RNWK RealNetworks Inc

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Quarter Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

 (in thousands, except per share data)

 Net revenue

$

44,993

$

17,579

$

128,713

$

52,953

 Cost of revenue

26,278

4,239

78,430

14,000

           Gross profit

18,715

13,340

50,283

38,953

 Operating expenses:

       Research and development

8,687

8,052

26,396

23,398

       Sales and marketing

8,470

4,998

24,972

15,878

       General and administrative

7,132

4,586

23,888

15,526

       Restructuring and other charges

691

632

1,587

1,320

       Lease exit and related benefit

—

—

—

(454)

           Total operating expenses

24,980

18,268

76,843

55,668

 Operating loss

(6,265)

(4,928)

(26,560)

(16,715)

 Other income (expenses):

       Interest expense

(220)

—

(429)

—

       Interest income

—

72

117

270

       Gain (loss) on equity investment, net

—

—

12,338

—

       Equity in net loss of Napster

—

(737)

—

(737)

       Other income (expenses), net

541

(112)

851

(195)

           Total other income (expenses), net

321

(777)

12,877

(662)

 Income (loss) before income taxes

(5,944)

(5,705)

(13,683)

(17,377)

 Income tax expense

310

272

812

708

Net income (loss) including noncontrolling interests

(6,254)

(5,977)

(14,495)

(18,085)

Net income (loss) attributable to noncontrolling interests

(286)

—

(858)

—

Net income (loss) attributable to RealNetworks

$

(5,968)

$

(5,977)

$

(13,637)

$

(18,085)

Net income (loss) per share attributable to RealNetworks- Basic:

$

(0.16)

$

(0.16)

$

(0.36)

$

(0.48)

Net income (loss) per share attributable to RealNetworks- Diluted:

$

(0.16)

$

(0.16)

$

(0.36)

$

(0.48)

 Shares used to compute basic net income (loss) per share

38,062

37,618

37,944

37,549

 Shares used to compute diluted net income (loss) per share

38,062

37,618

37,944

37,549

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

September 30,
2019

December 31,
2018

 (in thousands)

ASSETS

 Current assets:

 Cash and cash equivalents

$

18,101

$

35,561

 Short-term investments

—

24

 Trade accounts receivable, net

27,947

11,751

 Deferred costs, current portion

950

331

 Prepaid expenses and other current assets

18,931

5,911

 Total current assets

65,929

53,578

 Equipment and software

31,853

37,458

 Leasehold improvements

3,255

3,292

 Total equipment, software, and leasehold improvements

35,108

40,750

 Less accumulated depreciation and amortization

32,171

37,996

 Net equipment, software, and leasehold improvements

2,937

2,754

 Operating lease assets

12,499

—

 Restricted cash equivalents

5,374

1,630

 Other assets

2,842

3,997

 Deferred costs, non-current portion

957

528

 Deferred tax assets, net

831

851

 Other intangible assets, net

20,309

26

 Goodwill

65,154

16,955

 Total assets

$

176,832

$

80,319

 LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:

 Accounts payable

$

4,692

$

3,910

 Accrued royalties, fulfillment and other current liabilities

92,529

11,312

 Commitment to Napster

—

2,750

 Deferred revenue, current portion

6,134

2,125

 Notes payable

3,599

—

 Total current liabilities

106,954

20,097

 Deferred revenue, non-current portion

139

268

 Deferred rent

—

986

 Deferred tax liabilities, net

1,225

1,168

 Long-term lease liabilities

9,486

—

 Long-term debt

3,900

—

 Other long-term liabilities

11,195

960

 Total liabilities

132,899

23,479

 Total shareholders' equity

44,036

56,840

Noncontrolling interests

(103)

—

 Total equity

43,933

56,840

 Total liabilities and equity

$

176,832

$

80,319

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended
September 30,

2019

2018

 (in thousands)

 Cash flows from operating activities:

