Form 10-Q REALNETWORKS INC For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM | |||||||||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Quarterly Period Ended June 30, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 1-37745
| (Exact name of registrant as specified in its charter) | |||||||||||||||||
| (State of incorporation) | (I.R.S. Employer Identification Number) | ||||||||||||||||
| , | |||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
| (Registrant’s telephone number, including area code) | |||||||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||||||||
| ☒ | Smaller reporting company | ||||||||||||||||
| 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. ¨ | |||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ☒
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
The number of shares of the registrant’s Common Stock outstanding as of July 22, 2022 was 47,343,993 .
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
.
| June 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Trade accounts receivable, net of allowances of $ | |||||||||||
| Deferred costs, current portion | |||||||||||
| Investments | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Equipment, software, and leasehold improvements, at cost: | |||||||||||
| Equipment and software | |||||||||||
| Leasehold improvements | |||||||||||
| Total equipment, software, and leasehold improvements | |||||||||||
| Less accumulated depreciation and amortization | |||||||||||
| Net equipment, software, and leasehold improvements | |||||||||||
| Operating lease assets | |||||||||||
| Restricted cash equivalents | |||||||||||
| Other assets | |||||||||||
| Deferred tax assets, net | |||||||||||
| Goodwill | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued and other current liabilities | |||||||||||
| Deferred revenue, current portion | |||||||||||
| Total current liabilities | |||||||||||
| Deferred revenue, non-current portion | |||||||||||
| Deferred tax liabilities, net | |||||||||||
| Long-term lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Shareholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
| Series A: authorized 200 shares, no shares issued and outstanding | |||||||||||
| Series B: authorized 8,100 shares; issued and outstanding 8,065 shares in 2022 and 2021 | |||||||||||
| Undesignated series: authorized 51,700 shares | |||||||||||
| Common stock, $0.001 par value, authorized 250,000 shares; issued and outstanding 47,342 shares in 2022 and 47,257 shares in 2021 | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In thousands, except per share data)
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Fair value adjustments to contingent consideration liability | ( | ||||||||||||||||||||||
| Restructuring and other charges | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expenses): | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Loss on equity and other investments, net | ( | ( | ( | ( | |||||||||||||||||||
| Gain on forgiveness of Paycheck Protection Program loan | |||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Total other income (expenses), net | ( | ( | ( | ||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net loss including noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Net loss attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net loss attributable to RealNetworks | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share attributable to RealNetworks- Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share attributable to RealNetworks- Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Shares used to compute basic net loss per share | |||||||||||||||||||||||
| Shares used to compute diluted net loss per share | |||||||||||||||||||||||
| Comprehensive loss: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Total other comprehensive loss | ( | ( | ( | ||||||||||||||||||||
| Net loss including noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive loss including noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive loss attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Comprehensive loss attributable to RealNetworks | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Loss on equity and other investments, net | |||||||||||
| Foreign currency gain | ( | ( | |||||||||
| Fair value adjustments to contingent consideration liability | ( | ||||||||||
| Loss on impairment of operating lease assets | |||||||||||
| Gain on deconsolidation of subsidiary | ( | ||||||||||
| Gain on forgiveness of Paycheck Protection Program loan | ( | ||||||||||
| Net change in certain operating assets and liabilities: | |||||||||||
| Trade accounts receivable | ( | ||||||||||
| Prepaid expenses, operating lease and other assets | |||||||||||
| Accounts payable | ( | ||||||||||
| Accrued, lease and other liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of equipment, software, and leasehold improvements | ( | ( | |||||||||
| Deconsolidation of subsidiary | ( | ||||||||||
| Other | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common stock (stock options) | |||||||||||
| Proceeds from equity offering, net of costs | |||||||||||
| Tax payments from shares withheld upon vesting of restricted stock | ( | ( | |||||||||
| Payment of contingent consideration liability | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
| Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Shareholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, January 1, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercise of stock options and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock from equity offering, net of costs | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deconsolidation of subsidiary | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Shareholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, January 1, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercise of stock options and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercise of stock options, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
7
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2022 and 2021
| Note 1. | Description of Business and Summary of Significant Accounting Policies | ||||
Description of Business. RealNetworks provides digital media software and services to consumers, mobile carriers, device manufacturers, system integrators, and other businesses. Consumers use our digital media products and services to store, organize, play, manage and enjoy their digital media content, either directly from us or through our distribution partners. We have recently developed a new generation of artificial intelligence (AI)-based products and solutions. The main two products and key investment initiatives in our AI portfolio are SAFR, our AI-based computer vision platform, and KONTXT, our natural language processing-based message classification and analysis platform.
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.
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 represent third-party ownership in the equity of Scener Inc. ("Scener"), which was deconsolidated on June 30, 2021, and are reflected separately in the Company's financial statements. See Note 12. Related Party Transactions for additional details. 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, 2022 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2022. 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).
Liquidity and Capital Resources. The Company continues to incur operating losses, including net operating losses of $4.9 million and $9.9 million for the three and six months ended June 30, 2022, respectively. The Company had an accumulated deficit of $581.2 million and $570.8 million as of June 30, 2022 and December 31, 2021, respectively. Our unrestricted cash and cash equivalents balance was $14.4 million as of June 30, 2022. We have evaluated our current liquidity position in light of our history of declining revenue and operating losses as well as our near-term expectations of net negative cash flows from operating activities. Moreover, our operating forecast is partly dependent on factors that are outside of our control, including the ongoing effects of the coronavirus pandemic and related impacts on global commerce and financial markets. These conditions raise substantial doubt about our ability to continue as a going concern within 12 months from the date of this filing. Our financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
We intend to use our existing unrestricted cash balances to fund our short-term working capital needs. We have active plans to mitigate these conditions. Specifically, we plan to reduce negative cash flow through operating expense reductions. In addition, we are evaluating various strategic opportunities, which may include selling certain businesses or product lines, soliciting external investment into certain of our businesses, or seeking other strategic partnerships. Our plans are subject to inherent risks and uncertainties. Accordingly, there can be no assurance that our plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.
Risks and Uncertainties. In March 2020, the World Health Organization declared the outbreak of the coronavirus that causes COVID-19 to be a global pandemic. As the virus spread throughout the U.S. and the world, authorities implemented numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, business limitations, and shutdowns. In addition to the pandemic's widespread impact on public health and global society, reactions to the pandemic as well as measures taken to contain the virus have caused significant turmoil to the global economy and financial markets. Moreover, similar to other companies, we have taken steps to support the health and well-being of our employees, customers, partners and communities, which include working remotely and learning to operate our businesses in a fundamentally different way.
The COVID-19 pandemic, including the emergence of variants such as the delta and omicron variants, and the resultant economic instability and financial market turmoil has added complexity, uncertainty and risk to nearly all aspects of our
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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, 2021 (the 10-K).
| Note 2. | Recent Accounting Pronouncements | ||||
Recently issued accounting pronouncements not yet adopted
In August 2020, the Financial Accounting Standards Board ("FASB") issued new guidance that simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. The guidance enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. It is effective for annual reporting periods beginning after December 15, 2023, with early adoption permitted. This update permits the use of either the modified retrospective or fully retrospective method of transition. We are in the process of evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures.
