
|
|
Deferred:
|
|
|
|
|
|
|
|
United States federal
|
|
338
|
|
|
(3,643
|
)
|
|
3
|
|
|
State and local
|
|
—
|
|
|
2
|
|
|
1
|
|
|
Foreign
|
|
832
|
|
|
(230
|
)
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
1,170
|
|
|
(3,871
|
)
|
|
130
|
|
|
Total income tax expense (benefit)
|
|
$
|
2,202
|
|
|
$
|
(2,778
|
)
|
|
$
|
776
|
|
Income tax expense differs from “expected” income tax expense (computed by applying the U.S. federal income tax rate of 21% in 2018 and
35%
in 2017 and 2016) due to the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
United States federal tax expense (benefit) at statutory rate
|
|
$
|
(4,785
|
)
|
|
$
|
(7,067
|
)
|
|
$
|
(12,949
|
)
|
|
State taxes, net of United States federal tax expense (benefit)
|
|
(694
|
)
|
|
(273
|
)
|
|
(533
|
)
|
|
Change in valuation allowance
|
|
5,804
|
|
|
1,133
|
|
|
13,148
|
|
|
Non-deductible stock compensation
|
|
448
|
|
|
587
|
|
|
144
|
|
|
Impact of non-U.S. jurisdictional tax rate difference
|
|
(117
|
)
|
|
603
|
|
|
335
|
|
|
Research and development tax credit
|
|
(12
|
)
|
|
—
|
|
|
(338
|
)
|
|
Increase (reversal) of unrecognized tax benefits
|
|
—
|
|
|
—
|
|
|
135
|
|
|
Basis difference in investment
|
|
159
|
|
|
1,397
|
|
|
538
|
|
|
Non-U.S. withholding tax
|
|
470
|
|
|
435
|
|
|
452
|
|
|
Change in indefinite reinvestment assertion
|
|
998
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
(69
|
)
|
|
407
|
|
|
(156
|
)
|
|
Total income tax expense (benefit)
|
|
$
|
2,202
|
|
|
$
|
(2,778
|
)
|
|
$
|
776
|
|
Net deferred tax assets, which are recorded at December 31, 2018 and December 31, 2017 using a
21%
tax rate in the U.S. following the passage of the Tax Act, are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
United States federal net operating loss carryforwards
|
|
$
|
62,983
|
|
|
$
|
59,457
|
|
|
Deferred expenses
|
|
660
|
|
|
926
|
|
|
Research and development tax credit carryforwards
|
|
24,523
|
|
|
24,499
|
|
|
Net unrealized loss on investments
|
|
62
|
|
|
62
|
|
|
Accrued loss on excess office facilities
|
|
291
|
|
|
489
|
|
|
Stock-based compensation
|
|
2,603
|
|
|
2,738
|
|
|
State net operating loss carryforwards
|
|
11,971
|
|
|
13,746
|
|
|
Foreign net operating loss carryforwards
|
|
31,254
|
|
|
32,759
|
|
|
Deferred revenue
|
|
67
|
|
|
108
|
|
|
Equipment, software, and leasehold improvements
|
|
2,642
|
|
|
3,119
|
|
|
Intangibles
|
|
13
|
|
|
2
|
|
|
Net unrealized gains and basis differences on investments
|
|
1,193
|
|
|
1,188
|
|
|
Other
|
|
486
|
|
|
183
|
|
|
Gross deferred tax assets
|
|
138,748
|
|
|
139,276
|
|
|
Less valuation allowance
|
|
137,246
|
|
|
137,117
|
|
|
Gross deferred tax assets, net of valuation allowance
|
|
$
|
1,502
|
|
|
$
|
2,159
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Other intangible assets
|
|
$
|
(155
|
)
|
|
$
|
(62
|
)
|
|
Undistributed foreign earnings
|
|
(1,001
|
)
|
|
—
|
|
|
Other
|
|
(479
|
)
|
|
(814
|
)
|
|
Prepaid expenses
|
|
(184
|
)
|
|
(254
|
)
|
|
Gross deferred tax liabilities
|
|
(1,819
|
)
|
|
(1,130
|
)
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(317
|
)
|
|
$
|
1,029
|
|
In
2018
, we continued to record a valuation allowance on the deferred tax assets that we believe are not more likely than not to be realized. The net change in valuation allowance was a
$0.1 million
increase and a
$39.2 million
decrease during the years ended December 31,
2018
and
2017
, respectively.
