FORM 10-Q |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
RealNetworks, Inc. | ||||
(Exact name of registrant as specified in its charter) | ||||
Washington | 91-1628146 | |||
(State of incorporation) | (I.R.S. Employer Identification Number) | |||
1501 First Avenue South, Suite 600 Seattle, Washington | 98134 | |||
(Address of principal executive offices) | (Zip Code) | |||
(206) 674-2700 | ||||
(Registrant’s telephone number, including area code) |
Large accelerated filer | ¨ | Accelerated filer | ý | ||
Non-accelerated filer | ¨ | Smaller reporting company | ý | ||
Emerging growth company | ¨ | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, Par Value $0.001 per share | RNWK | The NASDAQ Stock Market | ||
Preferred Share Purchase Rights | RNWK | The NASDAQ Stock Market |
Page | |
Item 1. | Financial Statements |
June 30, 2019 | December 31, 2018 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 26,339 | $ | 35,561 | |||
Short-term investments | — | 24 | |||||
Trade accounts receivable, net of allowances of $644 and $560 | 31,957 | 11,751 | |||||
Deferred costs, current portion | 465 | 331 | |||||
Prepaid expenses and other current assets | 20,382 | 5,911 | |||||
Total current assets | 79,143 | 53,578 | |||||
Equipment, software, and leasehold improvements, at cost: | |||||||
Equipment and software | 32,079 | 37,458 | |||||
Leasehold improvements | 3,319 | 3,292 | |||||
Total equipment, software, and leasehold improvements, at cost | 35,398 | 40,750 | |||||
Less accumulated depreciation and amortization | 32,268 | 37,996 | |||||
Net equipment, software, and leasehold improvements | 3,130 | 2,754 | |||||
Operating lease assets | 13,672 | — | |||||
Restricted cash equivalents | 2,124 | 1,630 | |||||
Other assets | 2,739 | 3,997 | |||||
Deferred costs, non-current portion | 797 | 528 | |||||
Deferred tax assets, net | 854 | 851 | |||||
Other intangible assets, net | 21,616 | 26 | |||||
Goodwill | 65,395 | 16,955 | |||||
Total assets | $ | 189,470 | $ | 80,319 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 5,224 | $ | 3,910 | |||
Accrued royalties, fulfillment and other current liabilities | 97,951 | 11,312 | |||||
Commitment to Napster | — | 2,750 | |||||
Deferred revenue, current portion | 6,054 | 2,125 | |||||
Notes payable | 7,878 | — | |||||
Total current liabilities | 117,107 | 20,097 | |||||
Deferred revenue, non-current portion | 179 | 268 | |||||
Deferred rent | — | 986 | |||||
Deferred tax liabilities, net | 1,262 | 1,168 | |||||
Long-term lease liabilities | 10,384 | — | |||||
Other long-term liabilities | 11,070 | 960 | |||||
Total liabilities | 140,002 | 23,479 | |||||
Commitments and contingencies | |||||||
Shareholders’ equity: | |||||||
Preferred stock, $0.001 par value, no shares issued and outstanding: | |||||||
Series A: authorized 200 shares | — | — | |||||
Undesignated series: authorized 59,800 shares | — | — | |||||
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 38,049 shares in 2019 and 37,728 shares in 2018 | 37 | 37 | |||||
Additional paid-in capital | 642,720 | 641,930 | |||||
Accumulated other comprehensive loss | (61,697 | ) | (61,118 | ) | |||
Retained deficit | (531,678 | ) | (524,009 | ) | |||
Total shareholders’ equity | 49,382 | 56,840 | |||||
Noncontrolling interests | 86 | — | |||||
Total equity | 49,468 | 56,840 | |||||
Total liabilities and equity | $ | 189,470 | $ | 80,319 |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net revenue | $ | 44,248 | $ | 15,724 | $ | 83,720 | $ | 35,374 | |||||||
Cost of revenue | 27,282 | 4,625 | 52,152 | 9,761 | |||||||||||
Gross profit | 16,966 | 11,099 | 31,568 | 25,613 | |||||||||||
Operating expenses: | |||||||||||||||
Research and development | 8,876 | 7,652 | 17,709 | 15,346 | |||||||||||
Sales and marketing | 8,360 | 4,883 | 16,502 | 10,880 | |||||||||||
General and administrative | 8,392 | 5,339 | 16,756 | 10,940 | |||||||||||
Restructuring and other charges | 729 | 187 | 896 | 688 | |||||||||||
Lease exit and related benefit | — | (129 | ) | — | (454 | ) | |||||||||
Total operating expenses | 26,357 | 17,932 | 51,863 | 37,400 | |||||||||||
Operating loss | (9,391 | ) | (6,833 | ) | (20,295 | ) | (11,787 | ) | |||||||
Other income (expenses): | |||||||||||||||
Interest expense | (43 | ) | — | (209 | ) | — | |||||||||
Interest income | 40 | 111 | 117 | 198 | |||||||||||
Gain (loss) on equity investment, net | — | — | 12,338 | — | |||||||||||
Other income (expenses), net | 183 | (42 | ) | 310 | (83 | ) | |||||||||
Total other income (expenses), net | 180 | 69 | 12,556 | 115 | |||||||||||
Income (loss) before income taxes | (9,211 | ) | (6,764 | ) | (7,739 | ) | (11,672 | ) | |||||||
Income tax expense | 244 | 166 | 502 | 436 | |||||||||||
Net income (loss) including noncontrolling interests | (9,455 | ) | (6,930 | ) | (8,241 | ) | (12,108 | ) | |||||||
Net income (loss) attributable to noncontrolling interests | (253 | ) | — | (572 | ) | — | |||||||||
Net income (loss) attributable to RealNetworks | $ | (9,202 | ) | $ | (6,930 | ) | $ | (7,669 | ) | $ | (12,108 | ) | |||
Net income (loss) per share attributable to RealNetworks- Basic | $ | (0.24 | ) | $ | (0.18 | ) | $ | (0.20 | ) | $ | (0.32 | ) | |||
Net income (loss) per share attributable to RealNetworks- Diluted | $ | (0.24 | ) | $ | (0.18 | ) | $ | (0.20 | ) | $ | (0.32 | ) | |||
Shares used to compute basic net income (loss) per share | 37,948 | 37,577 | 37,885 | 37,514 | |||||||||||
Shares used to compute diluted net income (loss) per share | 37,948 | 37,577 | 37,885 | 37,514 | |||||||||||
Comprehensive income (loss): | |||||||||||||||
Unrealized investment holding gains (losses), net of reclassification adjustments | $ | — | $ | 2 | $ | — | $ | 3 | |||||||
Foreign currency translation adjustments, net of reclassification adjustments | (492 | ) | (1,604 | ) | (579 | ) | (1,208 | ) | |||||||
Total other comprehensive income (loss) | (492 | ) | (1,602 | ) | (579 | ) | (1,205 | ) | |||||||
Net income (loss) including noncontrolling interests | (9,455 | ) | (6,930 | ) | (8,241 | ) | (12,108 | ) | |||||||
Comprehensive income (loss) including noncontrolling interests | (9,947 | ) | (8,532 | ) | (8,820 | ) | (13,313 | ) | |||||||
Comprehensive income (loss) attributable to noncontrolling interests | (253 | ) | — | (572 | ) | — | |||||||||
Comprehensive income (loss) attributable to RealNetworks | $ | (9,694 | ) | $ | (8,532 | ) | $ | (8,248 | ) | $ | (13,313 | ) |
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) including noncontrolling interests | $ | (8,241 | ) | $ | (12,108 | ) | |
Adjustments to reconcile net income (loss) including noncontrolling interests to net cash used in operating activities: | |||||||
Depreciation and amortization | 2,959 | 1,231 | |||||
Stock-based compensation | 1,917 | 1,614 | |||||
Deferred income taxes, net | — | (12 | ) | ||||
(Gain) loss on equity investment, net | (12,338 | ) | — | ||||
Foreign currency (gain) loss | (315 | ) | — | ||||
Fair value adjustments to contingent consideration liability | 300 | — | |||||
Mark to market adjustment of warrants | — | 50 | |||||
Net change in certain operating assets and liabilities: | |||||||
Trade accounts receivable | 671 | 16,960 | |||||
Prepaid expenses, operating lease and other assets | (328 | ) | (1,633 | ) | |||
Accounts payable | 398 | (16,601 | ) | ||||
Accrued, lease and other liabilities | (1,122 | ) | (2,231 | ) | |||
Net cash used in operating activities | (16,099 | ) | (12,730 | ) | |||
Cash flows from investing activities: | |||||||
Purchases of equipment, software, and leasehold improvements | (873 | ) | (580 | ) | |||
Proceeds from sales and maturities of short-term investments | 24 | 5,726 | |||||
Acquisition, net of cash acquired | 12,260 | (4,192 | ) | ||||
Net cash provided by investing activities | 11,411 | 954 | |||||
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 | (287 | ) | (243 | ) | |||
Proceeds from notes payable | 19,760 | — | |||||
Repayments of notes payable | (24,018 | ) | — | ||||
Other financing activities | 450 | — | |||||
Net cash provided by (used in) financing activities | (3,951 | ) | (129 | ) | |||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (89 | ) | (731 | ) | |||
Net increase (decrease) in cash, cash equivalents and restricted cash | (8,728 | ) | (12,636 | ) | |||
Cash, cash equivalents and restricted cash, beginning of period | 37,191 | 53,596 | |||||
Cash, cash equivalents, and restricted cash end of period | $ | 28,463 | $ | 40,960 |
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Deficit) | Total Shareholders’ Equity | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||
Balances, January 1, 2018 | 37,341 | $ | 37 | $ | 638,727 | $ | (59,547 | ) | $ | (500,044 | ) | $ | 79,173 | $ | — | $ | 79,173 | ||||||||||||||
Cumulative effect of revenue recognition accounting change | 1,024 | 1,024 | — | 1,024 | |||||||||||||||||||||||||||
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock | 223 | — | (232 | ) | — | — | (232 | ) | — | (232 | ) | ||||||||||||||||||||
Stock-based compensation | — | — | 1,157 | — | — | 1,157 | — | 1,157 | |||||||||||||||||||||||
Investments unrealized gains (losses), net of tax effects of $0 | — | — | — | 1 | — | 1 | — | 1 | |||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | 396 | — | 396 | — | 396 | |||||||||||||||||||||||
Net income (loss) | — | — | — | — | (5,178 | ) | (5,178 | ) | — | (5,178 | ) | ||||||||||||||||||||
Balances, March 31, 2018 | 37,564 | $ | 37 | $ | 639,652 | $ | (59,150 | ) | $ | (504,197 | ) | $ | 76,342 | $ | — | $ | 76,342 | ||||||||||||||
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock | 48 | — | 103 | — | — | 103 | — | 103 | |||||||||||||||||||||||
Stock-based compensation | — | — | 457 | — | — | 457 | — | 457 | |||||||||||||||||||||||
Investments unrealized gains (losses), net of tax effects of $1 | — | — | — | 2 | — | 2 | — | 2 | |||||||||||||||||||||||
Foreign currency translation adjustments | (1,604 | ) | (1,604 | ) | (1,604 | ) | |||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (6,930 | ) | (6,930 | ) | — | (6,930 | ) | ||||||||||||||||||||
Balances, June 30, 2018 | 37,612 | $ | 37 | $ | 640,212 | $ | (60,752 | ) | $ | (511,127 | ) | $ | 68,370 | $ | — | $ | 68,370 |
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Deficit) | Total Shareholders’ Equity | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||
Balances, January 1, 2019 | 37,728 | $ | 37 | $ | 641,930 | $ | (61,118 | ) | $ | (524,009 | ) | $ | 56,840 | $ | — | $ | 56,840 | ||||||||||||||
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock | 190 | — | (271 | ) | — | — | (271 | ) | — | (271 | ) | ||||||||||||||||||||
Napster acquisition | — | — | (1,346 | ) | — | — | (1,346 | ) | 570 | (776 | ) | ||||||||||||||||||||
Stock-based compensation | — | — | 1,384 | — | — | 1,384 | — | 1,384 | |||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | (87 | ) | — | (87 | ) | — | (87 | ) | ||||||||||||||||||||
Net income (loss) | — | — | — | — | 1,533 | 1,533 | (319 | ) | 1,214 | ||||||||||||||||||||||
Other equity transactions | — | — | 362 | — | — | 362 | 88 | 450 | |||||||||||||||||||||||
Balances, March 31, 2019 | 37,918 | $ | 37 | $ | 642,059 | $ | (61,205 | ) | $ | (522,476 | ) | $ | 58,415 | $ | 339 | $ | 58,754 | ||||||||||||||
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares | 131 | — | 128 | — | — | 128 | — | 128 | |||||||||||||||||||||||
Stock-based compensation | — | — | 533 | — | — | 533 | — | 533 | |||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | (492 | ) | — | (492 | ) | — | (492 | ) | ||||||||||||||||||||
Net income (loss) | — | — | — | — | (9,202 | ) | (9,202 | ) | (253 | ) | (9,455 | ) | |||||||||||||||||||
Balances, June 30, 2019 | 38,049 | $ | 37 | $ | 642,720 | $ | (61,697 | ) | $ | (531,678 | ) | $ | 49,382 | $ | 86 | $ | 49,468 |
Note 1 | Description of Business and Summary of Significant Accounting Policies |
Note 2 | Recent Accounting Pronouncements |
Note 3 | Revenue Recognition |
Quarter Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||||||||||||||||||||||||||
Consumer Media | Mobile Services | Games | Napster | Consumer Media | Mobile Services | Games | Napster | |||||||||||||||||||||||||
Business Line | ||||||||||||||||||||||||||||||||
Software License | $ | 944 | $ | 957 | $ | — | $ | — | $ | 1,679 | $ | 1,556 | $ | — | $ | — | ||||||||||||||||
Subscription Services | 1,040 | 6,040 | 3,073 | 28,583 | 2,128 | 12,380 | 6,058 | 52,920 | ||||||||||||||||||||||||
Product Sales | 206 | — | 2,177 | — | 425 | — | 4,165 | — | ||||||||||||||||||||||||
Advertising and Other | 430 | — | 798 | — | 874 | 1,535 | — | |||||||||||||||||||||||||
Total | $ | 2,620 | $ | 6,997 | $ | 6,048 | $ | 28,583 | $ | 5,106 | $ | 13,936 | $ | 11,758 | $ | 52,920 | ||||||||||||||||
Quarter Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||||||||||||||||||||||||||
Consumer Media | Mobile Services | Games | Napster | Consumer Media | Mobile Services | Games | Napster | |||||||||||||||||||||||||
Business Line | ||||||||||||||||||||||||||||||||
Software License | $ | 1,808 | $ | 469 | $ | — | $ | — | $ | 5,145 | $ | 1,804 | $ | — | $ | — | ||||||||||||||||
Subscription Services | 1,225 | 6,250 | 2,689 | — | 2,510 | 13,619 | 5,382 | — | ||||||||||||||||||||||||
Product Sales | 299 | — | 1,953 | — | 639 | — | 4,355 | — | ||||||||||||||||||||||||
Advertising and Other | 552 | — | 479 | — | 1,073 | — | 847 | — | ||||||||||||||||||||||||
Total | $ | 3,884 | $ | 6,719 | $ | 5,121 | $ | — | $ | 9,367 | $ | 15,423 | $ | 10,584 | $ | — |
Quarter Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||||||||||||||||||||||||||
Consumer Media | Mobile Services | Games | Napster | Consumer Media | Mobile Services | Games | Napster | |||||||||||||||||||||||||
Sales Channel | ||||||||||||||||||||||||||||||||
Business to Business | $ | 1,375 | $ | 6,881 | $ | 1,115 | $ | 13,804 | $ | 2,553 | $ | 13,698 | $ | 2,151 | $ | 25,899 | ||||||||||||||||
Direct to Consumer | 1,245 | 116 | 4,933 | 14,779 | 2,553 | 238 | 9,607 | 27,021 | ||||||||||||||||||||||||
Total | $ | 2,620 | $ | 6,997 | $ | 6,048 | $ | 28,583 | $ | 5,106 | $ | 13,936 | $ | 11,758 | $ | 52,920 | ||||||||||||||||
Quarter Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||||||||||||||||||||||||||
Consumer Media | Mobile Services | Games | Napster | Consumer Media | Mobile Services | Games | Napster | |||||||||||||||||||||||||
Sales Channel | ||||||||||||||||||||||||||||||||
Business to Business | $ | 2,360 | $ | 6,573 | $ | 836 | $ | — | $ | 6,218 | $ | 15,103 | $ | 1,587 | $ | — | ||||||||||||||||