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, 2022, with early adoption permitted. We do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued new guidance amending existing guidance for the accounting of credit losses on financial instruments. Under the new guidance, the valuation allowance for credit losses is expected to be incurred over the financial asset’s contractual term. We reviewed the new credit loss standard and determined that it applies to our accounts receivable, which are typically of short duration and for which we have not historically experienced significant credit losses. This guidance is effective for us in fiscal years beginning after December 15, 2022 with any cumulative effect of adoption recorded as an adjustment to retained earnings. We are in the process of evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures.
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| Note 3. | Revenue Recognition | ||||
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.
Disaggregation of Revenue
The following table presents our disaggregated revenue by source and segment (in thousands):
| Quarter Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||
| Consumer Media | Mobile Services | Games | Consumer Media | Mobile Services | Games | |||||||||||||||||||||||||||||||||
| Business Line | ||||||||||||||||||||||||||||||||||||||
| Software License | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Subscription Services | ||||||||||||||||||||||||||||||||||||||
| Product Sales | ||||||||||||||||||||||||||||||||||||||
| Advertising and Other | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Quarter Ended June 30, 2021 | Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||
| Consumer Media | Mobile Services | Games | Consumer Media | Mobile Services | Games | |||||||||||||||||||||||||||||||||
| Business Line | ||||||||||||||||||||||||||||||||||||||
| Software License | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Subscription Services | ||||||||||||||||||||||||||||||||||||||
| Product Sales | ||||||||||||||||||||||||||||||||||||||
| Advertising and Other | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
The following table presents our disaggregated revenue by sales channel (in thousands):
| Quarter Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||
| Consumer Media | Mobile Services | Games | Consumer Media | Mobile Services | Games | |||||||||||||||||||||||||||||||||
| Sales Channel | ||||||||||||||||||||||||||||||||||||||
| Business to Business | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Direct to Consumer | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Quarter Ended June 30, 2021 | Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||
| Consumer Media | Mobile Services | Games | Consumer Media | Mobile Services | Games | |||||||||||||||||||||||||||||||||
| Sales Channel | ||||||||||||||||||||||||||||||||||||||
| Business to Business | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Direct to Consumer | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
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, 2022 and December 31, 2021, our balance of long-term accounts receivable was $0.3 million and $0.2 million, respectively, and is included in other long-term assets on our condensed consolidated balance sheets. The increase in this balance from December 31, 2021 to June 30, 2022 is primarily due to the timing of expected cash receipts. During the quarter and six months ended June 30, 2022, we recorded no impairments to our contract assets.
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We record deferred revenue when cash payments are received in advance of our completion of the underlying performance obligation. As of June 30, 2022 and December 31, 2021, we had a deferred revenue balance of $2.4 million and $2.8 million, respectively, primarily due to deferred revenue associated with monthly subscriptions.
Judgments and Estimates
Our contracts with customers can include obligations to provide multiple services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together can require significant judgment. For example, certain contracts include the sale of software licenses or subscriptions as well as services to be delivered over time. Judgment is also required to determine the standalone selling price ("SSP") for each distinct performance obligation in these arrangements. We allocate revenue to each performance obligation based on the relative SSP. We determine SSP for performance obligations based on overall pricing objectives, which take into consideration observable prices and market conditions.
For certain of our contracts, we recognize revenues using the sales- and usage-based exception as defined in the licensing guidance of Topic 606. For these contracts, we typically receive reporting of actual usage a quarter in arrears, and as such, we are required to estimate the current quarter's usage. To make these estimates, we utilize historical reporting information, as well as industry trends and interim reporting to quantify total quarterly usage. As actual usage information is received, we record a true-up in the following quarter to reflect any variance from our estimate. In the six months ended June 30, 2022 and 2021, we did not record any material true-ups to our consolidated financial statements.
Practical Expedients
| Note 4. | Stock-Based Compensation | ||||
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Expected dividend yield | % | % | % | % | |||||||||||||||||||
| Risk-free interest rate | % | % | % | % | |||||||||||||||||||
| Expected life (years) | |||||||||||||||||||||||
| Volatility | % | % | % | % | |||||||||||||||||||
The total stock-based compensation amounts for 2022 and 2021 disclosed above are recorded in their respective line items within operating expenses in the unaudited condensed consolidated statements of operations and comprehensive loss. Included in the expense for the six months ended June 30, 2021 was stock compensation recorded for 2020 incentive bonuses paid in fully vested restricted stock units, which were authorized and granted during the first quarter of 2021.
As of June 30, 2022, there was $1.4 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately years.
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| 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 June 30, 2022 and December 31, 2021, 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 | ||||||||||||||||||||||||||||
| June 30, 2022 | June 30, 2022 | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Restricted cash equivalents | |||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Fair Value Measurements as of | Amortized Cost as of | ||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2021 | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Investments | N/A | ||||||||||||||||||||||||||||
| Restricted cash equivalents | |||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | N/A | ||||||||||||||||||||||||
Restricted cash equivalents as of June 30, 2022 and December 31, 2021 primarily relate to maintaining a minimum balance of unrestricted cash at the bank. See Note 7. Debt for additional details.
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). Other than those discussed in Note 8. Restructuring and Other Charges, during the six months ended June 30, 2022 and 2021, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.
| Note 6. | Accrued and other current liabilities | ||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| Royalties and other fulfillment costs | $ | $ | |||||||||
| Employee compensation, commissions and benefits | |||||||||||
| Sales, VAT and other taxes payable | |||||||||||
| Operating lease liabilities | |||||||||||
| Other | |||||||||||
| Total accrued and other current liabilities | $ | $ | |||||||||
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| Note 7. | Debt | ||||
In February 2021, we entered into an amendment to our existing Loan and Security Agreement (Loan Agreement) with a third-party financial institution. Under the terms of the amended Loan Agreement, the bank extended a revolving line of credit (Revolver) whereby the borrowing base is comprised of eligible accounts receivable and direct to consumer deposits. Borrowings may not exceed $6.5 million and are reduced by a $0.4 million standby letter of credit entered into with the bank in connection with certain lease agreements. Advances bear interest at a rate equal to one-half of one percentage point (0.5 %) above the greater of the prime rate or 3.25 %. The Loan Agreement contains customary covenants, including financial covenants, minimum EBITDA levels to be updated annually, and maintaining a minimum balance of $1.5 million unrestricted cash at the bank. The Revolver matured August 1, 2022. The Company is currently in negotiations to extend or replace the Revolver with a comparable facility.
| Note 8. | Restructuring and Other Charges | ||||
Restructuring and other charges in 2022 and 2021 consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts, which primarily relate to lease impairment and severance costs due to workforce reductions.
Restructuring charges are as follows (in thousands):
| Employee Separation Costs | Asset Related and Other Costs | Total | ||||||||||||||||||
| Costs incurred and charged to expense for the six months ended June 30, 2022 | $ | $ | $ | |||||||||||||||||
| Costs incurred and charged to expense for the six months ended June 30, 2021 | $ | $ | $ | |||||||||||||||||
During the six months ended June 30, 2021, we recorded $2.5 million of lease impairment charges for an office space
previously vacated.