We maintain a valuation allowance of
$137.2 million
for our deferred tax assets due to uncertainty regarding their realization as of December 31,
2018
. The net increase in the valuation allowance since December 31,
2017
of $0.1 million was the result of an increase in current year deferred tax assets for which the Company maintains a valuation allowance.
RealNetworks' U.S. federal net operating loss carryforwards totaled
$299.9 million
and
$283.1 million
at December 31,
2018
and
2017
, respectively. The increase is mainly due to the current year U.S. taxable loss. The remaining net operating loss carryforwards as of December 31,
2018
are from prior U.S. taxable losses and from acquired subsidiaries that are limited under Internal Revenue Code Section 382. These net operating loss carryforwards expire between 2024 and 2037.
In 2018, we finalized our evaluation of the current and future impacts of the Tax Act. There have been no changes to the estimates the Company provisionally recorded in 2017 in accordance with SAB 118. The primary impact of the Tax Act was the elimination of the corporate AMT for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers are refundable beginning in 2018. The Company's
$3.6 million
of AMT credit carryovers are expected to be fully refunded by 2022. A
$3.6 million
benefit was recognized in 2017 as a result of this change.
Income tax receivables were
$3.6 million
at December 31,
2018
and
2017
.
$1.8 million
of the
$3.6 million
is refundable in 2019 and has been recorded in our current tax receivable. The remaining
$1.8 million
remains in other long term assets.
We have concluded that we will not owe U.S. taxes on previously untaxed accumulated and current E&P of certain foreign subsidiaries. This conclusion is based on our history of negative E&P generated by our foreign subsidiaries. We have also concluded that we will not owe U.S. taxes on global intangible low-taxed income earned by controlled foreign corporations. In 2018, RealNetworks’ controlled foreign corporations had more tested loss than tested income; therefore, the Company did not have any deemed intangible income inclusion under the global intangible low-taxed income regime.
RealNetworks' U.S. federal research and development tax credit carryforward totaled
$24.5 million
at December 31,
2018
and
2017
. The research and development credit carryforwards expire between 2020 and 2038.
Unrecognized tax benefits were
$0.4 million
as of December 31, 2018 and 2017. The unrecognized tax benefits are due to federal research and development tax credit carryforward risks. As of December 31, 2018, there are no unrecognized tax benefits remaining that would affect our effective tax rate if recognized, as the offset would increase the valuation allowance. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.
We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31,
2018
, and 2017 we have
no
accrued interest or penalties related to uncertain tax positions.
Prior to the Tax Act, the Company had not provided for U.S. income taxes on undistributed earnings and other outside basis differences of its foreign subsidiaries as it was the Company's intention for these tax basis differences to remain indefinitely reinvested. As a result of the Tax Act and other factors in the Company's strategic plan, the Company reevaluated its assertion and no longer intends to indefinitely reinvest substantially all of the Company's foreign earnings outside of the U.S. As a result of this change, we have recorded deferred taxes of
$1.0 million
as of December 31, 2018 to reflect local country foreign withholding taxes associated with a future repatriation of such foreign earnings.
Reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Balance, beginning of year
|
|
$
|
358
|
|
|
$
|
493
|
|
|
$
|
320
|
|
|
Increases related to prior year tax positions
|
|
8
|
|
|
—
|
|
|
38
|
|
|
Decreases related to prior year tax positions
|
|
—
|
|
|
(135
|
)
|
|
—
|
|
|
Increases related to current year tax positions
|
|
8
|
|
|
—
|
|
|
135
|
|
|
Balance, end of year
|
|
$
|
374
|
|
|
$
|
358
|
|
|
$
|
493
|
|
|
|
|
|
|
|
Note 16.
|
Earnings (Loss) Per Share
|
Basic and diluted net income (loss) per share (EPS) (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Net income (loss) from continuing operations
|
|
$
|
(24,989
|
)
|
|
$
|
(17,414
|
)
|
|
$
|
(37,773
|
)
|
|
Weighted average common shares outstanding used to compute basic EPS
|
|
37,582
|
|
|
37,163
|
|
|
36,781
|
|
|
Dilutive effect of stock based awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted average common shares outstanding used to compute diluted EPS
|
|
37,582
|
|
|
37,163
|
|
|
36,781
|
|
|
Basic EPS from continuing operations
|
|
$
|
(0.66
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(1.02
|
)
|
|
Diluted EPS from continuing operations
|
|
$
|
(0.66
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(1.02
|
)
|
Approximately
6.5 million
,
5.3 million
, and
4.8 million
shares of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS for the years ended December 31,
2018
,
2017
, and
2016
, respectively, because of their antidilutive effect.
|
|
|
|
|
|
Note 17.
|
Discontinued Operations
|
On December 31, 2017, our contract with our low-margin music on demand customer LOEN expired. The activity for this contract represented our only revenue source relating to music on demand services, and we did not renew the sole contract for this service, resulting in the abandonment of the related business. As the exit of the music on demand business represented a strategic shift, and the amounts were financially significant to our consolidated results, at December 31, 2017 we determined this business should be reported as a discontinued operation, and treated it as such beginning in our fourth quarter of 2017.
The following table summarizes the results of operations, which were recorded in our Mobile Services segment, relating to the discontinued operation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Net revenue
|
|
$
|
—
|
|
|
$
|
46,034
|
|
|
$
|
38,989
|
|
|
Cost of revenue
|
|
—
|
|
|
44,612
|
|
|
37,420
|
|
|
Gross profit
|
|
—
|
|
|
1,422
|
|
|
1,569
|
|
|
Income taxes
|
|
—
|
|
|
313
|
|
|
346
|
|
|
Income from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
1,109
|
|
|
$
|
1,223
|
|
The following table summarizes the carrying amounts of major classes of assets and liabilities of the discontinued operation (in thousands). These assets and liabilities relate to final settlements of prior year activity between various parties. These balances were fully settled prior to the end of the second quarter of 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
Trade accounts receivable, net
|
|
$
|
—
|
|
|
$
|
17,456
|
|
|
Total current assets of discontinued operations
|
|
—
|
|
|
17,456
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
15,836
|
|
|
Accrued and other current liabilities
|
|
—
|
|
|
1,271
|
|
|
Total current liabilities of discontinued operations
|
|
$
|
—
|
|
|
$
|
17,107
|
|
The cash flows related to the discontinued operation have not been segregated, and are included in the Consolidated Statements of Cash Flows. For all periods presented, depreciation and amortization, capital expenditures and significant operating non-cash items from the discontinued operation were not material.
|
|
|
|
|
|
Note 18.
|
Commitments and Contingencies
|
Commitments.
We have commitments for future payments related to office facilities leases. We lease office facilities under various operating leases expiring through 2024. Future minimum payments as of December 31,
2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Office
Leases
|
|
2019
|
|
$
|
3,744
|
|
|
2020
|
|
3,049
|
|
|
2021
|
|
2,722
|
|
|
2022
|
|
2,424
|
|
|
2023
|
|
2,348
|
|
|
Thereafter
|
|
1,634
|
|
|
Total minimum payments (a)
|
|
$
|
15,921
|
|
(a) Total minimum payments exclude executory costs, inclusive of insurance, maintenance, and taxes, of
$6.2 million
; minimum payments also have not been reduced by sublease rentals of
$6.0 million
due in the future under noncancelable subleases.
Rent expense during the years ended December 31,
2018
,
2017
, and
2016
, was
$2.8 million
,
$3.0 million
, and
$4.2 million
, respectively.
As discussed in
Note 5.