Direct to Consumer | 1,524 | 146 | 4,285 | — | 3,149 | 320 | 8,997 | — | ||||||||||||||||||||||||
Total | $ | 3,884 | $ | 6,719 | $ | 5,121 | $ | — | $ | 9,367 | $ | 15,423 | $ | 10,584 | $ | — |
Note 4 | Stock-Based Compensation |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Total stock-based compensation expense | $ | 533 | $ | 457 | $ | 1,917 | $ | 1,614 |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | |||
Risk-free interest rate | 2.26 | % | 2.72 | % | 2.32 | % | 2.59 | % | |||
Expected life (years) | 3.8 | 3.8 | 4.1 | 4.0 | |||||||
Volatility | 41 | % | 35 | % | 41 | % | 35 | % |
Note 5 | Acquisitions |
Consideration, at estimated fair value: | ||||
Cash | $ | 1,000 | ||
Contingent consideration | 11,600 | |||
RealNetworks' preexisting 42% equity interest in Napster | 2,700 | |||
Effective settlement of Napster debt and warrants, held by RealNetworks | 6,408 | |||
Total consideration | $ | 21,708 | ||
Assets acquired and liabilities assumed, at estimated fair value: | ||||
Cash and cash equivalents | $ | 10,138 | ||
Accounts receivable | 20,838 | |||
Prepaid expenses and other current assets | 12,879 | |||
Restricted cash | 2,322 | |||
Equipment, software and leasehold improvements | 474 | |||
Operating lease assets | 2,314 | |||
Other long-term assets | 77 | |||
Deferred tax assets, net | 5,942 | |||
Intangible assets | 23,700 | |||
Goodwill | 48,474 | |||
Total assets acquired | 127,158 | |||
Accounts payable | 937 | |||
Accrued royalties and fulfillment | 71,980 | |||
Accrued and other current liabilities | 7,475 | |||
Deferred revenue, current portion | 3,600 | |||
Notes payable | 12,115 | |||
Deferred tax liabilities, net | 6,061 | |||
Long-term lease liabilities | 1,197 | |||
Other long-term liabilities | 1,515 | |||
Total liabilities assumed | 104,880 | |||
Total net assets acquired | 22,278 | |||
Noncontrolling interests | 570 | |||
Net assets acquired | $ | 21,708 |
Intangible category | Estimated fair value | Method used to calculate fair value | Estimated remaining useful life | |||||
Trade name and trademarks | $ | 6,800 | Relief-from-royalty | 15 years | ||||
Developed technology | 5,900 | Excess earnings | 4 years | |||||
Customer relationships | 5,900 | Cost-to-replace | 3 years | |||||
Partner relationships | 5,100 | Distributor method | 8 years | |||||
Total | $ | 23,700 |
Quarter Ended - Pro Forma (Unaudited) June 30, | Six Months Ended - Pro Forma (Unaudited) June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net revenue | $ | 44,355 | $ | 52,296 | $ | 90,193 | $ | 112,145 | |||||||
Net income (loss) attributable to RealNetworks (1) | (8,455 | ) | (4,694 | ) | (17,973 | ) | 2,295 |
Note 6 | Fair Value Measurements |
Fair Value Measurements as of | Amortized Cost as of | ||||||||||||||||||
June 30, 2019 | June 30, 2019 | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets: | |||||||||||||||||||
Cash and cash equivalents: | |||||||||||||||||||
Cash | $ | 25,660 | $ | — | $ | — | $ | 25,660 | $ | 25,660 | |||||||||
Money market funds | 679 | — | — | 679 | 679 | ||||||||||||||
Total cash and cash equivalents | 26,339 | — | — | 26,339 | 26,339 | ||||||||||||||
Restricted cash equivalents | — | 2,124 | — | 2,124 | 2,124 | ||||||||||||||
Total assets | $ | 26,339 | $ | 2,124 | $ | — | $ | 28,463 | $ | 28,463 | |||||||||
Liabilities: | |||||||||||||||||||
Accrued royalties, fulfillment and other current liabilities | |||||||||||||||||||
Napster acquisition contingent consideration | $ | — | $ | — | $ | 2,685 | $ | 2,685 | N/A | ||||||||||
Other long-term liabilities | |||||||||||||||||||
Napster acquisition contingent consideration | — | — | 9,215 | 9,215 | N/A | ||||||||||||||
Total liabilities | $ | — | $ | — | $ | 11,900 | $ | 11,900 | N/A |
Fair Value Measurements as of | Amortized Cost as of | ||||||||||||||||||
December 31, 2018 | December 31, 2018 | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets: | |||||||||||||||||||
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 | — | 1,630 | — | 1,630 | 1,630 | ||||||||||||||
Warrants issued by Napster (included in Other assets) | — | — | 865 | 865 | — | ||||||||||||||
Total assets | $ | 35,561 | $ | 1,654 | $ | 865 | $ | 38,080 | $ | 37,215 |
Note 7 | Other Intangible Assets |
June 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||
Gross Amount | Accumulated Amortization | Net | Gross Amount | Accumulated Amortization | Net | ||||||||||||||||||||
Amortizing intangible assets: | |||||||||||||||||||||||||
Customer relationships | $ | 41,155 | $ | 31,358 | $ | 9,797 | $ | 30,993 | $ | 30,993 | $ | — | |||||||||||||
Developed technology | 29,934 | 24,710 | 5,224 | 24,446 | 24,446 | — | |||||||||||||||||||
Patents, trademarks and tradenames | 10,471 | 3,879 | 6,592 | 3,765 | 3,765 | — | |||||||||||||||||||
Service contracts | 5,454 | 5,451 | 3 | 5,538 | 5,512 | 26 | |||||||||||||||||||
Total | $ | 87,014 | $ | 65,398 | $ | 21,616 | $ | 64,742 | $ | 64,716 | $ | 26 |
Future Amortization | ||||
2019 (Excluding the six months ended June 30, 2019) | $ | 2,266 | ||
2020 | 4,526 | |||
2021 | 4,526 | |||
2022 | 2,641 | |||
2023 | 1,145 | |||
Thereafter | 6,512 | |||
$ | 21,616 |
Note 8 | Goodwill |
Balance, December 31, 2018 | $ | 16,955 | |
Increases due to current year acquisitions | 48,474 | ||
Effects of foreign currency translation | (34 | ) | |
Balance, June 30, 2019 | $ | 65,395 |
June 30, 2019 | |||
Consumer Media | $ | 580 | |
Mobile Services | 2,032 | ||
Games | 14,309 | ||
Napster | 48,474 | ||
Total goodwill | $ | 65,395 |
Note 9 | Accrued royalties, fulfillment and other current liabilities |
June 30, 2019 | December 31, 2018 | ||||||
Royalties and other fulfillment costs | $ | 75,849 | $ | 1,989 | |||
Employee compensation, commissions and benefits | 6,395 | 4,444 | |||||
Sales, VAT and other taxes payable | 3,293 | 785 | |||||
Operating Lease Liabilities - Current | 5,028 | — | |||||
Other | 7,386 | 4,094 | |||||
Total accrued royalties, fulfillment and other current liabilities | $ | 97,951 | $ | 11,312 |
Note 10 | Notes Payable - Napster |
Note 11 | Restructuring Charges |
Employee Separation Costs | Asset Related and Other Costs | Total | ||||||||||
Costs incurred and charged to expense for the six months ended June 30, 2019 | $ | 344 | $ | 552 | $ | 896 | ||||||
Costs incurred and charged to expense for the six months ended June 30, 2018 | $ | 688 | $ | — | $ | 688 |
Employee Separation Costs | Asset Related and Other Costs | Total | ||||||||||
Accrued liability at December 31, 2018 | $ | 755 | $ | — | $ | 755 | ||||||
Costs incurred and charged to expense for the six months ended June 30, 2019, excluding noncash charges | 344 | 227 | 571 | |||||||||
Cash payments | (693 | ) | — | (693 | ) | |||||||
Accrued liability at June 30, 2019 | $ | 406 | $ | 227 | $ | 633 |
Note 12 | Income Taxes |
Note 13 | Income (Loss) Per Share |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income (loss) attributable to RealNetworks | $ | (9,202 | ) | $ | (6,930 | ) | $ | (7,669 | ) | $ | (12,108 | ) | |||
Weighted average common shares outstanding used to compute basic EPS | 37,948 | 37,577 | 37,885 | 37,514 | |||||||||||
Dilutive effect of stock based awards | — | — | — | — | |||||||||||
Weighted average common shares outstanding used to compute diluted EPS | 37,948 | 37,577 | 37,885 | 37,514 | |||||||||||
Basic EPS attributable to RealNetworks | $ | (0.24 | ) | $ | (0.18 | ) | $ | (0.20 | ) | $ | (0.32 | ) | |||
Diluted EPS attributable to RealNetworks | $ | (0.24 | ) | $ | (0.18 | ) | $ | (0.20 | ) | $ | (0.32 | ) |
Note 14 | Leases |
Quarter Ended June 30, | Six Months Ended June 30, | |||||||
2019 | 2019 | |||||||
Operating lease expense | $ | 1,463 | $ | 2,803 | ||||
Variable lease expense | 358 | 511 | ||||||
Sublease income | (511 | ) | (986 | ) | ||||
Net lease expense | $ | 1,310 | $ | 2,328 | ||||
Operating cash outflows for lease liabilities | $ | 1,412 | $ | 2,873 |
June 30, 2019 | |||
Weighted-average remaining lease term (in years) | 4 years | ||
Weighted-average discount rate | 5.13 | % |
Operating Leases | ||||
2019 (Excluding the six months ended June 30, 2019) | $ | 2,737 | ||
2020 | 4,909 | |||
2021 | 3,296 | |||
2022 | 2,429 | |||
2023 | 2,347 | |||
Thereafter | 1,634 | |||
Total minimum payments(a) | 17,352 | |||
Less: Imputed interest | 1,940 | |||
Present value of total minimum payments(b) | $ | 15,412 |
Note 15 | Commitments and Contingencies |
Note 16 | Guarantees |
Note 17 | Segment Information |
Consumer Media | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue | $ | 2,620 | $ | 3,884 | $ | 5,106 | $ | 9,367 | |||||||
Cost of revenue | 803 | 1,028 | 1,636 | 2,021 | |||||||||||
Gross profit | 1,817 | 2,856 | 3,470 | 7,346 | |||||||||||
Operating expenses | 2,877 | 3,439 | 5,996 | 7,357 | |||||||||||
Operating income (loss) | $ | (1,060 | ) | $ | (583 | ) | $ | (2,526 | ) | $ | (11 | ) |
Mobile Services | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue | $ | 6,997 | $ | 6,719 | $ | 13,936 | $ | 15,423 | |||||||
Cost of revenue | 1,865 | 2,134 | 3,913 | 4,450 | |||||||||||
Gross profit | 5,132 | 4,585 | 10,023 | 10,973 | |||||||||||
Operating expenses | 7,438 | 6,969 | 14,999 | 14,335 | |||||||||||
Operating income (loss) | $ | (2,306 | ) | $ | (2,384 | ) | $ | (4,976 | ) | $ | (3,362 | ) |
Games | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue | $ | 6,048 | $ | 5,121 | $ | 11,758 | $ | 10,584 | |||||||
Cost of revenue | 1,655 | 1,456 | 3,325 | 3,273 | |||||||||||
Gross profit | 4,393 | 3,665 | 8,433 | 7,311 | |||||||||||
Operating expenses | 5,288 | 5,095 | 10,325 | 10,012 | |||||||||||
Operating income (loss) | $ | (895 | ) | $ | (1,430 | ) | $ | (1,892 | ) | $ | (2,701 | ) |
Napster | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue | $ | 28,583 | $ | — | $ | 52,920 | $ | — | |||||||
Cost of revenue | 23,026 | — | 43,422 | — | |||||||||||
Gross profit | 5,557 | — | 9,498 | — | |||||||||||
Operating expenses | 6,638 | — | 12,170 | — | |||||||||||
Operating income (loss) | $ | (1,081 | ) | $ | — | $ | (2,672 | ) | $ | — |
Corporate | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Cost of revenue | $ | (67 | ) | $ | 7 | $ | (144 | ) | $ | 17 | |||||
Operating expenses | 4,116 | 2,429 | 8,373 | 5,696 | |||||||||||
Operating income (loss) | $ | (4,049 | ) | $ | (2,436 | ) | $ | (8,229 | ) | $ | (5,713 | ) |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
United States | $ | 21,322 | $ | 7,646 | $ | 40,292 | $ | 19,080 | |||||||
Europe | 17,097 | 3,010 | 32,481 | 6,035 | |||||||||||
Rest of the World | 5,829 | 5,068 | 10,947 | 10,259 | |||||||||||
Total net revenue | $ | 44,248 | $ | 15,724 | $ | 83,720 | $ | 35,374 |
June 30, 2019 | December 31, 2018 | ||||||
United States | $ | 89,883 | $ | 11,823 | |||
Europe | 11,028 | 6,761 | |||||
Rest of the World | 2,902 | 1,151 | |||||
Total long-lived assets | $ | 103,813 | $ | 19,735 |
Note 18 | Related Party Transactions |
Note 19 | Subsequent Event |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
• | the expected benefits and other consequences of our growth plans, strategic initiatives, and restructurings; |
• | our expected introduction, and related monetization, of new and enhanced products, services and technologies across our businesses; |
• | future revenues, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations; |
• | the effects of our past acquisitions, including our January 18, 2019 acquisition of a controlling interest in Napster, and expectations for future acquisitions and divestitures; |
• | plans, strategies and expected opportunities for future growth, increased profitability and innovation; |
• | the expected financial position, performance, growth and profitability of, and investment in, our businesses and the availability of funding or other resources; |
• | the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses; |
• | the continuation and expected nature of certain customer relationships; |
• | impacts of competition and certain customer relationships on the future financial performance and growth of our businesses; |
• | our involvement in potential claims, legal proceedings and government investigations, and the potential outcomes and effects of such potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations; |
• | the effects of U.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and |
• | the effect of economic and market conditions on our business, prospects, financial condition or results of operations. |
Quarter Ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||||||
2019 | 2018 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||
Total revenue | $ | 44,248 | $ | 15,724 | $ | 28,524 | 181 | % | $ | 83,720 | $ | 35,374 | $ | 48,346 | 137 | % | |||||||||||||
Cost of revenue | 27,282 | 4,625 | 22,657 | 490 | % | 52,152 | 9,761 | 42,391 | 434 | % | |||||||||||||||||||
Gross profit | 16,966 | 11,099 | 5,867 | 53 | % | 31,568 | 25,613 | 5,955 | 23 | % | |||||||||||||||||||
Gross margin | 38 | % | 71 | % | 38 | % | 72 | % | |||||||||||||||||||||
Operating expenses | 26,357 | 17,932 | 8,425 | 47 | % | 51,863 | 37,400 | 14,463 | 39 | % | |||||||||||||||||||
Operating loss | $ | (9,391 | ) | $ | (6,833 | ) | $ | (2,558 | ) | (37 | )% | $ | (20,295 | ) | $ | (11,787 | ) | $ | (8,508 | ) | (72 | )% |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2019 | 2018 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||
Revenue | $ | 2,620 | $ | 3,884 | $ | (1,264 | ) | (33 | )% | $ | 5,106 | $ | 9,367 | $ | (4,261 | ) | (45 | )% | |||||||||||
Cost of revenue | 803 | 1,028 | (225 | ) | (22 | )% | 1,636 | 2,021 | (385 | ) | (19 | )% | |||||||||||||||||
Gross profit | 1,817 | 2,856 | (1,039 | ) | (36 | )% | 3,470 | 7,346 | (3,876 | ) | (53 | )% | |||||||||||||||||
Gross margin | 69 | % | 74 | % | 68 | % | 78 | % | |||||||||||||||||||||
Operating expenses | 2,877 | 3,439 | (562 | ) | (16 | )% | 5,996 | 7,357 | (1,361 | ) | (18 | )% | |||||||||||||||||
Operating income (loss) | $ | (1,060 | ) | $ | (583 | ) | $ | (477 | ) | (82 | )% | $ | (2,526 | ) | $ | (11 | ) | $ | (2,515 | ) | NM |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2019 | 2018 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||
Revenue | $ | 6,997 | $ | 6,719 | $ | 278 | 4 | % | $ | 13,936 | $ | 15,423 | $ | (1,487 | ) | (10 | )% | ||||||||||||
Cost of revenue | 1,865 | 2,134 | (269 | ) | (13 | )% | 3,913 | 4,450 | (537 | ) | (12 | )% | |||||||||||||||||
Gross profit | 5,132 | 4,585 | 547 | 12 | % | 10,023 | 10,973 | (950 | ) | (9 | )% | ||||||||||||||||||
Gross margin | 73 | % | 68 | % | 72 | % | 71 | % | |||||||||||||||||||||
