Fair Value Measurements

12 Months Ended

Dec. 31, 2020


Note 5.			Fair Value Measurements

Items Measured at Fair Value on a Recurring Basis

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


	Fair Value Measurements as of								Amortized Cost as of
	December 31, 2020								December 31, 2020
	Level 1		Level 2		Level 3		Total

Cash and cash equivalents	$	23,940	$	—	$	—	$	23,940	$	23,940
Investments	—		—		9,965		9,965		N/A
Restricted cash equivalents	1,630		—		—		1,630		1,630
Total assets	$	25,570	$	—	$	9,965	$	35,535	N/A
Accrued and other current liabilities:
Napster acquisition contingent consideration	$	—	$	—	$	4,800	$	4,800	N/A
Other long-term liabilities
Simple Agreements for Future Equity	—		—		2,106		2,106		N/A
Total liabilities	$	—	$	—	$	6,906	$	6,906	N/A


	Fair Value Measurements as of								Amortized Cost as of
	December 31, 2019								December 31, 2019
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	8,472	$	—	$	—	$	8,472	$	8,472
Restricted cash equivalents	3,500		1,380		—		4,880		4,880
Total assets	$	11,972	$	1,380	$	—	$	13,352	$	13,352
Accrued and other current liabilities:
Napster acquisition contingent consideration	$	—	$	—	$	2,800	$	2,800	N/A
Other long-term liabilities
Napster acquisition contingent consideration	—		—		9,800		9,800		N/A
Total liabilities	$	—	$	—	$	12,600	$	12,600	N/A

Restricted cash equivalents as of December 31, 2020 and 2019 relate to cash pledged as collateral against letters of credit in connection with lease agreements and, as of December 31, 2020 and 2019, our Loan Agreement requires us to maintain a minimum balance of $1.5 million and $3.5 million,respectively, unrestricted cash at the bank. See Note 9. Debt for additional details.

Investments as of December 31, 2020 are comprised of MelodyVR ordinary shares received as a portion of the consideration from the Napster disposition. The fair value of these equity securities was calculated using the closing price of the shares as of December 31, 2020 and discounted for a lack of liquidity due to the restriction of selling or transferring the shares. Pursuant to the transaction documents executed in connection with the Napster disposition, RealNetworks is restricted from selling or transferring the MelodyVR shares, except in limited circumstances, for a period of approximately one year from the close of the transaction. The determination of the discount required the use of significant unobservable inputs, such as the lock-up period combined with an estimated equity volatility for the shares, that reflect our own estimates of assumptions that market participants would use. A 10% increase or decrease to the equity volatility rate could result in a $0.2 million decrease or $0.1 million increase, respectively, in the fair value of the stock. For the year ended December 31, 2020, we recognized unrealized gains of $0.7 million in Gain on equity and other investments, net on the consolidated statement of operations.

Accrued and other current liabilities as of December 31, 2020 and 2019 and other long-term liabilities as of December 31, 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 4. Acquisitions and Dispositions, this liability is adjusted quarterly to fair value through earnings. The terms of the 2019 transaction whereby RealNetworks acquired a controlling interest in Napster included initial cash consideration of $1.0 million and additional contingent consideration. Initial cash consideration of $0.2 million was paid at closing. With regards to contingent

consideration, over the five years following the acquisition, RealNetworks committed to pay the lesser of the following: (a) an additional $14.0 million to seller, or (b) if RealNetworks were to sell the interest to a third party for less than $15.0 million, the actual amount received by RealNetworks, minus the $1.0 million initial consideration. These contingent consideration amounts were part of the total consideration at estimated fair value.

During the year ended December 31, 2020, we recorded a change in fair value of the contingent consideration of $8.6 million as a decrease to the total liability on the consolidated balance sheet and as a reduction in operating expense on the consolidated statement of operations. During the fiscal year ended December 31, 2019, we recorded a change in fair value of the contingent consideration of $1.0 million as an increase to the total liability on the consolidated balance sheet and as an increase in operating expense on the consolidated statement of operations. Other than the adjustments to the estimated fair value, there were no changes in the balance of the contingent consideration during fiscal years 2020 and 2019.

The valuation methodology of contingent consideration at December 31, 2020 was based on RealNetworks' contractual obligation to pay the seller of the interests purchased by RealNetworks in the January 2019 Napster transaction discussed in Note 4. Acquisitions and Dispositions. For purposes of determining fair value of contingent consideration at December 31, 2020, this obligation was deemed to have a fair value of $4.8 million based on the terms of the Napster sale transaction. This amount represents the amount received for sale of the interest acquired in the Napster purchase transaction of $5.0 million less the $0.2 million paid at closing in January 2019. At December 31, 2019, the fair value of the contingent consideration was estimated using multiple scenarios for each tranche of contingent consideration and then probability weighting each scenario and discounting them to an estimated fair value.

In the third quarter of 2020, Scener, our 82%-owned subsidiary, received $2.1 million in cash in return for issuing rights to investors for certain shares of Scener's capital stock contingent upon the occurrence of specific future capital raising events by Scener. The rights were each issued as a Simple Agreement for Future Equity ("SAFE Notes"). The future contingent events also contemplate the possibility of Scener having to pay back the original cash investment to each investor. The SAFE Notes are recorded as a liability on our consolidated financial statements within Other long-term liabilities and are required to be recorded at fair value each quarter. The valuation analysis model for the fair value of the SAFE Notes as of December 31, 2020 used significant unobservable inputs that reflect our own estimates of assumptions that market participants would use. There has been no change in the estimated fair value since the issuance in the third quarter of 2020. Significant unobservable inputs to the valuation analysis model include the underlying conversion date for the SAFE Notes, Scener's capitalization prior to conversion of the SAFE Notes, an 80% discount rate as defined in the SAFE Note agreements, conversion price, conversion shares and an annual present value rate. All of the inputs are subject to significant judgment. See Note 19. Related Party Transactions for additional discussion of Scener.

Items Measured at Fair Value on a Non-recurring Basis

Certain of our assets and liabilities are measured at estimated fair value on a non-recurring basis, using Level 3 inputs. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). We did not record any impairments on those assets required to be measured at fair value on a non-recurring basis in 2020 or 2019.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details