Changes to the accrued restructuring liability (which is included in Accrued and other current liabilities) are as follows (in thousands):
| Employee Separation Costs | Asset Related and Other Costs | Total | ||||||||||||||||||
| Accrued liability at December 31, 2021 | $ | $ | $ | |||||||||||||||||
| Costs incurred and charged to expense for the six months ended June 30, 2022, excluding noncash charges | ||||||||||||||||||||
| Cash payments | ( | ( | ( | |||||||||||||||||
| Accrued liability at June 30, 2022 | $ | $ | $ | |||||||||||||||||
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| Note 9. | 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):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss attributable to RealNetworks | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average common shares outstanding used to compute basic EPS | |||||||||||||||||||||||
| Dilutive effect of stock based awards and Series B Preferred Stock | |||||||||||||||||||||||
| Weighted average common shares outstanding used to compute diluted EPS | |||||||||||||||||||||||
| Net loss per share attributable to RealNetworks- Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share attributable to RealNetworks- Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
During the quarter and six months ended June 30, 2022, 8.5 million and 8.2 million shares of common stock, respectively, of potentially issuable shares from common stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect. During the quarter and six months ended June 30, 2021, 4.2 million and 4.4 million shares of common stock, respectively, of potentially issuable shares from common stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.
During the quarters and six months ended June 30, 2022 and 2021, the 8.1 million shares of Series B Preferred Stock outstanding were excluded from the calculation of diluted EPS because of their antidilutive effect.
| Note 10. | 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.
On April 6, 2020, RealNetworks Asia Pacific Co., Ltd. received notice of a civil lawsuit filed by Korean Music Copyright Association (KOMCA) in Seoul Central District Court seeking damages of $2.6 million. Also named as a defendant in the lawsuit is Kakao M Corp (formerly known as LOEN Entertainment Corp.), one of the largest media publishing companies in Korea, which operates the Melon music platform. The claim is for a late payment penalty under a music licensing contract, pursuant to which, from 2004 to 2017, RealNetworks licensed music for its services to LOEN for its Melon platform. The current lawsuit relates solely to the late payment of music licensing fees under the contract; the underlying music licensing fees were paid by Kakao M to KOMCA in a separate settlement prior to KOMCA’s filing of this lawsuit. While we believe we have meritorious defenses to this lawsuit and are vigorously defending against it, litigation is inherently uncertain and we cannot currently predict the ultimate outcome of this matter. We have a liability accrued related to this matter as of June 30, 2022, at the low end of the range of outcomes, for an immaterial amount. Because of the uncertainty of this matter, it is reasonably possible that the estimated amount of the liability recorded will change in the near term.
| Note 11. | Segment Information | ||||
We manage our business and report revenue and operating income (loss) in three segments: (1) Consumer Media, which includes licensing of our codec technology and our PC-based RealPlayer products, including RealPlayer Plus and related products; (2) Mobile Services, which includes our SaaS services, our integrated RealTimes® platform which is sold to mobile carriers and our computer vision platform, SAFR; and (3) Games, which includes all our games-related businesses, including sales of in-game virtual goods, mobile games and games licenses, games subscription services, and in-game advertising and advertising on game sites.
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,
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human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items may also include changes in the fair value of the contingent consideration liability, restructuring charges, and stock compensation charges.
RealNetworks reports the three 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 2021 10-K.
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Consumer Media | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Operating income | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Mobile Services | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Operating loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Games | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Operating income (loss) | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Corporate | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Operating loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Europe | |||||||||||||||||||||||
| Rest of the World | |||||||||||||||||||||||
| Total net revenue | $ | $ | $ | $ | |||||||||||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| United States | $ | $ | |||||||||
| Europe | |||||||||||
| Rest of the World | |||||||||||
| Total long-lived assets | $ | $ | |||||||||
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| Note 12. | Related Party Transactions | ||||
| Note 13. | Subsequent Events | ||||
The Company evaluated subsequent events occurring after June 30, 2022 through the date of filing of this Quarterly Report on Form 10-Q in which these financial statements are included, and concluded that there was no event of which management was aware that occurred after the balance sheet date that would require any adjustment to the accompanying consolidated financial statements.
Merger Agreement
On July 27, 2022, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Robert Glaser, the Company's Chairman and Chief Executive Officer, Greater Heights LLC, a Washington limited liability company (Greater Heights), an entity controlled by Mr. Glaser, and Greater Heights Acquisition LLC, a Washington limited liability company and wholly owned subsidiary of Greater Heights (Merger Sub). Mr. Glaser and his affiliates currently hold approximately 39% of the Company’s outstanding common stock
In accordance with the terms of the Merger Agreement, the Company will be merged with and into Merger Sub, with Merger Sub continuing as the surviving entity as a wholly owned subsidiary of Greater Heights (the Merger). At the effective time of the Merger, (i) each share of the Company’s Common Stock issued and outstanding as of immediately prior to such effective time of the Merger, other than shares held by Robert Glaser and certain of his affiliates (the Founder Shareholders) and any dissenting shares of the Company’s Common Stock (which, for the avoidance of doubt, will be cancelled and retired without any consideration therefor), will be cancelled and retired and converted into the right to receive cash in an amount equal to $0.73, without interest and subject to any applicable withholding taxes (Merger Consideration) (ii) each issued and outstanding Company stock option will be cancelled and converted into the right to receive the Merger Consideration (less the aggregate exercise price for such Company stock options and applicable taxes), (iii) each vested Company RSU will be cancelled and converted into the right to receive the Merger Consideration less any applicable taxes, and (iv) all unvested Company equity awards under any Company stock plan will be treated in accordance with the terms of the applicable stock plan and form of award issued thereunder.
The closing of the Merger is subject to, among other conditions (i) adoption of the Merger Agreement and approval of the Merger by (A) holders of a majority of the issued and outstanding shares of Company Common Stock and Company Preferred Stock, each voting as a separate class, and (B) holders of a majority of the issued and outstanding shares of Company Common Stock held by shareholders other than the Founder Shareholders, (ii) the Company delivering evidence of Amendment No. 1 (defined below) and (iii) not more than 15% of the Company Common Stock outstanding as of immediately prior to the effective time of the Merger being dissenting shares. Consummation of the Merger is also subject to certain other closing conditions, including the accuracy of each party’s representation and warranties and each party’s compliance with its covenants and agreements contained in the Merger Agreement in all material respects and that since the date of the Merger Agreement there shall not have occurred a material adverse effect that is continuing. The Merger Agreement does not include a financing condition.
The Merger Agreement provides that the Company may not solicit takeover proposals provided that the Company, may provide information to, and may engage or participate in discussions or negotiations, with respect to an unsolicited takeover proposal that the Company’s Board has determined, in good faith and after consultation with its financial advisors and outside legal counsel, individually or in the aggregate with any other unsolicited takeover proposals, constitutes or could reasonably be expected to result in a superior proposal.
The Company and Greater Heights may mutually agree to terminate the Merger Agreement. Additionally, the Merger Agreement contains other termination rights exercisable by the Company and Greater Heights. If the Merger Agreement is terminated under certain circumstances, the Company could be required to pay Greater Heights a termination fee equal to one of (i) $1,043,971, (ii) $521,985.50 or (iii) the lesser of (A) Greater Heights’s fees and expenses incurred in connection with the Merger Agreement and the Merger and (B) $500,000.