 Net income (loss) including noncontrolling interests

$

(14,495)

$

(18,085)

 Adjustments to reconcile net income (loss) including noncontrolling interests to net cash used in operating activities:

Depreciation and amortization

4,397

1,738

Stock-based compensation

2,420

2,113

Equity in net loss of Napster

—

737

Deferred income taxes, net

—

5

(Gain) loss on equity investment, net

(12,338)

—

Foreign currency (gain) loss

(804)

—

Fair value adjustments to contingent consideration liability

700

—

Mark to market adjustment of warrants

—

78

Net change in certain operating assets and liabilities

(177)

(2,214)

  Net cash used in operating activities

(20,297)

(15,628)

 Cash flows from investing activities:

Purchases of equipment, software, and leasehold improvements

(1,068)

(698)

Proceeds from sales and maturities of short-term investments

24

7,607

Acquisition, net of cash acquired

12,260

(4,192)

 Net cash provided by investing activities

11,216

2,717

 Cash flows from financing activities:

Proceeds from issuance of common stock (stock options and stock purchase plan)

144

114

Tax payments from shares withheld upon vesting of restricted stock

(289)

(243)

Proceeds from notes payable and revolving credit facility

31,337

—

Repayments of notes payable and revolving credit facility

(35,768)

—

Payment of financing fees

(569)

—

Other financing activities

900

—

 Net cash used in financing activities

(4,245)

(129)

 Effect of exchange rate changes on cash, cash equivalents and restricted cash

(390)

(962)

 Net increase (decrease) in cash, cash equivalents and restricted cash

(13,716)

(14,002)

 Cash, cash equivalents and restricted cash, beginning of period

37,191

53,596

 Cash, cash equivalents and restricted cash, end of period

$

23,475

$

39,594

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

2019

2018

 Q3

 Q2

Q1

 Q4

 Q3

 Q2

 Q1

 (in thousands)

Net Revenue by Segment

Consumer Media (A)

$

3,632

$

2,620

$

2,486

$

4,068

$

4,733

$

3,884

$

5,483

Mobile Services (B)

6,895

6,997

6,939

6,899

7,348

6,719

8,704

Games (C)

7,164

6,048

5,710

5,590

5,498

5,121

5,463

Napster (D)

27,302

28,583

24,337

—

—

—

—

     Total net revenue

$

44,993

$

44,248

$

39,472

$

16,557

$

17,579

$

15,724

$

19,650

Net Revenue by Product

Consumer Media

- Software License (E)

$

1,987

$

944

$

735

$

2,049

$

2,746

$

1,808

$

3,337

- Subscription Services (F)

1,028

1,040

1,088

1,153

1,232

1,225

1,285

- Product Sales (G)

207

206

219

257

281

299

340

- Advertising & Other (H)

410

430

444

609

474

552

521

Mobile Services

- Software License (I)

888

957

599

514

520

469

1,335

- Subscription Services (J)

6,007

6,040

6,340

6,385

6,828

6,250

7,369

Games

- Subscription Services (K)

3,056

3,073

2,985

3,014

2,745

2,689

2,693

- Product Sales (L)

3,078

2,177

1,988

2,013

2,279

1,953

2,402

- Advertising & Other (M)

1,030

798

737

563

474

479

368

Napster

- Subscription Services (N)

27,302

28,583

24,337

—

—

—

—

     Total net revenue

$

44,993

$

44,248

$

39,472

$

16,557

$

17,579

$

15,724

$

19,650

Net Revenue by Geography

United States

$

22,015

$

21,322

$

18,970

$

7,697

$

9,026

$

7,646

$

11,434

Rest of world

22,978

22,926

20,502

8,860

8,553

8,078

8,216

     Total net revenue

$

44,993

$

44,248

$

39,472

$

16,557

$

17,579

$

15,724

$

19,650

Net Revenue by Segment

(A) The Consumer Media segment primarily includes revenue from the licensing of our portfolio of video codec technologies. Also included is RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, sales of RealPlayer Plus software to consumers, and consumer subscriptions such as RealPlayer Plus and SuperPass.