Operating expenses | 7,438 | 6,969 | 469 | 7 | % | 14,999 | 14,335 | 664 | 5 | % | |||||||||||||||||||
Operating loss | $ | (2,306 | ) | $ | (2,384 | ) | $ | 78 | 3 | % | $ | (4,976 | ) | $ | (3,362 | ) | $ | (1,614 | ) | (48 | )% |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2019 | 2018 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||
Revenue | $ | 6,048 | $ | 5,121 | $ | 927 | 18 | % | $ | 11,758 | $ | 10,584 | $ | 1,174 | 11 | % | |||||||||||||
Cost of revenue | 1,655 | 1,456 | 199 | 14 | % | 3,325 | 3,273 | 52 | 2 | % | |||||||||||||||||||
Gross profit | 4,393 | 3,665 | 728 | 20 | % | 8,433 | 7,311 | 1,122 | 15 | % | |||||||||||||||||||
Gross margin | 73 | % | 72 | % | 72 | % | 69 | % | |||||||||||||||||||||
Operating expenses | 5,288 | 5,095 | 193 | 4 | % | 10,325 | 10,012 | 313 | 3 | % | |||||||||||||||||||
Operating loss | $ | (895 | ) | $ | (1,430 | ) | $ | 535 | 37 | % | $ | (1,892 | ) | $ | (2,701 | ) | $ | 809 | 30 | % |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2019 | 2018 | $ Change | 2019 | 2018 | $ Change | ||||||||||||||||||
Revenue | $ | 28,583 | $ | — | $ | 28,583 | $ | 52,920 | $ | — | $ | 52,920 | |||||||||||
Cost of revenue | 23,026 | — | 23,026 | 43,422 | — | 43,422 | |||||||||||||||||
Gross profit | 5,557 | — | 5,557 | 9,498 | — | 9,498 | |||||||||||||||||
Gross margin | 19 | % | — | % | 18 | % | — | % | |||||||||||||||
Operating expenses | 6,638 | — | 6,638 | 12,170 | — | 12,170 | |||||||||||||||||
Operating loss | $ | (1,081 | ) | $ | — | $ | (1,081 | ) | $ | (2,672 | ) | $ | — | $ | (2,672 | ) |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2019 | 2018 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||
Cost of revenue | $ | (67 | ) | $ | 7 | $ | (74 | ) | NM | $ | (144 | ) | $ | 17 | $ | (161 | ) | NM | |||||||||||
Operating expenses | 4,116 | 2,429 | 1,687 | 69 | % | 8,373 | 5,696 | 2,677 | 47 | % | |||||||||||||||||||
Operating loss | $ | (4,049 | ) | $ | (2,436 | ) | $ | (1,613 | ) | (66 | )% | $ | (8,229 | ) | $ | (5,713 | ) | $ | (2,516 | ) | (44 | )% |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2019 | 2018 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||
Research and development | $ | 8,876 | $ | 7,652 | $ | 1,224 | 16 | % | $ | 17,709 | $ | 15,346 | $ | 2,363 | 15 | % | |||||||||||||
Sales and marketing | 8,360 | 4,883 | 3,477 | 71 | % | 16,502 | 10,880 | 5,622 | 52 | % | |||||||||||||||||||
General and administrative | 8,392 | 5,339 | 3,053 | 57 | % | 16,756 | 10,940 | 5,816 | 53 | % | |||||||||||||||||||
Restructuring and other charges | 729 | 187 | 542 | 290 | % | 896 | 688 | 208 | 30 | % | |||||||||||||||||||
Lease exit and related charges | — | (129 | ) | 129 | (100 | )% | — | (454 | ) | 454 | (100 | )% | |||||||||||||||||
Total consolidated operating expenses | $ | 26,357 | $ | 17,932 | $ | 8,425 | 47 | % | $ | 51,863 | $ | 37,400 | $ | 14,463 | 39 | % |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2019 | 2018 | $ Change | 2019 | 2018 | $ Change | ||||||||||||||||||
Interest expense | $ | (43 | ) | $ | — | $ | (43 | ) | $ | (209 | ) | $ | — | $ | (209 | ) | |||||||
Interest income | 40 | 111 | (71 | ) | 117 | 198 | (81 | ) | |||||||||||||||
Gain (loss) on equity investment, net | — | — | — | 12,338 | — | 12,338 | |||||||||||||||||
Other income (expense), net | 183 | (42 | ) | 225 | 310 | (83 | ) | 393 | |||||||||||||||
Total other income (expense), net | $ | 180 | $ | 69 | $ | 111 | $ | 12,556 | $ | 115 | $ | 12,441 |
June 30, 2019 | December 31, 2018 | ||||||
Working capital | $ | (37,964 | ) | $ | 33,481 | ||
Cash, cash equivalents, and short-term investments | 26,339 | 35,585 | |||||
Restricted cash equivalents | 2,124 | 1,630 |
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
Cash used in operating activities | $ | (16,099 | ) | $ | (12,730 | ) | |
Cash provided by investing activities | 11,411 | 954 | |||||
Cash used in financing activities | (3,951 | ) | (129 | ) |
• | Revenue recognition; |
• | Music Royalties; |
• | Valuation of definite-lived assets and goodwill; and |
• | Accounting for income taxes. |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 4. | Controls and Procedures |
Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
• | reduced prices or margins; |
• | loss of current and potential customers, or partners and potential partners who distribute our products and services or who provide content that we distribute to our customers; |
• | changes to our products, services, technologies, licenses or business practices or strategies; |
• | lengthened sales cycles; |
• | inability to meet demands for more rapid sales or development cycles; |
• | industry-wide changes in content distribution to customers or in trends in consumer consumption of digital media products and services; |
• | pressure to prematurely release products or product enhancements; or |
• | degradation in our stature or reputation in the market. |
• | periodic local or geographic economic downturns and unstable political conditions; |
• | price and currency exchange controls; |
• | fluctuation in the relative values of currencies; |
• | difficulty in repatriating money, whether as a result of tax laws or otherwise; |
• | compliance with current and changing tax laws, and the coordination of compliance with U.S. tax laws and the laws of any of the jurisdictions in which we do business; |
• | difficulties protecting intellectual property; |
• | compliance with labor laws and other laws governing employees; |
• | local labor disputes; |
• | changes in trading policies, regulatory requirements, tariffs and other barriers, or the termination or renegotiation of existing trade agreements; |
• | impact of changes in immigration or other policies impacting our ability to attract, hire, and retain key talent; and |
• | difficulties in managing a global enterprise, including staffing, collecting accounts receivable, and managing suppliers, distributors and representatives. |
• | difficulties and expenses in assimilating the operations, products, technology, information systems, and/or personnel of the acquired company; |
• | retaining key management or employees of the acquired company; |
• | entrance into unfamiliar markets, industry segments, or types of businesses; |
• | operating, managing and integrating acquired businesses in remote locations or in countries in which we have little or no prior experience; |
• | diversion of management time and other resources from existing operations; |
• | impairment of relationships with employees, affiliates, advertisers or content providers of our business or acquired business; |
• | assumption of known and unknown liabilities of the acquired company, including intellectual property claims; and |
• | potential impacts to our system of internal controls and disclosure controls and procedures. |
• | elect or defeat the election of our directors; |
• | amend or prevent amendment of our articles of incorporation or bylaws; |
• | effect or prevent a merger, sale of assets or other corporate transaction; and |
• | control the outcome of any other matter submitted to the shareholders for vote. |
• | adopt a plan of merger; |
• | authorize the sale, lease, exchange or mortgage of assets representing more than 50% of the book value of our assets prior to the transaction or on which our long-term business strategy is substantially dependent; |
• | authorize our voluntary dissolution; or |
• | take any action that has the effect of any of the above. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 3. | Default Upon Senior Securities |
Item 4. | Mine Safety Disclosures |
Item 5. | Other Information |
Item 6. | Exhibits |
REALNETWORKS, INC. | |||
By: | /s/ Cary Baker | ||
Cary Baker | |||
Title: | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
Exhibit Number | Description |
2.2 | |
10.1 * | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
RHAPSODY APPLEBEE, LLC | |
By: /s/ Andrew Intrater Name: Andrew Intrater Title: Authorized Person | |
REALNETWORKS DIGITAL MUSIC OF CALIFORNIA, INC. | |
By: /s/ Michael M. Parham Name: Michael M. Parham Title: CEO |
(a) | Investments of Borrowers in the equity interests of their Subsidiaries existing on the Closing Date and any other Investments existing on the Closing Date disclosed in the Schedule; |
(b) | (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor’s Corporation or Moody’s Investors Service, (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank and (iv) Bank’s money market accounts; |
(c) | Investments (including debt obligations) to be paid in connection with settlement of [l]; |
(d) | Investments of Subsidiaries (which are not Borrowers or Guarantors) in or to other Subsidiaries or Borrowers; |
(e) | Investments by any Borrower or any Subsidiary in any other Borrower or Subsidiary, provided that such Investments shall not exceed $250,000 in the aggregate in any fiscal year; |
(f) | Investments by and among Borrowers and their Subsidiaries constituting transfer pricing practices, provided, however, that (x) such Investments are made when no Default or Event of Default has occurred and is continuing and such Investments are (I) incurred in the ordinary course of business consistent with past business practices and (II) made in respect of transfer pricing arrangements funded on a cost plus five percent (5.00%) (or less) basis and on terms that are in accordance with Section 482 of the IRC, and any state or foreign law equivalent, and supported by contemporaneous transfer pricing documentation required by applicable law or (y) (I) any such loans and advances made by a Borrower or Guarantor shall be evidenced by a promissory note pledged to Bank and (II) the amount of such Investments made by Borrower or Guarantor to Subsidiaries that are not a Borrower or Guarantor (together with outstanding investments permitted under Permitted |
(g) | to the extent constituting Investments, loans and guarantees permitted under the definition of “Permitted Indebtedness”; provided, however, that with respect to the Permitted Intercompany Loans, to the extent the borrower under such Permitted Intercompany Loan is a Borrower or Guarantor under this Agreement, then such Borrower or Guarantor shall not make any payments with respect to such Permitted Intercompany Loan in excess of Seven Hundred Fifty Thousand Dollars ($750,000) per fiscal year prior to the Revolving Maturity Date; |
(h) | Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; |
(i) | Investments consisting of deposit and securities accounts permitted to be maintained outside of Bank under Section 6.7, in which Bank has a perfected security interest to the extent required under Section 6.7; |
(j) | Investments consisting of transactions permitted under Section 7.3 of this Agreement; |
(k) | Repurchases of stock permitted under Section 7.6; and |
(l) | other Investments in an aggregate amount not to exceed Two Hundred Fifty Thousand Dollars ($250,000) in original cost outstanding at any time. |
(a) | Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; |
(b) | Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank’s security interests; |
(c) | Liens (i) upon or in any equipment which was not financed by Bank acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; |
(d) | Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; |
(e) | Liens taken by the [l] in accordance with that certain [l] Agreement, each between Borrower and [l], provided that such lien has no priority over any of Bank’s security interests and shall be subject to Bank’s reasonable prior approval; and |
(f) | Licenses of Intellectual Property in connection with joint ventures or collaborations the ordinary course of business; |
(g) | Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in nature arising in the ordinary course of business so long as such Liens attach only to Inventory and Equipment and secure liabilities in the aggregate amount not to exceed Fifty Thousand Dollars ($50,000) in the aggregate, which are not delinquent or remain payable without penalty or which, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP, are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; |
(h) | Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties that are promptly paid on or before the date they become due; |
(i) | Liens on insurance proceeds securing the payment of financed insurance premiums that are promptly paid on or before the date they become due (provided that such Liens extend only to such insurance proceeds and not to any other property or assets); |
(j) | leases or subleases of real property granted in the ordinary course of Borrower’s business (or, if referring to another Person, in the ordinary course of such Person’s business), and leases, subleases, non‑exclusive licenses or sublicenses of personal property (other than Intellectual Property) granted in the ordinary course of Borrower’s business (or, if referring to another Person, in the ordinary course of such Person’s business), if the leases, subleases, licenses and sublicenses do not prohibit granting Bank a security interest therein; |
(k) | Liens arising under the ABN Amro Facility as of the Closing Date; |
(l) | Liens on amounts pledged or deposited in the ordinary course of business in connection with obtaining worker’s compensation or other unemployment insurance or other social security laws or regulations; |
(m) | customary rights of set-off, revocation, refund or chargeback under deposit agreements or securities accounts or under the Code or common law of banks or other financial institutions where any Borrower or any of its Subsidiaries maintains deposits (other than deposits intended as cash collateral) in the ordinary course of business; subject to compliance with requirements set forth in this Agreement and the other Loan Documents with respect to such deposit accounts or securities accounts; and |
(n) | Liens on cash collateral securing the Closing Date Letters of Credit until the date such letters of credit are set to expire or be renewed. |
Quarter Ending | Minimum EBITDA |
September 30, 2019 | [l] |
December 31, 2019 | [l] |
If to Borrowers: | c/o REALNETWORKS, INC. |
If to Bank: | Bridge Bank, a division of Western Alliance Bank |
RHAPSODY INTERNATIONAL INC., a Delaware corporation By: /s/ William J. Patrizio Name: William J. Patrizio Title: Chief Executive Officer | |
REALNETWORKS, INC. a Washington corporation By: /s/ Cary Baker Name: Cary Baker Title: Chief Financial Officer | |