Napster Joint Venture
, in late 2017, we entered into an arrangement whereby we may be required to guarantee up to
$2.75 million
of Napster's outstanding indebtedness on their revolving credit facility. As of the date of this filing, we have not been required to pay any portion of this commitment. For additional details, refer to
Note 22.
Subsequent Event
.
We could in the future become 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 the ordinary course of business, RealNetworks is subject to potential obligations for standard warranty and indemnification provisions that are contained within many of our customer license and service agreements. Our warranty provisions are consistent with those prevalent in our industry, and we do not have a history of incurring losses on warranties; therefore, we do not maintain accruals for warranty-related obligations. With regard to indemnification provisions, nearly all of our carrier contracts obligate us to indemnify our carrier customers for certain liabilities that may be incurred by them. We have received in the past, and may receive in the future, claims for indemnification from some of our carrier customers.
In relation to certain patents and other technology assets we sold to Intel in the second quarter of 2012, we have specific obligations to indemnify Intel for breaches of the representations and warranties that we made and covenants that we agreed to in the asset purchase agreement for certain potential future intellectual property infringement claims brought by third parties against Intel. The amount of any potential liabilities related to our indemnification obligations to Intel will not be determined until a claim has been made, but we are obligated to indemnify Intel up to the amount of the gross purchase price that we received in the sale.
|
|
|
|
|
|
Note 20.
|
Segment Information
|
We manage our business and report revenue and operating income (loss) in
three
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; and (3) Games, which includes all our games-related businesses, including sales of mobile games and games licenses, online games subscription services, in-game virtual goods, and advertising on games sites and social network sites.
We allocate to our reportable segments certain corporate expenses which are directly attributable to supporting the 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 the business, are reported as corporate items. These corporate items also include restructuring charges, lease exit and related charges, and stock compensation charges.
RealNetworks reports the three reportable segments based on factors such as how we manage our operations and how our 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
.
Segment results for the years ended December 31,
2018
,
2017
and
2016
were as follows (in thousands):
Consumer Media
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Revenue
|
|
$
|
18,168
|
|
|
$
|
22,569
|
|
|
$
|
25,051
|
|
|
Cost of revenue
|
|
3,858
|
|
|
4,460
|
|
|
7,074
|
|
|
Gross profit
|
|
14,310
|
|
|
18,109
|
|
|
17,977
|
|
|
Operating expenses
|
|
14,419
|
|
|
14,530
|
|
|
18,399
|
|
|
Operating income (loss)
|
|
$
|
(109
|
)
|
|
$
|
3,579
|
|
|
$
|
(422
|
)
|
Mobile Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Revenue
|
|
$
|
29,670
|
|
|
$
|
30,752
|
|
|
$
|
31,289
|
|
|
Cost of revenue
|
|
8,623
|
|
|
10,021
|
|
|
12,606
|
|
|
Gross profit
|
|
21,047
|
|
|
20,731
|
|
|
18,683
|
|
|
Operating expenses
|
|
28,066
|
|
|
27,970
|
|
|
34,439
|
|
|
Operating income (loss)
|
|
$
|
(7,019
|
)
|
|
$
|
(7,239
|
)
|
|
$
|
(15,756
|
)
|
Games
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Revenue
|
|
$
|
21,672
|
|
|
$
|
25,397
|
|
|
$
|
25,139
|
|
|
Cost of revenue
|
|
6,123
|
|
|
8,710
|
|
|
7,919
|
|
|
Gross profit
|
|
15,549
|
|
|
16,687
|
|
|
17,220
|
|
|
Operating expenses
|
|
20,324
|
|
|
20,401
|
|
|
19,644
|
|
|
Operating income (loss)
|
|
$
|
(4,775
|
)
|
|
$
|
(3,714
|
)
|
|
$
|
(2,424
|
)
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cost of revenue
|
|
$
|
(877
|
)
|
|
$
|
(27
|
)
|
|
$
|
(51
|
)
|
|
Operating expenses
|
|
11,245
|
|
|
13,284
|
|
|
20,192
|
|
|
Operating income (loss)
|
|
$
|
(10,368
|
)
|
|
$
|
(13,257
|
)
|
|
$
|
(20,141
|
)
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
United States
|
|
$
|
35,803
|
|
|
$
|
40,832
|
|
|
$
|
41,505
|
|
|
Europe
|
|
12,144
|
|
|
12,973
|
|
|
13,700
|
|
|
Rest of the World
|
|
21,563
|
|
|
24,913
|
|
|
26,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,510
|
|
|
$
|
78,718
|
|
|
$
|
81,479
|
|
Long-lived assets (consists of equipment, software, leasehold improvements, other intangible assets, and goodwill) by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
United States
|
|
$
|
11,823
|
|
|
$
|
12,236
|
|
|
Europe
|
|
6,761
|
|
|
3,437
|
|
|
Rest of the World
|
|
1,151
|
|
|
1,572
|
|
|
Total long-lived assets
|
|
$
|
19,735
|
|
|
$
|
17,245
|
|
|
|
|
|
|
|
Note 21.