We anticipate the Merger to close in the fourth quarter of 2022, subject to, among other things, the satisfaction (or waiver) of the conditions set forth above.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about RealNetworks’ industry, products, management’s beliefs, and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to:
•the potential impact of, and any potential developments related to, the proposed Merger, including the risk that the conditions to the consummation of the Merger are not satisfied or waived, litigation challenging the Merger, the impact on our stock price, business, financial condition and results of operations if the Merger is not consummated, and the potential negative impact to our business and employee relationships due to the Merger;
•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, including our investment initiatives, SAFR and KONTXT;
•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 and expectations for future acquisitions and divestitures;
•plans, strategies and expected opportunities for future growth, increased profitability and innovation;
•our expected financial position, including liquidity, cash usage and conservation, 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 in the U.S. and in foreign jurisdictions, including recent and potential future regulatory and legal developments in the areas of artificial intelligence, privacy, cybersecurity and intellectual property;
•the continuation and expected nature of certain customer and third party distributor relationships, including the U.S. government and the large, third party platforms that host our applications;
•impacts of competition and certain customer and third party distributor 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, including global pandemics and financial crises, on our business, prospects, financial condition or results of operations.
These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in Item 1A entitled “Risk Factors.” RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by RealNetworks from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
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Overview
Our Business
RealNetworks invented the streaming media category in 1995 and continues to build on its foundation of digital media expertise and innovation. In recent years, we have leveraged our technical expertise and access to proprietary data sources to develop a new generation of AI-based products and solutions. These products and solutions are designed to help customers be safer and smarter, and for their companies to be more efficient and more successful. The main two products and key investment initiatives in our AI portfolio are SAFR, our AI-based computer vision platform, and KONTXT, our natural language processing-based (NLP) message classification and analysis platform.
SAFR leverages the power of AI to enhance security, safety, convenience, and operational efficiencies with fast and accurate face recognition and additional person- and object-based AI capabilities. KONTXT is based on AI NLP analysis, allowing our customers to analyze and classify multiple billions of messages monthly in real time in order to protect end consumers from spam and fraud. Our focus on AI-based products and our data science resources allows us to be agile, continuously evolving, and rapidly creating new solutions to solve consumers’ problems.
In addition to our AI solutions, our consumer products also feature GameHouse Original Stories, a unique IP portfolio of free-to-play and subscription mobile games, used by millions of players. Our consumer products also include ringback tones, which we sell to consumers through mobile operators, and the renowned RealPlayer, which introduced streaming to the world in 1995 and today provides millions of people worldwide a powerful way to stream, download, store, organize, and experience the rapidly expanding universe of digital media content. We also create video compression and enhancement technology, which we primarily license to OEMs, including manufacturers of mobile devices, smart TVs, and set-top boxes.
Our Segments
We manage our business and report revenue and operating income (loss) in three segments: (1) Consumer Media (2) Mobile Services, and (3) Games.
Within our Consumer Media segment, revenue is derived from the software licensing of our video compression and enhancement, or codec, technologies, including primarily from our prior-generation codec RealMedia Variable Bitrate, or RMVB, as well as our newer codec technology, RealMedia High Definition, or RMHD. We also generate revenue from the sale of our RealPlayer products, including RealPlayer Plus and related products. These products and services are delivered directly to consumers and through partners, such as OEMs and mobile device manufacturers.
Our Mobile Services business generates revenue primarily from the sale of subscription services, which include our intercarrier messaging service and ringback tones, as well as through software licenses for the integration of our RealTimes platform and certain system implementations. We generate a significant portion of our revenue from sales within our Mobile Services business to a few mobile carriers and one service partner. Our Mobile Services segment also includes our AI-based growth initiatives, SAFR and KONTXT.
Our Games business generates revenue primarily through the development, publishing, and distribution of casual games under the GameHouse and Zylom brands. Games are offered via mobile devices, digital downloads, and subscription play. We derive revenue from consumer purchases of in-game virtual goods within our free-to-play games and advertising on mobile games. In addition, we derive revenue from the sale of individual games and subscription offerings.
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, IT, 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 expense.
Pending Merger
On July 27, 2022, the Company entered into the Merger Agreement with Greater Heights and Merger Sub. Mr. Glaser and his affiliates currently hold approximately 39% of the Company’s outstanding common stock. The Merger Agreement provides, among other things, that subject to the satisfaction or waiver of conditions set forth therein and in accordance with applicable law, the Company will be merged with and into Merger Sub, with Merger Sub continuing as the surviving entity in the merger and as a wholly owned subsidiary of Greater Heights. At the effective time of the Merger, each share of the Company’s Common Stock issued and outstanding as of immediately prior to such effective time of the Merger, other than shares held by the Founder Shareholders and any dissenting shares of the Company’s Common Stock (which, for the avoidance of doubt, will be cancelled and retired without any consideration therefor), will be cancelled and retired and converted into the right to receive cash in an amount equal to $0.73, without interest and subject to any applicable withholding taxes (subject to certain terms and conditions set forth in the Merger Agreement).
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Consummation of the Merger is subject to the satisfaction or waiver of customary closing conditions, including approval of the Merger Agreement by the Company’s stockholders. The transaction is expected to close during the fourth quarter of 2022.
For a summary of the proposed merger, see Note 13. Subsequent Events to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q and our Form 8-K filed with the SEC on July 28, 2022.
COVID-19
In March 2020, the World Health Organization declared the outbreak of the coronavirus that causes COVID-19 to be a global pandemic. As the virus spread throughout the U.S. and the world, authorities implemented numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, business limitations, and shutdowns. In addition to the pandemic's widespread impact on public health and global society, reactions to the pandemic as well as measures taken to contain the virus have caused significant turmoil to the global economy and financial markets. Similar to other companies, from the onset of the pandemic, we implemented measures to support the health and well-being of our employees, customers, partners and communities, including working remotely and operating our business in a fundamentally different way. We reevaluated our operating plans, causing some significant pivots in our growth initiatives, while also reducing costs and reallocating resources.
The COVID-19 pandemic and the resultant economic instability and financial market turmoil added complexity, uncertainty and risk to nearly all aspects of our business. We continue to assess our plans as the pandemic environment evolves and strive to operate our business as efficiently as possible. We are unable to fully predict the impacts that the COVID-19 pandemic, including the emergence of variants, such as the delta and omicron variants, will continue to have on our results from operations, financial condition, liquidity and cash flows for the fiscal year 2022 or beyond, due to the numerous uncertainties, including the duration and severity of the pandemic and ongoing containment measures. We will continue to monitor and evaluate the effects to our businesses and adjust our plans as needed.
Financial Results
As of June 30, 2022, we had $14.4 million in unrestricted cash and cash equivalents, compared to $27.1 million as of December 31, 2021. The 2022 decrease in cash and cash equivalents compared to the prior year end amount was primarily due to our ongoing cash used in operating activities, which totaled $11.4 million for the first six months of 2022.
Condensed consolidated results were as follows (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 11,856 | $ | 14,561 | $ | (2,705) | (19) | % | $ | 25,132 | $ | 30,449 | $ | (5,317) | (17) | % | |||||||||||||||||||||||||||||||
| Cost of revenue | 2,705 | 3,572 | (867) | (24) | % | 5,441 | 7,251 | (1,810) | (25) | % | |||||||||||||||||||||||||||||||||||||
| Gross profit | 9,151 | 10,989 | (1,838) | (17) | % | 19,691 | 23,198 | (3,507) | (15) | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 77 | % | 75 | % | 78 | % | 76 | % | |||||||||||||||||||||||||||||||||||||||
| Operating expenses | 14,070 | 16,683 | (2,613) | (16) | % | 29,567 | 35,087 | (5,520) | (16) | % | |||||||||||||||||||||||||||||||||||||
| Operating loss | $ | (4,919) | $ | (5,694) | $ | 775 | 14 | % | $ | (9,876) | $ | (11,889) | $ | 2,013 | 17 | % | |||||||||||||||||||||||||||||||
In the second quarter of 2022, our total consolidated revenue decreased $2.7 million as compared with the prior-year period. The decrease was due to lower revenues in our Mobile Services and Games segments of $1.9 million, $1.2 million, respectively, offset in part by higher revenues in our Consumer Media segment of $0.4 million. See below for further information regarding fluctuations by segment.