REALNETWORKS DIGITAL MUSIC OF CALIFORNIA, INC., a California corporation By: /s/ Cary Baker Name: Cary Baker Title: Chief Financial Officer | |
WESTERN ALLIANCE BANK, an Arizona corporation By: Elisa Sun Name: Elisa Sun Title: VP |
1. | I have reviewed this report on Form 10-Q of RealNetworks, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: | August 5, 2019 | ||
/s/ Robert Glaser | |||
Robert Glaser | |||
Title: | Chairman and Chief Executive Officer | ||
(Principal Executive Officer) |
1. | I have reviewed this report on Form 10-Q of RealNetworks, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: | August 5, 2019 | ||
/s/ Cary Baker | |||
Cary Baker | |||
Title: | Senior Vice President, Chief Financial Officer and Treasurer | ||
(Principal Financial and Accounting Officer) |
Date: | August 5, 2019 | ||
By: | /s/ Robert Glaser | ||
Name: | Robert Glaser | ||
Title: | Chairman and Chief Executive Officer | ||
(Principal Executive Officer) |
Date: | August 5, 2019 | ||
By: | /s/ Cary Baker | ||
Name: | Cary Baker | ||
Title: | Senior Vice President, Chief Financial Officer and Treasurer | ||
(Principal Financial and Accounting Officer) |
Document and Entity Information - shares |
6 Months Ended | |
---|---|---|
Jun. 30, 2019 |
Jul. 31, 2019 |
|
Document and Entity Information [Abstract] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Jun. 30, 2019 | |
Document Fiscal Year Focus | 2019 | |
Document Fiscal Period Focus | Q2 | |
Entity Registrant Name | REALNETWORKS INC | |
Entity Central Index Key | 0001046327 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Accelerated Filer | |
Entity Small Business | true | |
Entity Emerging Growth Company | false | |
Entity Shell Company | false | |
Entity Current Reporting Status | Yes | |
Entity Common Stock, Shares Outstanding | 38,049,868 |
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Accounts Receivable, Allowance for Credit Loss, Current | $ 644 | $ 560 |
Preferred stock, par value (USD per share) | $ 0.001 | $ 0.001 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock, par value (USD per share) | $ 0.001 | $ 0.001 |
Common stock, authorized | 250,000,000 | 250,000,000 |
Common stock, issued | 38,049,000 | 37,728,000 |
Common stock, outstanding | 38,049,000 | 37,728,000 |
Preferred stock, Series A | ||
Preferred stock, authorized | 200,000 | 200,000 |
Preferred stock, Undesignated series | ||
Preferred stock, authorized | 59,800,000 | 59,800,000 |
Description of Business and Summary of Significant Accounting Policies |
6 Months Ended | ||||||
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Jun. 30, 2019 | |||||||
Accounting Policies [Abstract] | |||||||
Description of Business and Summary of Significant Accounting Policies |
Description of Business. RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play, and share digital media. The Company also develops and markets software products and services that enable the creation, distribution, and consumption of digital media, including audio and video. Our Napster music business, which we acquired on January 18, 2019, offers a comprehensive set of digital music products and services designed to provide consumers with broad access to digital music. For more information on Napster, see Note 5 Acquisitions. Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services, and the ability to generate related revenue and cash flow. In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”. Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries in which it has a more than 50% voting interest. Noncontrolling interests primarily represent third-party ownership in the equity of Napster and are reflected separately in the Company’s financial statements. Intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2019. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the 10-K). Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
Recent Accounting Pronouncements |
6 Months Ended | ||||||
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Accounting Changes and Error Corrections [Abstract] | |||||||
Recent Accounting Pronouncements |
Recently adopted accounting pronouncements In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance related to the accounting for leases. A major change in the new guidance is that lessees are now required to present right-of-use assets and lease liabilities on the balance sheet. Enhanced disclosures are also required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. We adopted the new guidance effective January 1, 2019 and elected to apply the new guidance at the beginning of the year of adoption, rather than applying the new guidance retrospectively to each prior reporting period presented. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classification. We have finalized our assessment of the impacts resulting from the new standard, including the impact on our internal controls. As a result of our evaluation, we have modified certain accounting policies and practices and existing controls. Adoption of the standard resulted in the recognition of $12.5 million of operating lease assets and $14.6 million of current and long-term operating lease liabilities as of January 1, 2019. The difference between the operating lease assets and lease liabilities recorded upon adoption relates to previously accrued deferred rent and lease exit and related charges included on our balance sheet as of December 31, 2018. Lease exit and related charges previously recorded pertain to the reduction in use of RealNetworks' office space and included estimates of sublease income expected to be received. The new guidance did not materially impact our consolidated statement of operations in the quarter of adoption or in the second quarter of 2019 and did not cause revision to previously recorded estimates for lease exit charges. See Note 14 Leases for additional information about the new accounting standard. In June 2018, the FASB issued new guidance related to the measurement and classification for share-based awards to non-employees. The new guidance essentially aligns the measurement and classification for these awards with that for share-based awards to employees. We adopted the new guidance effective January 1, 2019, with no material impact on our consolidated financial statements and related disclosures. Recently issued accounting pronouncements not yet adopted In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds the reporting unit's fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We are evaluating the impact of this guidance, but do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures. |
Revenue Recognition |
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Revenue from Contract with Customer [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue Recognition |
On January 1, 2018, we adopted the new revenue recognition standard by applying the modified retrospective approach to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition standard. We recorded a net decrease to opening retained deficit of $1.0 million as of January 1, 2018 due to the cumulative impact of adopting the new revenue recognition standard. This impact primarily related to licensing of our RealPlayer product and full recognition of non-recurring engineering fees, which were previously deferred and amortized over the life of the contract. We generate all of our revenue through contracts with customers. Revenue is either recognized over time as the service is provided, or at a point in time when the product is transferred to the customer, depending on the contract type. Our performance obligations typically have an original duration of one year or less. Napster revenue arrangements include subscription services to the Napster music streaming service sold either directly to end users (direct to consumer) or through partners (business to business), who are generally telecommunications companies, that bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. Napster also sells subscriptions to third parties to provide access to the Napster platform that is typically embedded in the third party's branded or co-branded service. Such subscriptions are included in the business to business sales channel. For services sold through third parties to end customers, we evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and are the principal (i.e. “gross”), or we arrange for other parties to provide the service to the end-user and are an agent (i.e. “net”). In our Napster business to business revenue stream, we generally operate as a principal in arrangements with end customers as we maintain control over the service prior to being transferred to the end customer. Certain business to business customer arrangements include variable consideration based on usage. We estimate variable consideration as part of the total transaction price that is allocated to performance obligations, or distinct service periods within a performance obligation, on a relative standalone selling price basis. Revenues related to Napster subscription services are recognized ratably over the contract period, typically 30 days. Direct to consumer subscriptions are paid in advance, typically on a monthly basis. Subscription services offered to businesses are invoiced on a monthly basis and the timing of payment generally does not vary significantly from the timing of invoice. Disaggregation of Revenue The following table presents our disaggregated revenue by source and segment (in thousands):
The following table presents our disaggregated revenue by sales channel (in thousands):
Contract Balances The timing of revenue recognition may differ from the timing of invoicing to our customers. We record accounts receivable when the right to consideration becomes unconditional, except for the passage of time. For certain contracts, payment schedules may exceed one year; for those contracts we recognize a long-term receivable. As of June 30, 2019 and December 31, 2018, our balance of long-term accounts receivable was $0.1 million and $0.7 million, respectively, and is included in other long-term assets on our condensed consolidated balance sheets. The decrease in this balance from December 31, 2018 to June 30, 2019 is primarily due to the timing of expected cash receipts. During the quarter and six months ended June 30, 2019, we recorded no impairments to our contract assets. We record deferred revenue when cash payments are received or due in advance of our completion of the underlying performance obligation. As of June 30, 2019, we had a deferred revenue balance of $6.2 million, an increase of $3.8 million from December 31, 2018, primarily due to deferred revenue associated with Napster. Practical Expedients For those contracts for which we recognize revenue at the amount to which we have the right to invoice for service performed, we do not disclose the value of any unsatisfied performance obligations. We also do not disclose the remaining unsatisfied performance obligations which have an original duration of one year or less. Additionally, we immediately expense sales commissions when incurred as the amortization period would have been less than one year. These costs are recorded within sales and marketing expense. |
Stock-Based Compensation |
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Share-based Payment Arrangement [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-Based Compensation |
Total stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations and comprehensive income (loss) includes amounts related to stock options, restricted stock, and employee stock purchase plans and was as follows (in thousands):
The fair value of RealNetworks options granted determined using the Black-Scholes model used the following weighted-average assumptions:
The total stock-based compensation amounts for 2019 and 2018 disclosed above are recorded in their respective line items within operating expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Included in the expense for the six months ended June 30, 2019 and 2018 was stock compensation expense recorded in the first quarter of 2019 and 2018 related to our 2018 and 2017 incentive bonuses paid in fully vested restricted stock units, which were authorized and granted in the first quarter of 2019 and 2018, respectively. As of June 30, 2019, $3.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 3.1 years. |
Acquisitions |
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Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Combination Disclosure |