|
Related Party Transactions
|
See
Note 5.
Napster Joint Venture
,
Note 6.
Fair Value Measurements
and
Note 22.
Subsequent Event
for details on transactions involving Napster.
|
|
|
|
|
|
Note 22.
|
Subsequent Event
|
On January 18, 2019, RealNetworks acquired an additional
42%
interest in Napster from its former joint venture partner resulting in our now having a majority voting interest, owning
84%
of Napster's outstanding equity. We also now have the right to nominate directors constituting a majority of the Napster board of directors. Napster will continue to operate as an independent business, however, with its own board of directors, strategy and leadership team. Although we have no legal obligation to fund Napster losses and it is our intention to have Napster continue to operate as an independent company, RealNetworks has a majority voting interest in Napster’s business and will consolidate Napster's financial results into our financial statements for fiscal periods following the closing of the acquisition.
The terms of the transaction include initial cash consideration of
$1.0 million
,
$0.2 million
of which was paid at closing and the remainder of which will be paid no later than April 25, 2019, which will be funded with our existing cash balances. During the five years following the acquisition, RealNetworks will pay the lesser of (a) an additional
$14.0 million
to seller, (paid ratably over such five-year period), or (b) if RealNetworks sells the interest to a third party for less than
$15.0 million
, the actual amount received by RealNetworks, minus the
$1.0 million
initial payment. Moreover, in the event that RealNetworks sells such equity interest for consideration in excess of
$15.0 million
, then RealNetworks will pay seller additional consideration, 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
. Due to the limited time since the closing of the transaction, the initial accounting for this acquisition is still in process. The remaining disclosures required under ASC 805 will be provided upon finalization of our preliminary purchase accounting in the first quarter of 2019.
We will fully consolidate Napster's financial results with ours from the date we obtained control and record and present the
16%
of Napster that we do not own as a noncontrolling interest. We will record 100% of the fair value of the assets acquired and liabilities assumed as of January 18, 2019, and, as part of this consolidation, the carrying value of our existing
42%
equity method investment will be stepped-up to fair value. The step-up to fair value of the existing historical
42%
ownership interest is expected to result in our recording of a material gain in the first quarter of 2019. Our consolidated balance sheet will reflect Napster's working capital deficit, which we expect will result in a consolidated working capital deficit. RealNetworks does not have any contractual or implied obligation to provide funding or other financial support to Napster or to guarantee or provide other such support related to Napster's third party borrowing or Napster's other obligations, except as noted in
Note 5.
Napster Joint Venture
.