Cost of revenue decreased by $0.9 million for the quarter ended June 30, 2022 as compared with the prior-year period, due to decreases in our Mobile Services, Games, and Consumer Media segments of $0.6 million, $0.3 million, and $0.1 million, respectively.
Operating expenses decreased by $2.6 million in the quarter ended June 30, 2022 as compared with the prior-year period. The decrease was primarily due to lower salaries and other people-related costs of $1.8 million, lower restructuring charges of $0.6 million, and lower marketing fees of $0.4 million.
For the six months ended June 30, 2022, our total consolidated revenue decreased $5.3 million as compared with the year-earlier period. The decrease was due primarily to lower revenues in our Games, Mobile Services, and Consumer Media segments of $2.3 million, $2.2 million and $0.8 million, respectively.
Cost of revenue decreased by $1.8 million for the six months ended June 30, 2022 as compared with the year-earlier period, primarily due to decreases in our Mobile Services, Games and Consumer Media segments of $1.0 million, $0.7 million, and $0.2 million respectively.
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Operating expenses decreased by $5.5 million in the six months ended June 30, 2022 as compared with the year-earlier period. The decrease was due primarily to lower restructuring charges of $3.4 million, lower salaries and other people-related costs of $2.4 million, and lower marketing expenses of $0.9 million. These decreases were partially offset by the $1.0 million benefit in the six months ended June 30, 2021 related to the fair value adjustment of the contingent consideration liability that was settled in the second quarter of 2021. The decreases were also offset by higher professional fees of $0.3 million.
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Segment Operating Results
Consumer Media
Consumer Media segment results of operations were as follows (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 2,499 | $ | 2,061 | $ | 438 | 21 | % | $ | 4,610 | $ | 5,370 | $ | (760) | (14) | % | |||||||||||||||||||||||||||||||
| Cost of revenue | 432 | 497 | (65) | (13) | % | 820 | 975 | (155) | (16) | % | |||||||||||||||||||||||||||||||||||||
| Gross profit | 2,067 | 1,564 | 503 | 32 | % | 3,790 | 4,395 | (605) | (14) | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 83 | % | 76 | % | 82 | % | 82 | % | |||||||||||||||||||||||||||||||||||||||
| Operating expenses | 1,397 | 2,332 | (935) | (40) | % | 2,869 | 4,533 | (1,664) | (37) | % | |||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 670 | $ | (768) | $ | 1,438 | NM | $ | 921 | $ | (138) | $ | 1,059 | NM | |||||||||||||||||||||||||||||||||
Total Consumer Media revenue for the quarter ended June 30, 2022 increased $0.4 million as compared to the same quarter in 2021. The increase was due to higher software license revenues, offset in part by lower subscription service revenues, and lower product sales.
Software License
In the quarter ended June 30, 2022, the increase in software license revenue of $0.6 million was primarily due to a new contract effectuated in the current quarter.
Subscription Services
For our subscription services revenues, the $0.1 million decrease was primarily due to declines in our legacy subscription products, which we expect to continue.
Product Sales
The decrease in product sales of $0.2 million was primarily due to lower RealPlayer Plus sales during the first quarter of 2022.
Cost of revenue for the quarter ended June 30, 2022 decreased $0.1 million compared with the prior-year period, primarily due to reductions in salaries and other people-related expenses due to lower headcount.
Operating expenses for the quarter ended June 30, 2022 decreased $0.9 million as compared with the prior-year period, primarily due to Scener costs incurred in the prior-year period. Scener was deconsolidated from RealNetworks, Inc. as of June 30, 2021.
Total Consumer Media revenue for the six months ended June 30, 2022 decreased $0.8 million as compared to the same period in 2021. The decrease was due to lower software license revenues, lower subscription service revenues, and lower product sales.
Software License
For the six months ended June 30, 2022, the decrease in software license revenue of $0.3 million was due primarily to the timing of contract renewals.
Subscription Services
For our subscription services revenue, the $0.2 million decrease was primarily due to declines in our long-standing subscription products, which we expect to continue.
Product Sales
The decrease in product sales of $0.5 million was primarily due to lower RealPlayer Plus sales during the first six months of 2022.
Cost of revenue for the six months ended June 30, 2022 decreased $0.2 million compared with the year-earlier period. This was primarily due to reductions in people expenses due to lower headcount.
Operating expenses for the six months ended June 30, 2022 decreased $1.7 million as compared with the year-earlier period, primarily due to Scener costs incurred in the prior-year period.
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Mobile Services
Mobile Services segment results of operations were as follows (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 4,457 | $ | 6,356 | $ | (1,899) | (30) | % | $ | 10,097 | $ | 12,336 | $ | (2,239) | (18) | % | |||||||||||||||||||||||||||||||
| Cost of revenue | 965 | 1,517 | (552) | (36) | % | 2,010 | 3,009 | (999) | (33) | % | |||||||||||||||||||||||||||||||||||||
| Gross profit | 3,492 | 4,839 | (1,347) | (28) | % | 8,087 | 9,327 | (1,240) | (13) | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 78 | % | 76 | % | 80 | % | 76 | % | |||||||||||||||||||||||||||||||||||||||
| Operating expenses | 6,510 | 6,332 | 178 | 3 | % | 13,176 | 12,477 | 699 | 6 | % | |||||||||||||||||||||||||||||||||||||
| Operating loss | $ | (3,018) | $ | (1,493) | $ | (1,525) | (102) | % | $ | (5,089) | $ | (3,150) | $ | (1,939) | (62) | % | |||||||||||||||||||||||||||||||
Total Mobile Services revenue decreased by $1.9 million in the quarter ended June 30, 2022 compared with the prior-year period. The revenue decrease was primarily due to lower software license revenues of $1.1 million and lower subscription services revenues of $0.8 million.
Software License
For our software license revenue, the decrease in revenue for the quarter ended June 30, 2022 as compared to the prior-year period was due to lower sales of our SAFR product of $0.9 million.
Subscription Services
The decline in our subscription service revenue of $0.8 million in the quarter ended June 30, 2022 as compared to the prior-year period was primarily due to lower revenues from our ring back tones business.
Cost of revenue decreased by $0.6 million in the quarter ended June 30, 2022 compared with the prior-year period, primarily due to reductions in salaries and other people-related costs due to lower headcount.
Operating expenses increased by $0.2 million for the quarter ended June 30, 2022 compared with the prior-year period primarily due to our AI-based growth initiatives.
Total Mobile Services revenue decreased by $2.2 million in the six months ended June 30, 2022 compared with the prior-year period. The revenue decrease was due to lower subscription services revenues of $1.3 million, and lower software license revenues of $0.9 million.
Software License
For our software license revenue, the decrease in revenue for the six months ended June 30, 2022 as compared to the prior-year period was due primarily to lower sales of our SAFR product of $0.7 million.
