On January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc. (doing business as Napster) which brought our aggregate ownership to 84% of 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. On August 24, 2020, RealNetworks announced that Napster had signed an agreement to be sold to MelodyVR Group PLC in a transaction that closed in the fourth quarter of 2020. See Napster Disposition below for additional details.

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.

Subsequent to RealNetworks’ January 18, 2019 acquisition, Napster operated as an independent business with its own board of directors, strategy and leadership team. Napster's separate legal existence was further supported by each company's ongoing compliance with corporate formalities, the independent direction of Napster's activities, and the consistent treatment of each of RealNetworks and Napster as distinct organizations. During the periods of the acquisition date until the announcement of the sale, we consolidated Napster's financial results into our financial statements and reported Napster as a separate segment in our consolidated financial statements.

We 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 RealNetworks did not own between the acquisition and disposition was accounted for as a noncontrolling interest in our consolidated financial statements. 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 at the time of acquisition, which is a component of the overall gain recognized as a part of this transaction. Our consolidated balance sheet reflected Napster's working capital deficit, which resulted in a consolidated working capital deficit. RealNetworks did 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.


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	$	10,127
Accounts receivable	20,915
Prepaid expenses and other current assets	2,421
Restricted cash	2,322
Equipment, software and leasehold improvements	474
Operating lease assets	2,400
Other long-term assets	77
Deferred tax assets, net	5,932
Intangible assets	23,700
Goodwill	45,520
Total assets acquired	113,888

Accounts payable	786
Accrued royalties and fulfillment	59,036
Accrued and other current liabilities	7,032
Deferred revenue, current portion	3,526
Notes payable	12,211
Deferred tax liabilities, net	6,208
Long-term lease liabilities	1,190
Other long-term liabilities	1,621
Total liabilities assumed	91,610
Total net assets acquired	22,278
Noncontrolling interests	570
Net assets acquired	$	21,708

Under the acquisition method of accounting, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values. In the fourth quarter of 2019, we recorded purchase price allocation adjustments that reflect new information obtained during the measurement period about facts and circumstances that existed at the date of the acquisition. These adjustments did not have a material effect on 2019 consolidated financial statements and were primarily associated with the estimated fair values of acquired prepaid royalties, accrued royalties, and accrued taxes, with a corresponding net reduction of $3.0 million to goodwill. Adjustments to acquired prepaid royalties and accrued royalties also include the matching and invoicing of music royalties owed as of the opening balance sheet.

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

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 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 our preexisting 42% equity method investment was 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), net in the consolidated statement of operations in 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. At the time of acquisition, we used a group of comparable companies and selected an appropriate EBITDA multiple to apply to Napster's projected 2020 and 2021 EBITDA. Assumptions in both the income and market approaches were significant to the overall valuation of Napster and changes to these assumptions could have materially impacted the 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 at the time of acquisition. This fair value calculation was directly impacted by the estimated total enterprise value described above. See Note 5. Fair Value Measurements for additional discussion.

The effective settlement of Napster's debt and warrants totaling $6.4 million represented the estimated fair value of debt and warrants held between RealNetworks and Napster as of the acquisition date. The estimated fair value was derived from the estimated total enterprise value described above. The resulting net gain of $5.5 million was included in other income (expenses), net in the consolidated statement of operations in 2019.

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 at the time of acquisition, which was included in other income (expenses), net in the consolidated statement of operations in 2019. RealNetworks has not been required to pay any portion of this commitment, and Napster fully repaid this loan balance on April 30, 2019, thus releasing RealNetworks' previous guaranty.

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 at the time of acquisition, which is included in other income (expenses), net in the consolidated statement of operations in 2019.

We also recorded goodwill of $45.5 million, representing the intangible assets that do not qualify for separate recognition for accounting purposes, including the expected growth in Napster's business to business model and the assembled workforce. The goodwill was reported in the Napster segment and was not deductible for income tax purposes.

RealNetworks, Inc. entered into a Support Agreement dated August 25, 2020 by and among its 84%-owned subsidiary, Napster, and MelodyVR Group PLC, referred to as MelodyVR, an English public limited company. The Support Agreement was executed in connection with an Agreement and Plan of Merger, or Merger Agreement, by and among Napster, MelodyVR, and a wholly owned subsidiary of MelodyVR. The transaction was completed on December 30, 2020. Pursuant to the Merger Agreement, on the closing date, MelodyVR's subsidiary merged with and into Napster, with Napster surviving as a wholly owned subsidiary of MelodyVR. Other than as Securityholder Representative, RealNetworks was not a party to the Merger Agreement.

MelodyVR paid consideration of approximately $26 million to certain holders of debt and equity of Napster, comprised of $12 million in cash, shares of MelodyVR, and a $3 million 18-month indemnity escrow. The shares of MelodyVR that RealNetworks received may not be sold or transferred, except in limited circumstances, for a period of approximately one year from the close of the transaction. Certain proceeds from the transaction were used to fully repay the advance to Napster on the revolving line of credit, as discussed in Note 9. Debt, pay Napster's transaction expenses, and pay amounts to certain of Napster's common stockholders. Additionally, a portion of the proceeds paid to RealNetworks is subject to contingent consideration obligations associated with its January 2019 acquisition from a third party of a 42% stake in Napster and a $5.0 million loan that the third party had made to Napster. See Note 5. Fair Value Measurements for additional discussion.

Effective on the execution of the Agreement and Plan of Merger on August 25, 2020, Napster was treated as discontinued operations and held-for-sale for accounting and disclosure purposes and subsequently sold in December 2020. As such, Napster’s operating results and financial condition were recast to conform to this presentation.


	December 31, 2019
Cash and cash equivalents	$	8,333
Trade accounts receivable, net of allowance	16,740
Other current assets	3,303
Total current assets of discontinued operations	28,376
Net equipment, software, and leasehold improvements	401
Other intangible assets	19,286
Goodwill	45,520
Other non-current assets	2,604
Total assets of discontinued operations	$	96,187
Accrued royalties, fulfillment and other current liabilities	$	65,310
Notes payable	7,331
Total current liabilities of discontinued operations	72,641
Other non-current liabilities	1,843
Total liabilities of discontinued operations	$	74,484


	2020		2019
Revenue	$	96,185	$	106,311
Cost of revenue	73,318		85,901
Gross profit	22,867		20,410
Operating expenses	24,734		25,789
Operating loss	(1,867)		(5,379)
Other income (expenses)	2,175		(285)
Income (loss) from discontinued operations before income taxes	308		(5,664)
Income tax expense	514		366
Net loss from discontinued operations	(206)		(6,030)
Noncontrolling interests in net income (loss) from discontinued operations	(184)		(1,094)
Net loss from discontinued operations attributable to RealNetworks	$	(22)	$	(4,936)