(B) The Mobile Services segment primarily includes revenue from SaaS services and sales of professional services provided to mobile carriers.

(C) The Games segment primarily includes revenue from sales of mobile and PC games, online games subscription services, player purchases of in-game virtual goods, and advertising on games sites and social network sites.

(D) The Napster segment primarily includes revenue from subscription music offerings from on-demand streaming services and conditional downloads. Napster revenues are included in our consolidated results from the January 18, 2019 acquisition date forward.

Net Revenue by Product

(E) Software licensing revenue within Consumer Media includes revenues from licenses of our video codec technologies.

(F) Subscriptions revenue within Consumer Media includes revenue from subscriptions such as our RealPlayer Plus and SuperPass offerings.

(G) Product sales within Consumer Media includes sales of RealPlayer Plus software to consumers.

(H) Advertising & other revenue within Consumer Media includes distribution of third-party software products and advertising on RealPlayer websites.

(I) Software license revenue within Mobile Services includes revenue from our integrated RealTimes platform and our facial recognition platform, SAFR.

(J) Subscription services revenue within Mobile Services includes revenue from ringback tones and our messaging platform services, as well as from related professional services provided to mobile carriers.

(K) Subscription services revenue within Games includes revenue from online games subscriptions.

(L) Product sales revenue within Games includes revenue from retail and wholesale games-related revenue, sales of mobile games, and player purchases of in-game virtual goods.

(M) Advertising & other revenue within Games includes advertising on games sites and social network sites.

(N) Subscription services revenue within Napster includes music tracks by way of on-demand streaming and conditional downloads offered directly to end consumers and distribution partners.

RealNetworks, Inc. and Subsidiaries

Segment Results of Operations and Reconciliation to non-GAAP Contribution Margin

(Unaudited)

2019

2018

2019

2018

Q3

Q2

Q3

YTD

YTD

 (in thousands)

Consumer Media

Net revenue

$

3,632

$

2,620

$

4,733

$

8,738

$

14,100

Cost of revenue

705

803

955

2,341

2,976

Gross profit

2,927

1,817

3,778

6,397

11,124

Gross margin

81

%

69

%

80

%

73

%

79

%

Operating expenses

2,692

2,877

3,448

8,688

10,805

Operating income (loss), a GAAP measure

$

235

$

(1,060)

$

330

$

(2,291)

$

319

Depreciation and amortization

34

56

49

144

146

Contribution margin, a non-GAAP measure

$

269

$

(1,004)

$

379

$

(2,147)

$

465

Mobile Services

Net revenue

$

6,895

$

6,997

$

7,348

$

20,831

$

22,771

Cost of revenue

1,721

1,865

2,052

5,634

6,502

Gross profit

5,174

5,132

5,296

15,197

16,269

Gross margin

75

%

73

%

72

%

73

%

71

%

Operating expenses

7,143

7,438

6,825

22,142

21,160

Operating income (loss), a GAAP measure

$

(1,969)

$

(2,306)

$

(1,529)

$

(6,945)

$

(4,891)

Acquisitions related intangible asset amortization

—

—

70

—

253

Depreciation and amortization

81

106

165

418

500

Contribution margin, a non-GAAP measure

$

(1,888)

$

(2,200)

$

(1,294)

$

(6,527)

$

(4,138)

Games

Net revenue

$

7,164

$

6,048

$

5,498

$

18,922

$

16,082

Cost of revenue

1,934

1,655

1,228

5,259

4,501

Gross profit

5,230

4,393

4,270

13,663

11,581

Gross margin

73

%

73

%

78

%

72

%

72

%

Operating expenses

5,151

5,288

5,447

15,476

15,459

Operating income (loss), a GAAP measure

$

79

$

(895)

$

(1,177)