Through the date of this filing, we have incurred approximately
$0.7 million
in acquisition-related costs, including regulatory, legal, and other advisory fees, which we have recorded within general and administrative expenses during the respective fiscal periods in which they were incurred.
|
|
|
|
|
|
Note 23.
|
Quarterly Information (Unaudited)
|
The following table summarizes the unaudited statement of operations for each quarter of
2018
and
2017
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Dec. 31 (2)
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
69,510
|
|
|
$
|
16,557
|
|
|
$
|
17,579
|
|
|
$
|
15,724
|
|
|
$
|
19,650
|
|
|
Gross profit
|
|
51,783
|
|
|
12,830
|
|
|
13,340
|
|
|
11,099
|
|
|
14,514
|
|
|
Operating (loss) income
|
|
(22,271
|
)
|
|
(5,556
|
)
|
|
(4,928
|
)
|
|
(6,833
|
)
|
|
(4,954
|
)
|
|
Net income (loss)
|
|
(24,989
|
)
|
|
(6,904
|
)
|
|
(5,977
|
)
|
|
(6,930
|
)
|
|
(5,178
|
)
|
|
Basic net income (loss) per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic
|
|
(0.66
|
)
|
|
(0.18
|
)
|
|
(0.16
|
)
|
|
(0.18
|
)
|
|
(0.14
|
)
|
|
Diluted net income (loss) per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - diluted
|
|
(0.66
|
)
|
|
(0.18
|
)
|
|
(0.16
|
)
|
|
(0.18
|
)
|
|
(0.14
|
)
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
78,718
|
|
|
$
|
18,865
|
|
|
$
|
18,557
|
|
|
$
|
21,605
|
|
|
$
|
19,691
|
|
|
Gross profit
|
|
55,554
|
|
|
13,900
|
|
|
13,214
|
|
|
15,318
|
|
|
13,122
|
|
|
Operating (loss) income
|
|
(20,631
|
)
|
|
(4,757
|
)
|
|
(4,459
|
)
|
|
(3,166
|
)
|
|
(8,249
|
)
|
|
Net income (loss) from continuing operations
|
|
(17,414
|
)
|
|
447
|
|
|
(4,532
|
)
|
|
(3,779
|
)
|
|
(9,550
|
)
|
|
Net income (loss) from discontinued operations
|
|
1,109
|
|
|
392
|
|
|
198
|
|
|
393
|
|
|
126
|
|
|
Net income (loss)
|
|
(16,305
|
)
|
|
839
|
|
|
(4,334
|
)
|
|
(3,386
|
)
|
|
(9,424
|
)
|
|
Basic net income (loss) per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
(0.47
|
)
|
|
0.01
|
|
|
(0.12
|
)
|
|
(0.10
|
)
|
|
(0.26
|
)
|
|
Discontinued operations
|
|
0.03
|
|
|
0.01
|
|
|
—
|
|
|
0.01
|
|
|
0.01
|
|
|
Net income (loss) per share - basic
|
|
(0.44
|
)
|
|
0.02
|
|
|
(0.12
|
)
|
|
(0.09
|
)
|
|
(0.25
|
)
|
|
Diluted net income (loss) per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
(0.47
|
)
|
|
0.01
|
|
|
(0.12
|
)
|
|
(0.10
|
)
|
|
(0.26
|
)
|
|
Discontinued operations
|
|
0.03
|
|
|
0.01
|
|
|
—
|
|
|
0.01
|
|
|
0.01
|
|
|
Net income (loss) per share - diluted
|
|
(0.44
|
)
|
|
0.02
|
|
|
(0.12
|
)
|
|
(0.09
|
)
|
|
(0.25
|
)
|
|
|
|
|
(1)
|
The sum of the quarterly net income per share amounts will not necessarily equal net income per share for the year due to the use of weighted average quarterly shares and the effects of rounding.
|
|
|
|
|
(2)
|
Included in fourth quarter 2017 net income was a
$4.5 million
pretax gain related to the 2015 sale of Slingo, described in
Note 4.
Acquisitions and Disposals
.
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
RealNetworks, Inc.:
Opinion on the Consolidated
Financial Statements
We have audited the accompanying consolidated balance sheets of RealNetworks, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
March 8, 2019
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of Accounting Standards Codification Topic 606 -
Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company's auditor since 1994.
Seattle, Washington
March 8, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors
RealNetworks, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited RealNetworks, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated
March 8, 2019
expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Seattle, Washington
March 8, 2019