Subscription Services
The decline in our subscription service revenue of $1.3 million in the six months ended June 30, 2022 as compared to the prior-year period was due primarily to lower revenues from our ringback tones business of $0.8 million and ICM messaging platform business of $0.6 million, offset in part by higher revenues from our KONTXT messaging platform business of $0.2 million.
Cost of revenue decreased by $1.0 million in the six months ended June 30, 2022 compared with the prior-year period, due primarily to reductions in salaries and other people-related costs due to lower headcount.
Operating expenses increased $0.7 million for the six months ended June 30, 2022 compared with the year-earlier period primarily due to our AI-based growth initiatives.
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Games
Games segment results of operations were as follows (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 4,900 | $ | 6,144 | $ | (1,244) | (20) | % | $ | 10,425 | $ | 12,743 | $ | (2,318) | (18) | % | |||||||||||||||||||||||||||||||
| Cost of revenue | 1,300 | 1,552 | (252) | (16) | % | 2,595 | 3,257 | (662) | (20) | % | |||||||||||||||||||||||||||||||||||||
| Gross profit | 3,600 | 4,592 | (992) | (22) | % | 7,830 | 9,486 | (1,656) | (17) | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 73 | % | 75 | % | 75 | % | 74 | % | |||||||||||||||||||||||||||||||||||||||
| Operating expenses | 3,826 | 4,849 | (1,023) | (21) | % | 7,825 | 9,947 | (2,122) | (21) | % | |||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | (226) | $ | (257) | $ | 31 | 12 | % | $ | 5 | $ | (461) | $ | 466 | NM | ||||||||||||||||||||||||||||||||
Total Games revenue decreased by $1.2 million for the quarter ended June 30, 2022 as compared with the prior-year period primarily due to a decrease of $0.8 million in product sales revenue, and lower subscription service revenue of $0.3 million.
Subscription Services
Our subscription sales decreased $0.3 million as a result of fewer subscribers in the second quarter of 2022.
Product Sales
Our product sales decreased $0.8 million as a result of lower in-game purchases compared to the prior-year period.
Cost of revenue decreased $0.3 million in the quarter ended June 30, 2022 when compared to the prior-year period due to lower app store fees.
Operating expenses decreased $1.0 million in the quarter ended June 30, 2022 when compared with the prior-year period primarily due to lower marketing expenses of $0.5 million and lower salaries and other people-related costs due to lower headcount of $0.4 million.
Total Games revenue decreased by $2.3 million for the six months ended June 30, 2022 as compared with the prior-year period primarily due to a decrease of $1.6 million in product sales revenue, and lower subscription service revenue of $0.6 million.
Subscription Services
Our subscription sales decreased $0.6 million as a result of fewer subscribers during the six months ended June 30, 2022 compared to the prior year period.
Product Sales
Our product sales decreased $1.6 million as a result of lower in-game purchases for the six months ended June 30, 2022 compared to the prior-year period.
Cost of revenue decreased $0.7 million in the six months ended June 30, 2022 when compared to the prior year period due to lower app store fees.
Operating expenses decreased $2.1 million in the six months ended June 30, 2022 when compared with the prior-year period due primarily to lower people-related costs of $0.9 million, lower marketing expenses of $0.9 million and lower professional service fees of $0.4 million.
Corporate
Corporate results of operations were as follows (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Cost of revenue | $ | 8 | $ | 6 | $ | 2 | 33 | % | $ | 16 | $ | 10 | $ | 6 | 60 | % | |||||||||||||||||||||||||||||||
| Operating expenses | 2,337 | 3,170 | (833) | (26) | % | 5,697 | 8,130 | (2,433) | (30) | % | |||||||||||||||||||||||||||||||||||||
| Operating loss | $ | (2,345) | $ | (3,176) | $ | 831 | 26 | % | $ | (5,713) | $ | (8,140) | $ | 2,427 | 30 | % | |||||||||||||||||||||||||||||||
Operating expenses decreased by $0.8 million in the quarter ended June 30, 2022 compared with the prior-year period, due to lower salaries and other people-related costs of $0.7 million and lower restructuring costs of $0.6 million, offset in part by higher professional service fees of $0.6 million. The higher professional service fees are primarily due to the Company's
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engagement of legal and financial advisors who assisted the special committee of our Board of Directors in evaluating the unsolicited, non-binding acquisition proposal to acquire the Company by Mr. Glaser (the "acquisition proposal").
Operating expenses decreased by $2.4 million for the six months ended June 30, 2022 compared with the year-earlier period, primarily due to lower restructuring costs of $3.4 million and salaries and benefits of $0.6 million. These decreases were partially offset by the $1.0 million benefit in the six months ended June 30, 2021 related to the fair value adjustment of the contingent consideration liability, which was settled in the second quarter of 2021. The decreases were also offset by higher professional service fees of $0.8 million, primarily due to the acquisition proposal.
Consolidated Operating Expenses
Our operating expenses consist primarily of salaries and related personnel costs including stock-based compensation, consulting fees associated with product development, sales commissions, professional service fees, advertising costs, changes in the fair value of the contingent consideration liability, and restructuring charges. Operating expenses were as follows (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 5,332 | $ | 6,330 | $ | (998) | (16) | % | $ | 11,130 | $ | 12,568 | $ | (1,438) | (11) | % | |||||||||||||||||||||||||||||||
| Sales and marketing | 4,502 | 5,259 | (757) | (14) | % | 9,084 | 10,396 | (1,312) | (13) | % | |||||||||||||||||||||||||||||||||||||
| General and administrative | 4,071 | 4,376 | (305) | (7) | % | 8,898 | 9,274 | (376) | (4) | % | |||||||||||||||||||||||||||||||||||||
| Fair value adjustments to contingent consideration liability | — | — | — | NM | — | (1,040) | 1,040 | (100) | % | ||||||||||||||||||||||||||||||||||||||
| Restructuring and other charges | 165 | 718 | (553) | (77) | % | 455 | 3,889 | (3,434) | (88) | % | |||||||||||||||||||||||||||||||||||||
| Total consolidated operating expenses | $ | 14,070 | $ | 16,683 | $ | (2,613) | (16) | % | $ | 29,567 | $ | 35,087 | $ | (5,520) | (16) | % | |||||||||||||||||||||||||||||||
Research and development expenses decreased by $1.0 million in the quarter ended June 30, 2022 as compared with the prior-year period, primarily due to lower salaries and other people-related costs.
Research and development expenses decreased $1.4 million for the six months ended June 30, 2022 as compared with the year-earlier period, primarily due to a reduction in salaries and other people related costs.
Sales and marketing expenses decreased by $0.8 million in the quarter ended June 30, 2022 as compared with the prior-year period, due to lower marketing expense of $0.4 million and lower professional service fees of $0.3 million.
Sales and marketing expenses decreased $1.3 million for the six months ended June 30, 2022 as compared with the year-earlier period, primarily due to lower marketing expenses of $0.8 million and a $0.6 million decrease in professional service fees.
General and administrative expenses decreased by $0.3 million in the quarter ended June 30, 2022 as compared with the prior-year period, primarily due to lower salaries and other people-related costs of $0.9 million, offset in part by higher professional service fees of $0.5 million. The higher professional fees are primarily due to the acquisition proposal.
General and administrative expenses decreased by $0.4 million for the six months ended June 30, 2022 as compared with the year-earlier period, primarily due to lower people-related costs of $1.1 million, partially offset by higher professional service fees of $0.7 million. The higher professional fees are primarily due to the acquisition proposal.