Napster On January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc. (doing business as Napster) bringing our aggregate ownership to 84% of Napster's outstanding equity, thus giving RealNetworks a majority voting interest. Napster's music streaming service provides users with broad access to digital music, offering on-demand streaming and conditional downloads through unlimited access to a catalog of millions of music tracks. Napster offers music services worldwide and generates revenue primarily through subscriptions to its music services either directly to consumers or through distribution partners. Initially formed in 2007 and branded then as Rhapsody, Napster began as a joint venture between RealNetworks and MTV Networks, a division of Viacom International, Inc. Prior to the acquisition of the additional 42% interest in Napster, we accounted for our investment using the equity method of accounting. Following the January 2019 acquisition, RealNetworks has the right to nominate directors constituting a majority of the Napster board of directors, however, Napster will continue to operate as an independent business with its own board of directors, strategy and leadership team. We are consolidating Napster's financial results into our financial statements for fiscal periods following the closing of the acquisition, and Napster is reported as a separate segment in RealNetworks' consolidated financial statements. Napster, however, remains a distinct legal entity and RealNetworks assumes no ownership or control over the assets or liabilities of Napster. We have preliminarily recorded 100% of the estimated fair value of the assets acquired and liabilities assumed as of January 18, 2019 based on the results of an independent valuation. The 16% of Napster that we do not own is accounted for as a noncontrolling interest in our consolidated financial statements, and as part of this consolidation, the carrying value of our previous 42% equity method investment was remeasured to fair value on the acquisition date. The remeasurement to fair value of the historical 42% ownership interest resulted in the recognition of a $2.7 million gain in the first quarter of 2019, which is a component of the overall gain recognized as a part of this transaction. Our consolidated balance sheet reflects Napster's working capital deficit, which results in a consolidated working capital deficit. RealNetworks does not have any contractual or implied obligation to provide funding or other financial support to Napster, or to guarantee or provide other such support related to Napster's third party borrowing or Napster's other obligations on our consolidated balance sheet, except as discussed in Note 15 Commitments and Contingencies. The terms of the transaction included initial cash consideration of $1.0 million and additional contingent consideration. Initial cash consideration of $0.2 million was paid at closing and the remainder of the initial cash consideration is included in accrued royalties, fulfillment and other current liabilities and will be paid when due with existing cash balances. With regards to contingent consideration, over the five years following the acquisition, RealNetworks will pay the lesser of the following: (a) an additional $14.0 million to seller, or (b) if RealNetworks sells the interest to a third party for less than $15.0 million, the actual amount received by RealNetworks, minus the $1.0 million initial payment. In the event that RealNetworks sells such equity interest for consideration in excess of $15.0 million, RealNetworks will pay seller additional consideration, dependent on the sale price, which shall in no event exceed an additional $25.0 million. In order for seller to receive the full $40.0 million, the proceeds from the sale of Napster received by RealNetworks for the 42% equity interest acquired would have to exceed $60.0 million. These contingent consideration amounts were part of the total consideration at estimated fair value, as described in more detail below. The following table summarizes the preliminary allocation of the total consideration to the estimated fair values of the assets acquired and liabilities assumed as of January 18, 2019 (in thousands):
Under the acquisition method of accounting, the purchase price is allocated to the assets acquired and the liabilities assumed based on their estimated fair values. Due to the complexity and limited time since closing the transaction, the purchase price allocation is subject to change, which may result from additional information becoming available and additional analyses being performed on these acquired assets and assumed liabilities. Such changes could impact estimated fair values of intangible assets, accrued royalties and fulfillment, deferred revenue, and assets and liabilities assumed, as well as the contingent consideration, noncontrolling interests, and gain recognized from consolidation. Purchase price allocation adjustments may be recorded during the measurement period (a period not to exceed 12 months from the acquisition date). The final purchase price allocation could result in material differences, which could have a material impact on our financial statements. Acquired intangible assets have a total weighted average useful life of approximately 8 years, are being amortized using the straight line method, and are comprised of the following (in thousands):
The estimated fair value amounts for each of these intangibles were determined using a fair value measurement categorized within Level 3 of the fair value hierarchy. The fair value of the trade name and trademarks intangible asset was estimated using the income approach, utilizing the relief from royalty method, which values the assets by estimating the savings achieved by ownership of trade name and trademarks when compared with the cost of licensing them from an independent owner. The fair value of developed technology was estimated using the income approach, utilizing the excess earnings method. Under this method, cash flows attributable to the asset are estimated by deducting economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated by the asset. The fair value of customer relationships was estimated using a cost-to-replace approach, whereby the number of subscribers and the cost to acquire subscribers are key estimates utilized in the valuation. The fair value of partner relationships was estimated using the income approach, which uses market-based distributor data to value underlying distributor relationships. Revenue, earnings, and cash flow estimates associated with these underlying distributor relationships are key estimates in determining the fair value of the partner relationships intangibles. The fair value of deferred revenue was estimated using the income approach, utilizing a cost to fulfill analysis by estimating the direct and indirect costs related to supporting remaining obligations plus an assumed operating margin. The fair value of our preexisting 42% equity method investment has been remeasured to an estimated fair value of $2.7 million, which resulted in a pretax gain of $2.7 million, as our existing carrying value was zero. This gain, as well as the settlement of preexisting relationships and other purchase accounting adjustments discussed below, comprise the total gain of $12.3 million recognized in Other income (expenses) in the Consolidated statement of operations for the first quarter of 2019. The fair value of our preexisting equity method investment was calculated using an average of the income and market approach to arrive at estimated total enterprise value. The income approach fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, as well as the selection of an appropriate discount rate. Estimates of revenue growth and operating expenses were based on internal projections and considered the historical performance of Napster's business. The discount rate applied was based on Napster's weighted-average cost of capital and included a small-company risk premium. The market approach fair value measurement was based on a market comparable methodology. We used a group of comparable companies and selected an appropriate EBITDA and revenue multiple to apply to Napster's trailing twelve months and projected 2019, 2020 and 2021 EBITDA (weighted 90%) and revenues (weighted 10%). Assumptions in both the income and market approaches are significant to the overall valuation of Napster and changes to these assumptions could materially impact the preliminary fair values of assets acquired and liabilities assumed, noncontrolling interests, total consideration, and gain on consolidation. The fair value of the contingent consideration was estimated using multiple scenarios for each tranche of contingent consideration and then probability weighting each scenario and discounting them to estimated fair value of $11.6 million. This fair value calculation is directly impacted by the estimated total enterprise value described above. After the completion of the measurement period or in conjunction with changes in fair value unrelated to our preliminary estimate of fair value, the contingent consideration will be adjusted quarterly to fair value through earnings. Of the total amount of $11.6 million, we accrued $2.6 million and $9.0 million in Accrued royalties, fulfillment and other current liabilities, and Other long-term liabilities, respectively, as of March 31, 2019. See Note 6 Fair Value Measurements for details on the adjustment to this liability for the second quarter of 2019. The effective settlement of Napster's debt and warrants totaling $6.4 million represents the estimated fair value of debt and warrants held between RealNetworks and Napster as of the acquisition date. The estimated fair value is derived from the estimated total enterprise value described above. The resulting net gain of $5.5 million is included in Other income (expenses) in the Consolidated statement of operations. As discussed in Note 15 Commitments and Contingencies, the preexisting $2.8 million guarantee related to Napster's outstanding indebtedness on their revolving credit facility was eliminated upon the consolidation of Napster. This resulted in RealNetworks recording a gain of $2.8 million, which is included in Other income (expenses) in the Consolidated statement of operations. Prior to our acquisition of Napster, we accounted for our investment under the equity method of accounting and recorded Napster 's foreign currency translation adjustments in our equity. As part of the acquisition method of accounting, we released these amounts and recorded a gain of $1.3 million, which is included in Other income (expenses) in the Consolidated statement of operations. We recorded the fair value of noncontrolling interests on the acquisition date, estimated at $0.6 million, using the estimated total enterprise value described above. We also recorded goodwill of $48.5 million, representing the intangible assets that do not qualify for separate recognition for accounting purposes, including the expected growth in Napster's business to business model and the assembled workforce. The goodwill is reported in our Napster segment and is not deductible for income tax purposes. As discussed above, during the measurement period, purchase price allocation adjustments or changes in assumptions used in determining the total estimated enterprise value of Napster could materially impact goodwill recognized. Moreover, future performance of the Napster business will factor into our goodwill impairment analysis. We began consolidating Napster's results of operations and cash flows into our consolidated financial statements after January 18, 2019. For the quarter ended June 30, 2019, Napster's revenue and net loss including noncontrolling interests in our consolidated statements of operations was $28.6 million and $1.5 million, respectively. For the six months ended June 30, 2019, Napster's revenue and net loss including noncontrolling interests in our consolidated statements of operations was $52.9 million and $3.3 million, respectively. The following table provides the supplemental pro forma revenue and net results of the combined entity had the acquisition date of Napster been the first day of our first quarter of 2018 rather than during our first quarter of 2019 (in thousands):
(1) The pro forma net earnings attributable to RealNetworks for the quarter ended June 30, 2018 include $0.4 million of transaction costs, and for the six months ended June 30, 2018, pro forma net earnings attributable to RealNetworks include the acquisition related gain of $12.3 million and $1.2 million of transaction costs. The amounts in the supplemental pro forma earnings for the periods presented above fully eliminate intercompany transactions and conform Napster's accounting policies to RealNetworks'. These pro forma results also reflect amortization of acquisition-related intangibles and fair value adjustments to deferred revenue and contingent consideration. The unaudited pro forma amounts are based upon the historical financial statements of RealNetworks and Napster and were prepared using the acquisition method of accounting and are not necessarily indicative of results for any current or future period. The purchase price allocation is preliminary and is subject to change prior to finalization. The final purchase price allocation could result in material differences, which could have a material impact on the accompanying pro forma amounts. For the quarter and six months ended June 30, 2019, we incurred approximately $0.4 million and $1.2 million, respectively, in acquisition-related costs, including regulatory, legal, and other advisory fees, which we have recorded within general and administrative expenses. Games As described in more detail in our 2018 10-K, in order to acquire a 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 in April 2018. |
Fair Value Measurements |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 June 30, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands):
Restricted cash equivalents as of June 30, 2019 and December 31, 2018 relate to cash pledged as collateral against letters of credit in connection with lease agreements. Accrued royalties, fulfillment and other current liabilities and Other long-term liabilities as of June 30, 2019 include the estimated fair value of the contingent consideration for the Napster acquisition, which was determined using a fair value measurement categorized within Level 3 of the fair value hierarchy. As discussed in Note 5 Acquisitions, after completion of the measurement period or in conjunction with changes in fair value unrelated to our preliminary estimate of fair value, this liability is adjusted quarterly to fair value through earnings. In the second quarter of 2019, we recorded the change in fair value of the contingent consideration of $0.3 million as an increase to the total liability on the consolidated balance sheet and as general and administrative expense on the consolidated statement of operations. Realized gains or losses on sales of short-term investment securities for the quarters and six months ended June 30, 2019 and 2018 were not significant. Gross unrealized gains and gross unrealized losses on short-term investment securities as of June 30, 2019 and December 31, 2018 were also not significant. Items Measured at Fair Value on a Non-recurring Basis Certain of our assets and liabilities are measured at estimated fair value on a non-recurring basis, using Level 3 inputs. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). During the six months ended June 30, 2019 and 2018, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis. |
Other Intangible Assets |
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Other Intangible Assets |
Other intangible assets (in thousands):
Amortization expense related to other intangible assets during the quarters ended June 30, 2019, and June 30, 2018, was $1.1 million and $0.1 million, respectively. Amortization expense related to other intangible assets during the six months ended June 30, 2019, and June 30, 2018, was $2.1 million and $0.2 million, respectively. Estimated future amortization of other intangible assets (in thousands):
See Note 5 Acquisitions for details on our acquisitions. No impairments of other intangible assets were recognized in either of the six months ended June 30, 2019 or 2018. |
Goodwill |
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Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill |
The following table presents changes in goodwill (in thousands):
See Note 5 Acquisitions for details on our acquisitions and the impact to goodwill. The following table presents goodwill by segments (in thousands):
No impairment of goodwill was recognized in either of the six months ended June 30, 2019 or in 2018. |
Accrued and Other Current Liabilities |
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Accrued and Other Current Liabilities |
Accrued royalties, fulfillment and other current liabilities (in thousands):
Included in royalties and other fulfillment costs are Napster's accrued music royalties totaling $74.1 million at June 30, 2019. Napster’s agreements and arrangements with rights holders for the content used in its business are complex and the determination of royalty accruals involves significant judgments, assumptions, and estimates of the amounts to be paid. The variables involved in determining royalty accruals include unmatched royalty accruals, revenue to be recognized, the type of content used and the country it is used in, outstanding royalty audits, and identification of appropriate license holders, among other variables. In addition, some rights holders have allowed the use of their content while negotiations of the terms and conditions are ongoing. In certain jurisdictions, rights holders have several years to claim royalties for musical composition. While Napster bases its estimates on historical experience and on various assumptions that management believes to be reasonable under the circumstances, actual results may differ materially from these estimates in the event of modified assumptions or conditions. Related to Napster's accrued music royalties are amounts that are advanced to certain music publishers for royalty amounts that have been agreed as being owed, but for which the underlying rights holder have not yet been specifically matched. These prepaid royalty amounts totaling $12.9 million at June 30, 2019 are included in Prepaid expenses and other current assets on the unaudited condensed consolidated balance sheets. When these amounts are ultimately matched and invoiced to Napster, the prepaid royalty amount and the related accrued royalty liability are offset on the unaudited condensed consolidated balance sheets. |
Notes Payable - Napster |
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Related Party Transactions [Abstract] | |||||||
Debt |
In 2017, Napster entered into a Non-Recourse Purchase of Eligible Receivables Agreement (NRP Agreement) with an international bank (Purchaser) in which Napster will sell and assign on a continuing basis its eligible receivables to the Purchaser in return for 90% of the receivables upfront, up to a maximum amount of $15.0 million in advances. The interest rate is 2.25% above the 1-month-EURIBOR with a minimum 0.0% rate applying to the 1-month-EURIBOR rate. As of June 30, 2019, Napster had $7.9 million borrowings outstanding with an interest rate of 2.25%. In 2015, Napster entered into a Loan and Security Agreement (Revolver LSA) with a bank. The available borrowing on the Revolver LSA was based upon Napster's accounts receivable and direct to consumer subscription deposits. The Revolver LSA had a maximum available balance of $7.0 million. The Revolver LSA matured and the loan balance was paid in full on April 30, 2019. The Revolver LSA required Napster to maintain a balance of unrestricted cash at the bank of not less than $1.5 million plus 5% of the total amount outstanding under the NRP Agreement. As the loan was paid off on April 30, 2019, this amount is no longer restricted. |
Restructuring Charges |
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Restructuring and Related Activities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring Charges |
Restructuring and other charges in 2019 and 2018 consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts, which primarily relate to severance costs due to workforce reductions. Our Games segment continues its shift to focus on free-to-play games that offer in-game purchases of virtual goods and away from premium mobile games that require a one-time purchase. While certain new premium mobile games will be offered, this shift in focus resulted in restructuring costs of $0.6 million for the quarter, recorded in the Corporate segment. Restructuring charges are as follows (in thousands):
Changes to the accrued restructuring liability (which is included in Accrued royalties, fulfillment and other current liabilities) for 2019 (in thousands) are as follows:
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Income Taxes |
6 Months Ended | ||||||
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Jun. 30, 2019 | |||||||
Income Tax Disclosure [Abstract] | |||||||
Income Taxes |
As of June 30, 2019, RealNetworks has $4.5 million in uncertain tax positions, of which $4.1 million of unrecognized tax positions was recorded through purchase accounting on January 18, 2019 as a result of the acquisition of Napster. 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. |
Earnings (Loss) Per Share |
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings (Loss) Per Share |
Basic net income (loss) per share (EPS) is computed by dividing net income (loss) attributable to RealNetworks by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) attributable to RealNetworks by the weighted average number of common and dilutive potential common shares outstanding during the period. Basic and diluted EPS (in thousands, except per share amounts):
During the quarter and six months ended June 30, 2019, 7.7 million and 7.3 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect. During the quarter and six months ended June 30, 2018, 5.9 million and 6.0 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect. |
Leases |
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Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Leases |
We have commitments for future payments related to office facilities leases. We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease assets, Other current liabilities, and Long-term lease liabilities on our consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Operating lease assets also exclude lease incentives and initial direct costs incurred. Some of our leases include options to extend or terminate the lease. Our leases generally include one or more options to renew; however, the exercise of lease renewal options is at our sole discretion. For nearly all of our operating leases, upon adoption of the new guidance, we have not assumed any options to extend will be exercised as part of our calculation of the lease liability. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have operating leases for office space and data centers with remaining lease terms of 1 year to 5 years. Details related to lease expense and supplemental cash flow were as follows (in thousands):
Details related to lease term and discount rate were as follows:
Future minimum lease payments as of June 30, 2019 were as follows (in thousands):
(a)Total minimum payments exclude executory costs, inclusive of insurance, maintenance, and taxes, of $6.9 million; minimum payments also have not been reduced by sublease rentals of $6.1 million due in the future under noncancelable subleases. (b)$10.4 million is included in Long-term lease liabilities and $5.0 million is included in Accrued royalties, fulfillment, and other current liabilities on the condensed consolidated balance sheets. As of December 31, 2018, future minimum lease payments were $15.9 million in the aggregate, which consisted of the following: $3.7 million in 2019; $3.0 million in 2020; $2.7 million in 2021; $2.4 million in 2022; $2.3 million in 2023; and $1.6 million thereafter. |
Commitments and Contingencies |
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Jun. 30, 2019 | |||||||
Commitments and Contingencies Disclosure [Abstract] | |||||||
Commitments and Contingencies |
We have been in the past and could become in the future subject to legal proceedings, governmental investigations, and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks, and other intellectual property rights. Such claims, even if not meritorious, could force us to expend significant financial and managerial resources. In addition, given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. In the event of a determination adverse to us, we may incur substantial monetary liability, and/or be required to change our business practices. Either of these could have a material adverse effect on our consolidated financial statements. In 2017, we entered into an arrangement whereby we may be required to guarantee up to $2.8 million of Napster's outstanding indebtedness on their revolving credit facility. At that time and as a result of the guaranty, RealNetworks recognized previously suspended Napster losses up to the full $2.8 million guaranty in our consolidated statement of operations and as a Commitment to Napster in our consolidated balance sheets. Given the controlling interest RealNetworks acquired in Napster in the first quarter of 2019, we have eliminated the previously recorded guaranty from RealNetworks' balance sheet in consolidation. RealNetworks has not been required to pay any portion of this commitment, and, as discussed in Note 10 Notes Payable - Napster, Napster fully repaid this loan balance on April 30, 2019, thus releasing RealNetworks' previously made guaranty. In March 2016, Napster was notified of a putative consumer class action lawsuit relating to an alleged failure to pay so-called “mechanical royalties” on behalf of the plaintiffs and “other similarly-situated holders of mechanical rights in copyrighted musical works.” On April 7, 2017, the plaintiffs and Napster agreed to settlement terms during a mediation session. The long form Settlement Agreement was executed effective on January 16, 2019. The damages payable under the Settlement Agreement will be calculated on a claims made basis, subject to an overall maximum of $10.0 million. We have not recorded an accrual related to this settlement as of June 30, 2019 as the amount payable is not reasonably estimable. In May 2019, public notice was posted about the settlement informing purported class members that they can make claims or object to the settlement. The claims period ends on December 31, 2019, on which date (or shortly thereafter), Napster expects to know the total amount of damages payable in respect to validly made claims. Damages for valid claims are expected to be paid in the second quarter of 2020. |
Guarantees |
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Jun. 30, 2019 | |||||||
Guarantees [Abstract] | |||||||
Guarantees |
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 the ordinary course of business, Napster enters into agreements with various content providers that guarantee a minimum amount of royalty payments in a given period. These minimum payments are generally based on targets and, based on our historical experience and expectations under relevant contracts, we anticipate that actual royalty accruals and payments will exceed minimum guarantees and, accordingly, we do not maintain accruals for these minimum guarantees. 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. |
Segment Information |
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Segment Information |
We manage our business and report revenue and operating income (loss) in four 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; (3) Games, which includes all our games-related businesses, including sales of mobile games, games licenses, in-game virtual goods, subscription services, and advertising on games and social network sites; and (4) Napster, which includes our on-demand music streaming and music services. RealNetworks allocates to its Consumer Media, Mobile Services and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items also include restructuring charges and stock compensation charges. As stated in Note 5 Acquisitions, Napster is operating as an independent company and includes all their corporate expenses in their segment results, and RealNetworks does not allocate any expenses to the Napster segment. RealNetworks reports four reportable segments based on factors such as how we manage our operations and how the Chief Operating Decision Maker (CODM) reviews results. The CODM reviews financial information presented on both a consolidated basis and on a business segment basis. The accounting policies used to derive segment results are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies, in the 10-K. Segment results for the quarters and six months ended June 30, 2019 and 2018 (in thousands):
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):
Long-lived assets (consisting of goodwill, equipment, software, leasehold improvements, operating lease assets, and other intangible assets) by geographic region (in thousands) are as follows:
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Related Party Transactions |
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Jun. 30, 2019 | |||||||
Related Party Transactions [Abstract] | |||||||
Related Party Transactions |