$

(1,813)

$

(3,878)

Acquisitions related intangible asset amortization

4

—

23

27

43

Depreciation and amortization

89

84

91

256

402

Contribution margin, a non-GAAP measure

$

172

$

(811)

$

(1,063)

$

(1,530)

$

(3,433)

Napster

Net revenue

$

27,302

$

28,583

$

—

$

80,222

$

—

Cost of revenue

21,986

23,026

—

65,408

—

Gross profit

5,316

5,557

—

14,814

—

Gross margin

19

%

19

%

—

%

18

%

—

%

Operating expenses

6,472

6,638

—

18,642

—

Operating income (loss), a GAAP measure

$

(1,156)

$

(1,081)

$

—

$

(3,828)

$

—

Acquisitions related intangible asset amortization

1,126

1,129

—

3,198

—

Depreciation and amortization

72

69

—

256

—

Contribution margin, a non-GAAP measure

$

42

$

117

$

—

$

(374)

$

—

Cost of revenue

$

(68)

$

(67)

$

4

$

(212)

$

21

Gross profit

68

67

(4)

212

(21)

Gross margin

N/A

N/A

N/A

N/A

N/A

Operating expenses

3,522

4,116

2,548

11,895

8,244

Operating income (loss), a GAAP measure

$

(3,454)

$

(4,049)

$

(2,552)

$

(11,683)

$

(8,265)

Other income (expense), net

541

183

(112)

851

(195)

Foreign currency (gain) loss

(489)

(164)

78

(804)

98

Depreciation and amortization

32

33

109

98

394

Fair value adjustments to contingent consideration liability

400

300

—

700

—

Restructuring and other charges

691

729

632

1,587

1,320

Stock-based compensation

503

533

499

2,420

2,113

Lease exit and related benefit

—

—

—

—

(454)

Contribution margin, a non-GAAP measure ⁽¹⁾

$

(1,776)

$

(2,435)

$

(1,346)

$

(6,831)

$

(4,989)

⁽¹⁾2018 Corporate contribution margin was revised to exclude the impact of realized and unrealized foreign currency (gain) loss incurred in each respective period. Foreign currency (gain) loss is reported in Other income (expense), net, in our consolidated statement of operations.

RealNetworks, Inc. and Subsidiaries

Reconciliation of Net income (loss) including noncontrolling interests to adjusted EBITDA, a non-GAAP measure

(Unaudited)

2019

2018

2019

2018

Q3

Q2

Q3

 YTD

 YTD

(in thousands)

Reconciliation of GAAP Net income (loss) including noncontrolling interests to adjusted EBITDA:

Net income (loss) including noncontrolling interests

$

(6,254)

$

(9,455)

$

(5,977)

$

(14,495)

$

(18,085)

Income tax expense (benefit)

310

244

272

812

708

Interest expense

220

43

—

429

—

Interest income

—

(40)

(72)

(117)

(270)

(Gain) loss on equity investment, net

—

—

—

(12,338)

—

Foreign currency (gain) loss

(489)

(164)

78

(804)

98

Equity in net loss of Napster

—

—

737

—

737

Acquisitions related intangible asset amortization

1,130

1,129

93

3,225

296

Depreciation and amortization

308

348

414

1,172

1,442

Fair value adjustments to contingent consideration liability

400

300

—

700

—

Restructuring and other charges

691

729

632

1,587

1,320

Stock-based compensation

503

533

499

2,420

2,113

Lease exit and related benefit

—

—

—

—

(454)

   Adjusted EBITDA, a non-GAAP measure ⁽¹⁾

$

(3,181)

$

(6,333)

$

(3,324)

$

(17,409)

$

(12,095)

⁽¹⁾2018 adjusted EBITDA was revised to exclude the impact of realized and unrealized foreign currency (gain) loss incurred in each respective period. Foreign currency (gain) loss is reported in Other income (expense), net, in our consolidated statement of operations.