The fair value adjustment to the contingent consideration liability was a $1.0 million benefit in the six months ended June 30, 2021. This liability was settled in the second quarter of 2021.
Restructuring and other charges consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts. For additional details on these charges, see Note 8. Restructuring and Other Charges.
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Other Income (Expense)
Other income (expense), net was as follows (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | 2022 | 2021 | $ Change | ||||||||||||||||||||||||||||||
| Interest expense | $ | (22) | $ | (24) | $ | 2 | $ | (44) | $ | (119) | $ | 75 | |||||||||||||||||||||||
| Interest income | 7 | 7 | — | 14 | 20 | (6) | |||||||||||||||||||||||||||||
| Loss on equity and other investments, net | (410) | (569) | 159 | (599) | (4,841) | 4,242 | |||||||||||||||||||||||||||||
| Gain on forgiveness of Paycheck Protection Program loan | — | 2,897 | (2,897) | — | 2,897 | (2,897) | |||||||||||||||||||||||||||||
| Other income, net | 268 | 1,916 | (1,648) | 287 | 2,020 | (1,733) | |||||||||||||||||||||||||||||
| Total other income (expense), net | $ | (157) | $ | 4,227 | $ | (4,384) | $ | (342) | $ | (23) | $ | (319) | |||||||||||||||||||||||
For the quarter and six months ended June 30, 2022, the Loss on equity and other investments, net, was $0.4 million and $0.6 million, respectively. These amounts are related to Scener as further discussed in Note 12. Related Party Transactions. The $4.8 million Loss on equity and other investments, net, for the six months ended June 30, 2021 reflects unrealized losses on equity securities for the shares acquired from the sale of Napster in December 2020. These shares were acquired by a third-party in the first quarter of 2022.
On June 30, 2021, we deconsolidated Scener, previously a consolidated subsidiary of RealNetworks, and recognized a non-cash gain of $2.0 million within Other income, net on the condensed consolidated statement of operations. The remaining fluctuations in Other income (expense), net primarily relates to foreign exchange gains and losses.
Income Taxes
We recognized income tax expense of $0.1 million for the quarter ended June 30, 2022 related to U.S. and foreign income taxes. For the six months ended June 30, 2022 and 2021, income tax expense was $0.1 million.
As of June 30, 2022, RealNetworks has $0.7 million in uncertain tax positions.
The majority of our tax expense is due to income in our foreign jurisdictions. In addition, we have not benefited from losses in the U.S. and certain foreign jurisdictions as of the second quarter of 2022. We generate income in a number of foreign jurisdictions, some of which have higher or lower tax rates relative to the U.S. federal statutory rate. Our tax expense could fluctuate significantly on a quarterly basis to the extent income is less than anticipated in countries with lower statutory tax rates and more than anticipated in countries with higher statutory tax rates. For the quarter and six months ended June 30, 2022, decreases in tax expense from income generated in foreign jurisdictions with lower tax rates in comparison to the U.S. federal statutory rate were offset by increases in tax expense from income generated in foreign jurisdictions having comparable, or higher tax rates in comparison to the U.S. federal statutory rate. The effect of differences in foreign tax rates on the Company's tax expense for the quarter ended June 30, 2022 was minimal.
We file numerous consolidated and separate income tax returns in the U.S., including federal, state and local returns, as well as in foreign jurisdictions. With few exceptions, we are no longer subject to United States federal income tax examinations for tax years prior to 2013 or state, local or foreign income tax examinations for years prior to 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.
New Accounting Pronouncements
See Note 2. Recent Accounting Pronouncements, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q.
Liquidity and Capital Resources
The following summarizes working capital, excluding cash and cash equivalents, cash and cash equivalents, and restricted cash equivalents (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Working capital, excluding cash and cash equivalents | $ | (2,379) | $ | (3,952) | |||||||
| Cash and cash equivalents | 14,352 | 27,109 | |||||||||
| Restricted cash equivalents | 1,630 | 1,630 | |||||||||
Cash and cash equivalents decreased from December 31, 2021 primarily due to cash used in operating activities, which totaled $11.4 million in the first six months of 2022.
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As of June 30, 2022, approximately $5.5 million of the $14.4 million of cash and cash equivalents was held by our foreign subsidiaries outside the U.S.
The following summarizes cash flow activity (in thousands):
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash used in operating activities | $ | (11,420) | $ | (10,905) | |||||||
| Cash used in investing activities | (756) | (967) | |||||||||
| Cash provided by (used in) financing activities | (22) | 18,031 | |||||||||
Cash used in operating activities was $0.5 million higher in the six months ended June 30, 2022 as compared to the same period in 2021, due primarily to a higher amount of incremental cash used to fund the net change in working capital.
Cash used by investing activities for the six months ended June 30, 2022 included fixed asset purchases of $0.2 million. Also, for the six months ended June 30, 2022, cash used by investing activities included an investment of $0.6 million into Scener in exchange for additional preferred stock. Since its inception, Scener has continued to record operating losses. See Note 12. Related Party Transactions for additional information about Scener.
Cash used by investing activities for the six months ended June 30, 2021 consisted of fixed asset purchases of $0.1 million. Also, for the six months ended June 30, 2021, cash used by investing activities included the impact of the deconsolidation of Scener.
Cash used in financing activities for the six months ended June 30, 2022 was insignificant. Cash provided by financing activities for the six months ended June 30, 2021 was $18.0 million. This cash inflow was due to the net proceeds from the April 2021 equity offering of $20.1 million and $0.4 million issuance of common stock related to exercising of stock options, net of tax payments for shares withheld upon vesting of restricted stock, partially offset by the $2.5 million cash payment for settlement of the contingent consideration liability.
Two customers accounted for more than 10% of trade accounts receivable as of June 30, 2022, with the customers accounting for 22% and 10% each. One customer accounted for more than 10% of trade accounts receivable at December 31, 2021, with the customer accounting for 23% of trade accounts receivable. Two customers accounted for 27% of consolidated revenue, or $6.9 million, during the six months ended June 30, 2022. Three customers accounted for 38% of consolidated revenue, or $11.4 million, during the six months ended June 30, 2021.
While we currently have no planned significant capital expenditures for the remainder of 2022 other than those in the ordinary course of business, we do have contractual commitments for future payments related to office leases.
RealNetworks is a party to a Loan Agreement with a third-party financial institution for a revolving line of credit, as discussed in Note 7. Debt. Under the Loan Agreement, as amended, borrowings may not exceed $6.5 million and are reduced by a $0.4 million standby letter of credit entered into with the bank in connection with certain lease agreements. The borrowing base for the Revolver is comprised of eligible accounts receivable and direct to consumer deposits. At June 30, 2022, we had no outstanding draws on the Revolver. The Revolver matured August 1, 2022. The Company is currently in negotiations to extend or replace the Revolver with a comparable facility.
We have evaluated our current liquidity position in light of our history of declining revenue and operating losses as well as our near-term expectations of net negative cash flows from operating activities. However, our assessment is subject to inherent risks and uncertainties. Moreover, our operating forecast is partly dependent on factors that are outside of our control, including the ongoing effects of the coronavirus pandemic and related impacts on global commerce and financial markets. These conditions raise substantial doubt about our ability to continue as a going concern within 12 months of the date of this filing.