As described in Note 5 Acquisitions, on January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc., (doing business as Napster), bringing our aggregate ownership interest to 84% of Napster's outstanding equity, thus giving RealNetworks a majority voting interest in Napster. Following this acquisition of a controlling interest, we consolidate Napster's financial results into our financial statements for fiscal periods beginning with our first quarter of 2019. Rhapsody America LLC was initially formed in 2007 as a joint venture between RealNetworks and MTV Networks, a division of Viacom International, Inc., to own and operate a business-to-consumer digital audio music service originally branded as Rhapsody. The service has been significantly expanded and was re-branded in 2016 as Napster. Following certain restructuring transactions effective March 31, 2010, we began accounting for the investment using the equity method of accounting. As part of the 2010 restructuring transactions, RealNetworks contributed $18.0 million in cash, the Rhapsody brand and certain other assets, including content licenses, in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10.0 million preference upon certain liquidation events. Although we now consolidate Napster for reporting purposes, our convertible preferred stock and the related rights remain contractually binding instruments between RealNetworks and Napster. In December 2016, RealNetworks and the other then-owner of 42% of Napster each entered into an agreement to loan up to $5.0 million to Napster for general operating purposes, which loans were fully funded as of the end of January 2017 for an aggregate of $10 million. Included in RealNetworks' January 2019 acquisition of the additional 42% interest in Napster, RealNetworks assumed the seller's $5.0 million note, resulting in RealNetworks holding $10 million of notes receivable from Napster. The terms of the notes were modified subsequent to the original December 2016 execution, including a provision, effective July 2018, that requires repayment at the greater of (a) principal plus accrued interest at an annual rate of 15% or (b) a preference of three times the principal amount. In May 2019, RealNetworks extended a short-term loan to Napster in the principal amount of $1.1 million at an annual interest rate of 4.5%. These loans are subordinate to Napster's third party debt, as discussed in Note 10 Notes Payable - Napster. In each of February 2015 and February 2017, Napster issued warrants to purchase shares of its common stock to each of RealNetworks and the other then-owner of 42% of Napster. The warrants have a 10-year contractual term and were issued as compensation for past services provided by these two significant stockholders of Napster. As part of RealNetworks' January 2019 acquisition of the additional 42% interest in Napster, RealNetworks assumed the warrants held by the seller. Upon our acquisition of Napster, the notes and warrants were effectively settled and eliminated in our consolidated financial statements as they represented preexisting relationships between RealNetworks and Napster. However, the notes and warrants remain contractually binding instruments between RealNetworks and Napster. |
Subsequent Event |
6 Months Ended | ||||||
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Jun. 30, 2019 | |||||||
Subsequent Events [Abstract] | |||||||
Subsequent Events |
In August 2019, RealNetworks and Napster entered into a Loan and Security Agreement (the “Loan Agreement”) with a third-party financial institution. Under the terms of the Loan Agreement, the bank will extend a revolving line of credit not to exceed $10 million in the aggregate. Advances on the revolving line of credit, which will be used for working capital and general corporate purposes, are based on a borrowing base that comprises accounts receivable and direct-to-consumer deposits. As of the date of this filing, no amounts are outstanding on the revolving line of credit. Borrowings under the Loan Agreement are secured by a first priority security interest in the assets of RealNetworks and Napster. Advances bear interest at a rate equal to one-half of one percent point (0.5%) above the greater of the prime rate or 5.5%, with monthly payments of interest only and principal due at the end of the two-year term. The Loan Agreement contains customary covenants, including financial covenants, minimum EBITDA levels, and maintaining an unrestricted cash balance of $3.5 million. |
Description of Business and Summary of Significant Accounting Policies (Policies) |
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Jun. 30, 2019 | |
Accounting Policies [Abstract] | |
Description of Business | Description of Business. RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play, and share digital media. The Company also develops and markets software products and services that enable the creation, distribution, and consumption of digital media, including audio and video. Our Napster music business, which we acquired on January 18, 2019, offers a comprehensive set of digital music products and services designed to provide consumers with broad access to digital music. For more information on Napster, see Note 5 Acquisitions. Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services, and the ability to generate related revenue and cash flow. In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”. |
Basis of Presentation | Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries in which it has a more than 50% voting interest. Noncontrolling interests primarily represent third-party ownership in the equity of Napster and are reflected separately in the Company’s financial statements. Intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2019. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the 10-K). |
Use of Estimates | Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
Revenue | We generate all of our revenue through contracts with customers. Revenue is either recognized over time as the service is provided, or at a point in time when the product is transferred to the customer, depending on the contract type. Our performance obligations typically have an original duration of one year or less. Napster revenue arrangements include subscription services to the Napster music streaming service sold either directly to end users (direct to consumer) or through partners (business to business), who are generally telecommunications companies, that bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. Napster also sells subscriptions to third parties to provide access to the Napster platform that is typically embedded in the third party's branded or co-branded service. Such subscriptions are included in the business to business sales channel. For services sold through third parties to end customers, we evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and are the principal (i.e. “gross”), or we arrange for other parties to provide the service to the end-user and are an agent (i.e. “net”). In our Napster business to business revenue stream, we generally operate as a principal in arrangements with end customers as we maintain control over the service prior to being transferred to the end customer. Certain business to business customer arrangements include variable consideration based on usage. We estimate variable consideration as part of the total transaction price that is allocated to performance obligations, or distinct service periods within a performance obligation, on a relative standalone selling price basis. Revenues related to Napster subscription services are recognized ratably over the contract period, typically 30 days. Direct to consumer subscriptions are paid in advance, typically on a monthly basis. Subscription services offered to businesses are invoiced on a monthly basis and the timing of payment generally does not vary significantly from the timing of invoice. |
Segments | We manage our business and report revenue and operating income (loss) in four 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; (3) Games, which includes all our games-related businesses, including sales of mobile games, games licenses, in-game virtual goods, subscription services, and advertising on games and social network sites; and (4) Napster, which includes our on-demand music streaming and music services. RealNetworks allocates to its Consumer Media, Mobile Services and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items also include restructuring charges and stock compensation charges. As stated in Note 5 Acquisitions, Napster is operating as an independent company and includes all their corporate expenses in their segment results, and RealNetworks does not allocate any expenses to the Napster segment. RealNetworks reports four reportable segments based on factors such as how we manage our operations and how the Chief Operating Decision Maker (CODM) reviews results. The CODM reviews financial information presented on both a consolidated basis and on a business segment basis. The accounting policies used to derive segment results are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies, in the 10-K. |
Revenue Recognition (Tables) |
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Revenue from Contract with Customer [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Segment Reporting Information, by Segment | Disaggregation of Revenue The following table presents our disaggregated revenue by source and segment (in thousands):
The following table presents our disaggregated revenue by sales channel (in thousands):
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Stock-Based Compensation (Tables) |
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Share-based Payment Arrangement [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-Based Compensation Expense | Total stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations and comprehensive income (loss) includes amounts related to stock options, restricted stock, and employee stock purchase plans and was as follows (in thousands):
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Weighted-Average Assumptions Used to Determine Fair Value of Options Granted | The fair value of RealNetworks options granted determined using the Black-Scholes model used the following weighted-average assumptions:
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Acquisitions (Tables) |
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Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Recognized Identified Assets Acquired and Liabilities Assumed | The following table summarizes the preliminary allocation of the total consideration to the estimated fair values of the assets acquired and liabilities assumed as of January 18, 2019 (in thousands):
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Schedule of Finite-Lived Intangible Assets Acquired as Part of Business Combination | Acquired intangible assets have a total weighted average useful life of approximately 8 years, are being amortized using the straight line method, and are comprised of the following (in thousands):
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Business Acquisition, Pro Forma Information | The following table provides the supplemental pro forma revenue and net results of the combined entity had the acquisition date of Napster been the first day of our first quarter of 2018 rather than during our first quarter of 2019 (in thousands):
(1) The pro forma net earnings attributable to RealNetworks for the quarter ended June 30, 2018 include $0.4 million of transaction costs, and for the six months ended June 30, 2018, pro forma net earnings attributable to RealNetworks include the acquisition related gain of $12.3 million and $1.2 million of transaction costs. |
Fair Value Measurements (Tables) |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Assets 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 June 30, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands):
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Other Intangible Assets (Tables) |
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Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Intangible Assets | Other intangible assets (in thousands):
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Schedule of Finite-Lived Intangible Assets, Future Amortization Expense | Estimated future amortization of other intangible assets (in thousands):
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Goodwill (Tables) |
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Jun. 30, 2019 | |||||||||||||||||||||||||||||||||
Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||
Changes in Goodwill | The following table presents changes in goodwill (in thousands):
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Goodwill Assigned by Segments | The following table presents goodwill by segments (in thousands):
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Accrued and Other Current Liabilities (Tables) |
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Payables and Accruals [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued and Other Liabilities | Accrued royalties, fulfillment and other current liabilities (in thousands):
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Restructuring Charges (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring and Related Activities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Restructuring Charges by Type of Cost | Restructuring charges are as follows (in thousands):
Changes to the accrued restructuring liability (which is included in Accrued royalties, fulfillment and other current liabilities) for 2019 (in thousands) are as follows:
|
Earnings (Loss) Per Share (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Calculation of Basic and Diluted Earnings Per Share | Basic and diluted EPS (in thousands, except per share amounts):
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Leases (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lease, Cost | Details related to lease expense and supplemental cash flow were as follows (in thousands):
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Lessee, Operating Lease, Disclosure | Details related to lease term and discount rate were as follows:
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Lessee, Operating Lease, Liability, Maturity | Future minimum lease payments as of June 30, 2019 were as follows (in thousands):
|
Segment Information (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Results | Disaggregation of Revenue The following table presents our disaggregated revenue by source and segment (in thousands):
The following table presents our disaggregated revenue by sales channel (in thousands):
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Revenue by Geographic Region | 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):
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Long-Lived Assets by Geographic Region | Long-lived assets (consisting of goodwill, equipment, software, leasehold improvements, operating lease assets, and other intangible assets) by geographic region (in thousands) are as follows:
|
Recent Accounting Pronouncements Recent Accounting Pronouncements (Details) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Jan. 01, 2019 |
Dec. 31, 2018 |
---|---|---|---|
Accounting Changes and Error Corrections [Abstract] | |||
Operating lease assets | $ 13,672 | $ 12,537 | $ 0 |
Present value of total minimum payments(b) | $ 15,412 | $ 14,601 |
Revenue Recognition (Additional Information) (Details) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Dec. 31, 2018 |
Jan. 01, 2018 |
---|---|---|---|
Revenue, Initial Application Period Cumulative Effect Transition [Line Items] | |||
Retained deficit | $ (531,678) | $ (524,009) | |
Accounting Standards Update 2014-09 | |||
Revenue, Initial Application Period Cumulative Effect Transition [Line Items] | |||
Retained deficit | $ 1,000 |
Revenue Recognition Contract Balances (Details) - USD ($) $ in Millions |
6 Months Ended | |
---|---|---|
Jun. 30, 2019 |
Dec. 31, 2018 |
|
Contract Balances [Abstract] | ||
Long-term accounts receivable | $ 0.1 | $ 0.7 |
Deferred revenue | 6.2 | |
Increase in deferred revenue | $ 3.8 |
Stock-Based Compensation (Recognized Stock-Based Compensation Expense) (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Share-based Payment Arrangement [Abstract] | ||||
Total stock-based compensation expense | $ 533 | $ 457 | $ 1,917 | $ 1,614 |
Stock-Based Compensation (Weighted-Average Assumptions Used to Determine Fair Value of Options Granted) (Detail) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Share-based Payment Arrangement [Abstract] | ||||
Expected dividend yield | 0.00% | 0.00% | 0.00% | 0.00% |
Risk-free interest rate | 2.26% | 2.72% | 2.32% | 2.59% |
Expected life | 3 years 10 months 6 days | 3 years 9 months 1 day | 4 years 1 month 6 days | 4 years |
Volatility | 41.00% | 35.00% | 41.00% | 35.00% |
Stock-Based Compensation (Additional Information) (Detail) $ in Millions |
3 Months Ended |
---|---|
Jun. 30, 2019
USD ($)
| |
Share-based Payment Arrangement [Abstract] | |
Total unrecognized compensation cost | $ 3.1 |
Total unrecognized compensation cost, expected recognition period (in years) | 3 years 1 month 17 days |
Acquisitions - Pro Forma Information (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Business Acquisition [Line Items] | ||||
Business Acquisition, Pro Forma Revenue | $ 44,355 | $ 52,296 | $ 90,193 | $ 112,145 |
Business Acquisition, Pro Forma Net Income (Loss) | $ (8,455) | (4,694) | (17,973) | $ 2,295 |
Business Acquisition, Pro Forma Transaction Expenses | $ 357 | $ 1,157 |
Fair Value Measurements (Short-term Investments) (Details) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||
Total short-term investments | $ 28,463 | $ 38,080 |
Short-term Investments | ||
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||
Total short-term investments | $ 24 |
Other Intangible Assets - Estimated Amortization Expense (Details) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Finite-Lived Intangible Assets [Line Items] | ||
2019 (Excluding the six months ended June 30, 2019) | $ 2,266 | |
2020 | 4,526 | |
2021 | 4,526 | |
2022 | 2,641 | |
2023 | 1,145 | |
Thereafter | 6,512 | |
Finite-Lived Intangible Assets, Net | $ 21,616 | $ 26 |
Goodwill (Changes in Goodwill) (Detail) $ in Thousands |
6 Months Ended |
---|---|
Jun. 30, 2019
USD ($)
| |
Goodwill [Roll Forward] | |
Beginning Balance | $ 16,955 |
Goodwill, Written off Related to Sale of Business Unit | 48,474 |
Effects of foreign currency translation | (34) |
Ending Balance | $ 65,395 |
Goodwill (Additional Information) (Details) - USD ($) $ in Thousands |
Apr. 16, 2018 |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|---|
Acquired Finite-Lived Intangible Assets [Line Items] | |||
Goodwill | $ 65,395 | $ 16,955 | |
Netherlands-Based Game Development Studio | |||
Acquired Finite-Lived Intangible Assets [Line Items] | |||
Percentage of shares acquired | 100.00% | ||
Net purchase price | $ 4,200 |
Goodwill (Goodwill by Segments) (Detail) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Goodwill [Line Items] | ||
Goodwill | $ 65,395 | $ 16,955 |
Consumer Media | ||
Goodwill [Line Items] | ||
Goodwill | 580 | |
Mobile Services | ||
Goodwill [Line Items] | ||
Goodwill | 2,032 | |
Games | ||
Goodwill [Line Items] | ||
Goodwill | 14,309 | |
Napster | ||
Goodwill [Line Items] | ||
Goodwill | $ 48,474 |
Accrued and Other Current Liabilities (Detail) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Product Warranty Liability [Line Items] | ||
Royalties and other fulfillment costs | $ 75,849 | $ 1,989 |
Employee compensation, commissions and benefits | 6,395 | 4,444 |
Sales, VAT and other taxes payable | 3,293 | 785 |
Operating Lease, Liability, Current | 5,028 | 0 |
Other | 7,386 | 4,094 |
Total accrued and other liabilities | 97,951 | $ 11,312 |
Napster | ||
Product Warranty Liability [Line Items] | ||
Royalties and other fulfillment costs | 74,100 | |
Prepaid Royalties | $ 12,900 |
Restructuring Charges (Details) - USD ($) $ in Thousands |
6 Months Ended | |
---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Restructuring Cost and Reserve [Line Items] | ||
Costs incurred and charged to expense | $ 896 | $ 688 |
Restructuring Reserve [Roll Forward] | ||
Accrued liability beginning balance | 755 | |
Restructuring Reserve, Charged Against Earnings, Excluding Non-Cash Charges | 571 | |
Cash payments | (693) | |
Accrued liability ending balance | 633 | |
Employee Separation Costs | ||
Restructuring Cost and Reserve [Line Items] | ||
Costs incurred and charged to expense | 344 | 688 |
Restructuring Reserve [Roll Forward] | ||
Accrued liability beginning balance | 755 | |
Costs incurred and charged to expense | 344 | |
Cash payments | (693) | |
Accrued liability ending balance | 406 | |
Contract Termination [Member] | ||
Restructuring Cost and Reserve [Line Items] | ||
Costs incurred and charged to expense | 552 | $ 0 |
Restructuring Reserve [Roll Forward] | ||
Accrued liability beginning balance | 0 | |
Costs incurred and charged to expense | 227 | |
Cash payments | 0 | |
Accrued liability ending balance | $ 227 |
Lease Exit and Related Charges (Changes to Accrued Loss on Excess Office Facilities) (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Loans and Leases Receivable Disclosure [Line Items] | ||||
Lease exit and related charges (benefit) | $ 0 | $ 129 | $ 0 | $ 454 |
Income Taxes Income Taxes (Details) $ in Thousands |
Jun. 30, 2019
USD ($)
|
---|---|
Income Tax Contingency [Line Items] | |
Unrecognized Tax Benefits | $ 4,500 |
Napster | |
Income Tax Contingency [Line Items] | |
Unrecognized Tax Benefits | $ 4,100 |
Earnings (Loss) Per Share (Additional Information) (Detail) - shares shares in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Earnings Per Share [Abstract] | ||||
Shares of common stock excluded from the calculation of diluted net income per share because of antidilutive effect | 7.7 | 5.9 | 7.3 | 6.0 |
Leases - Details of Lease Assets and Liabilities (Details) $ in Thousands |
3 Months Ended | 6 Months Ended |
---|---|---|
Jun. 30, 2019
USD ($)
|
Jun. 30, 2019
USD ($)
|
|
Leases [Abstract] | ||
Operating Lease, Expense, Including Sublease Income | $ 1,463 | $ 2,803 |
Operating Lease, Variable Rent Expense | 358 | 511 |
Operating Leases, Rent Expense, Sublease Rentals | (511) | (986) |
Operating Lease, Expense | 1,310 | 2,328 |
Operating cash outflows for lease liabilities | $ (1,412) | $ (2,873) |
Weighted-average remaining lease term | 4 years | 4 years |
Weighted-average discount rate | 5.13% | 5.13% |
Leases - Schedule of Future Minimum Lease Payments (Details) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Jan. 01, 2019 |
Dec. 31, 2018 |
---|---|---|---|
Leases [Abstract] | |||
2019 (Excluding the six months ended June 30, 2019) | $ 2,737 | ||
2020 | 4,909 | ||
2021 | 3,296 | ||
2022 | 2,429 | ||
2023 | 2,347 | ||
Thereafter | 1,634 | ||
Total minimum payments(a) | 17,352 | ||
Less: Imputed interest | 1,940 | ||
Present value of total minimum payments(b) | 15,412 | $ 14,601 | |
Executory costs | 6,900 | ||
Sublease rentals | 6,100 | ||
Operating lease, liability, noncurrent | 10,384 | $ 0 | |
Operating lease, liability, current | $ 5,028 | $ 0 |
Leases - Narrative (Details) - USD ($) $ in Millions |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Lessee, Lease, Description [Line Items] | ||
Future minimum lease payments | $ 15.9 | |
2019 | 3.7 | |
2020 | 3.0 | |
2021 | 2.7 | |
2022 | 2.4 | |
2023 | 2.3 | |
Thereafter | $ 1.6 | |
Minimum | ||
Lessee, Lease, Description [Line Items] | ||
Lessee, Operating Lease, Term of Contract | 1 year | |
Maximum | ||
Lessee, Lease, Description [Line Items] | ||
Lessee, Operating Lease, Term of Contract | 5 years |
Commitments and Contingencies Commitments and Contingencies (Details) - USD ($) $ in Millions |
Jun. 30, 2019 |
Nov. 30, 2017 |
---|---|---|
Line of Credit | ||
Loss Contingencies [Line Items] | ||
Guarantor Obligations, Maximum Exposure, Undiscounted, Gain (loss) on Elimination | $ 2.8 | |
Guarantor Obligations, Maximum Exposure, Undiscounted | $ 2.8 | |
Napster | ||
Loss Contingencies [Line Items] | ||
Loss Contingency, Estimate of Possible Loss | $ 10.0 |
Segment Information (Additional Information) (Detail) |
3 Months Ended |
---|---|
Jun. 30, 2019
Segment
| |
Segment Reporting [Abstract] | |
Number of reporting segments | 4 |
Segment Information (Segment Results) (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Segment Reporting Information [Line Items] | ||||
Revenue | $ 44,248 | $ 15,724 | $ 83,720 | $ 35,374 |
Cost of revenue | 27,282 | 4,625 | 52,152 | 9,761 |
Gross profit | 16,966 | 11,099 | 31,568 | 25,613 |
Operating expenses | 26,357 | 17,932 | 51,863 | 37,400 |
Operating loss | (9,391) | (6,833) | (20,295) | (11,787) |
Consumer Media | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 2,620 | 3,884 | 5,106 | 9,367 |
Mobile Services | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 6,997 | 6,719 | 13,936 | 15,423 |
Games | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 6,048 | 5,121 | 11,758 | 10,584 |
Napster | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 28,583 | 0 | 52,920 | 0 |
Operating Segments | Consumer Media | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 2,620 | 3,884 | 5,106 | 9,367 |
Cost of revenue | 803 | 1,028 | 1,636 | 2,021 |
Gross profit | 1,817 | 2,856 | 3,470 | 7,346 |
Operating expenses | 2,877 | 3,439 | 5,996 | 7,357 |
Operating loss | (1,060) | (583) | (2,526) | (11) |
Operating Segments | Mobile Services | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 6,997 | 6,719 | 13,936 | 15,423 |
Cost of revenue | 1,865 | 2,134 | 3,913 | 4,450 |
Gross profit | 5,132 | 4,585 | 10,023 | 10,973 |
Operating expenses | 7,438 | 6,969 | 14,999 | 14,335 |
Operating loss | (2,306) | (2,384) | (4,976) | (3,362) |
Operating Segments | Games | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 6,048 | 5,121 | 11,758 | 10,584 |
Cost of revenue | 1,655 | 1,456 | 3,325 | 3,273 |
Gross profit | 4,393 | 3,665 | 8,433 | 7,311 |
Operating expenses | 5,288 | 5,095 | 10,325 | 10,012 |
Operating loss | (895) | (1,430) | (1,892) | (2,701) |
Operating Segments | Napster | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 28,583 | 0 | 52,920 | 0 |
Cost of revenue | 23,026 | 0 | 43,422 | 0 |
Gross profit | 5,557 | 0 | 9,498 | 0 |
Operating expenses | 6,638 | 0 | 12,170 | 0 |
Operating loss | (1,081) | 0 | (2,672) | 0 |
Corporate | ||||
Segment Reporting Information [Line Items] | ||||
Cost of revenue | (67) | 7 | (144) | 17 |
Operating expenses | 4,116 | 2,429 | 8,373 | 5,696 |
Operating loss | $ (4,049) | $ (2,436) | $ (8,229) | $ (5,713) |
Segment Information (Revenue by Geographic Region) (Detail) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenue | $ 44,248 | $ 15,724 | $ 83,720 | $ 35,374 |
United States | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenue | 21,322 | 7,646 | 40,292 | 19,080 |
Europe | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenue | 17,097 | 3,010 | 32,481 | 6,035 |
Rest of the World | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenue | $ 5,829 | $ 5,068 | $ 10,947 | $ 10,259 |
Segment Information (Long-Lived Assets by Geographic Region) (Detail) - USD ($) $ in Thousands |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Revenues from External Customers and Long-Lived Assets [Line Items] | ||
Long-lived assets | $ 103,813 | $ 19,735 |
United States | ||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||
Long-lived assets | 89,883 | 11,823 |
Europe | ||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||
Long-lived assets | 11,028 | 6,761 |
Rest of the World | ||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||
Long-lived assets | $ 2,902 | $ 1,151 |
Related Party Transactions Related Party Transactions (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Mar. 31, 2010 |
Jun. 30, 2019 |
Jan. 18, 2019 |
Dec. 31, 2018 |
Dec. 01, 2016 |
|
Related Party Transaction [Line Items] | |||||
Payments for restructuring | $ 693 | ||||
Rhapsody America LLC | |||||
Related Party Transaction [Line Items] | |||||
Loan principal to related party | 1,000 | ||||
Rhapsody America LLC | |||||
Related Party Transaction [Line Items] | |||||
Percentage of shares acquired | 42.00% | ||||
Business Combination, Step Acquisition, Equity Interest in Acquiree, Including Subsequent Acquisition, Percentage | 84.00% | ||||
Rhapsody America LLC | |||||
Related Party Transaction [Line Items] | |||||
Payments for restructuring | $ 18,000 | ||||
Liquidation preference amount | $ 10,000 | ||||
Percentage of ownership interest in Rhapsody | 42.00% | ||||
Loan principal to related party | $ 5,000 | ||||
Notes Payable, Related Parties, Aggregate Amount | $ 10,000 | ||||
Note payable, Related Parties, Interest Rate | 5.00% | 15.00% |
Subsequent Event (Details) - USD ($) $ in Millions |
Aug. 01, 2019 |
Jul. 31, 2019 |
Jun. 30, 2019 |
---|---|---|---|
Rhapsody America LLC | |||
Subsequent Event [Line Items] | |||
Loan principal to related party | $ 1.0 | ||
Restricted Cash Equivalents And Investments | Subsequent Event | |||
Subsequent Event [Line Items] | |||
Restricted Cash and Investments, Minimum Amount | $ 3.5 | ||
Revolving Credit Facility | Subsequent Event | |||
Subsequent Event [Line Items] | |||
Line of Credit Facility, Maximum Borrowing Capacity | $ 10.0 | ||
Debt Instrument, Description of Variable Rate Basis | 0.055 | ||
Revolving Credit Facility | Prime Rate | Subsequent Event | |||
Subsequent Event [Line Items] | |||
Debt Instrument, Basis Spread on Variable Rate | 0.50% |
Label | Element | Value |
---|---|---|
Cumulative Effect of New Accounting Principle in Period of Adoption | us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption | $ 1,024,000 |
Parent [Member] | ||
Cumulative Effect of New Accounting Principle in Period of Adoption | us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption | 1,024,000 |
Retained Earnings [Member] | ||
Cumulative Effect of New Accounting Principle in Period of Adoption | us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption | $ 1,024,000 |
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