We intend to use our existing unrestricted cash balances to fund our short-term working capital needs. We have active plans to mitigate these conditions. Specifically, we plan to reduce negative cash flow through operating expense reductions. In addition, we are evaluating various strategic opportunities, which may include selling certain businesses or product lines, soliciting external investment into certain of our businesses, or seeking other strategic partnerships. Our plans are subject to inherent risks and uncertainties. Accordingly, there can be no assurance that our plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.
For our anticipated cash needs for working capital and capital expenditures beyond the next 12 months, we may seek to raise additional funds through public or private equity financing, or through other sources such as a new credit facility, or the renewal of the Revolver. Such sources of funding may or may not be available to us on commercially reasonable terms. The sale of additional equity securities could result in dilution to our shareholders. In addition, in the future, we may enter into cash or stock acquisition transactions or other strategic transactions that could reduce cash available to fund our operations or result in dilution to shareholders.
Critical Accounting Policies and Estimates
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The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Our critical accounting estimates are discussed in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year ended December 31, 2021.
Due to the coronavirus pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk involves forward-looking statements. All statements that do not relate to matters of historical fact should be considered forward-looking statements. Actual results could differ materially from those projected in any forward-looking statements.
Interest Rate Risk. Our exposure to interest rate risk from changes in market interest rates relates primarily to RealNetworks' revolving line of credit. RealNetworks' borrowing arrangement has floating rate interest payments and thus has a degree of interest rate risk, if interest rates increase. Based on the available balance, a hypothetical 10% increase/decrease in interest rates would not increase/decrease our annual interest expense or cash flows by more than a nominal amount.
Foreign Currency Risk. We conduct business internationally in several currencies and thus are exposed to adverse movements in foreign currency exchange rates.
Our exposure to foreign exchange rate fluctuations arise in part from: (1) translation of the financial results of foreign subsidiaries into U.S. dollars in consolidation; (2) the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes; and (3) non-U.S. dollar denominated sales to foreign customers.
Our foreign currency risk management program reduces, but does not entirely eliminate, the impact of currency exchange rate movements. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the euro. We currently do not actively hedge our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations.
A hypothetical 10% increase or decrease in those currencies relative to the U.S. dollar as of June 30, 2022 would not result in a material impact on our financial position, results of operations or cash flows.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based upon that evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the second quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
See Note 10. Commitments and Contingencies, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q.
Item 1A. Risk Factors
You should carefully consider the risks described below together with all of the other information included in this Form 10-Q. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occurs, our business, financial condition or operating results, and the trading price of our common stock, could be materially harmed.
Risks Related to the COVID-19 Pandemic
Our operating plans and financial condition have been adversely affected by the various impacts of the COVID-19 pandemic, and we expect to experience continued adverse effects in future periods in connection with the ongoing public health and safety, governmental, and economic implications.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus that causes COVID-19 to be a global pandemic. As the virus spread throughout 2020, across the U.S. and the world, authorities implemented numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, business limitations, and shutdowns. In addition to the pandemic's widespread impact on public health and global society, reactions to the pandemic as well as measures taken to contain the virus initially caused significant turmoil to the global economy and financial markets. To address the public health and safety concerns, we took steps to support the health and well-being of our employees, customers, partners and communities, including working remotely and learning to operate our businesses in a fundamentally different way.
To date, we have had to change certain strategy and product plans in order to address implications of the pandemic to our businesses, in particular, to our growth initiatives. Although forced to furlough some employees in the early days of the pandemic, we were able to bring those employees back to work during the second quarter of 2020. We also reduced expenditures throughout 2020 in an effort to efficiently manage our businesses in the restricted and uncertain climate. We continue to face risk, however, related to fixed facilities costs given the uncertain post-pandemic future of the use of physical office space. In addition, the initial turmoil in financial markets contributed to significant downward pressure on our stock price early in the pandemic. In the ongoing remote work environment, we also face continued challenges in marketing new products, which in the past have relied on the intangible benefits of an in-person demo and sales experience. We cannot provide assurance that the actions we have taken will be sufficient, or that conditions will improve as the pandemic, including the emergence of variants of COVID-19 such as the delta and omicron variants, and reactions thereto, continue to evolve. Public health officials and medical professionals have warned that COVID-19 cases may continue to spike. It is unclear how long any resurgence will last, how severe it will be, and what safety measures governments will impose in response to it.
The COVID-19 pandemic and the resultant economic instability and financial market turmoil has added complexity, uncertainty and risk to nearly all aspects of our business. We are unable to fully predict the near-term and long-term impacts that the pandemic will have on our results from operations, financial condition, liquidity and cash flows for fiscal year 2022 or beyond.
Risks Related to our Strategy
Our growth initiatives could take longer than planned, be unsuccessful, or deplete our cash resources, any of which would have a material adverse effect on the performance of our businesses and financial results, and could cause us to pursue additional debt or other funding sources.
In recent years, we have developed new products and technologies, and funded initiatives, intended to create growth in our businesses, while simultaneously taking steps to reduce costs and increase profitability. These growth initiatives have impacted all segments of our organization, requiring us to allocate limited resources among our diverse business units. Our financial sustainability is largely dependent on the success of our growth initiatives, and there are many risks to that success, some of which are internal to our company, including our ability to develop and monetize our products and services, and some of which are externally driven and outside of our control, such as the potential impact of macroeconomic pressures, including high inflation rates and supply chain interruptions, and global pandemics. In addition, progress with our growth initiatives was and may continue to be negatively impacted by various reactions to the global outbreak of the coronavirus that causes COVID-19, such as travel restrictions, community lockdowns, tightening of corporate budgets, reduction in consumer confidence, and instability in financial markets. We cannot predict the duration or severity of these reactions or impacts to our business and, if prolonged, our cash reserves may prove insufficient, requiring us to pursue additional debt or other funding sources.
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Given the ambitious and significant nature of our growth initiatives, there is substantial risk that we may be unsuccessful in implementing our plans in a timely manner, our cash reserves may be depleted or insufficient to fully implement our plans, our growth initiatives may not gain adequate momentum, or the combination of our growth initiatives and cost reductions may not prove to be profitable. Moreover, our acceptance of outside funding for any of our growth businesses, such as our April 2021 public offering, exposes us to new risks and potential liabilities, including possible payment obligations and securities liability. Our business would suffer, and our operational results and financial outlook would be negatively impacted to a significant degree, in the event that any of our growth initiatives fail.
In August 2019, RealNetworks and Napster entered into a loan agreement with a third-party financial institution. Following the December 2020 sale of Napster to MelodyVR Group PLC, the loan agreement was amended to remove Napster as a co-borrower and, among other modifications, to reduce the amount available under the revolving line of credit to a maximum of $6.5 million. The loan agreement, as amended, contains customary covenants, including financial covenants, minimum EBITDA levels, and maintaining a minimum unrestricted cash balance. We have not had a debt facility in our recent past, therefore the entry into this facility introduced new risks to the company, including the risk that constraints around covenants may lead to less flexibility in operational decision making, the risk of default and various implications thereof, and the potential increase in liabilities on our balance sheet in the event that we draw down the line of credit. The Revolver matured August 1, 2022. The Company is currently in negotiations to extend or replace the Revolver with a comparable facility. There is no guarantee that the Company and the third-party financial institution will be able to reach mutually agreeable terms of the extension or replacement.
In April 2020, following an assessment of eligibility and upon approval by our Board of Directors, RealNetworks issued a promissory note in the principal amount of $2.9 million pursuant to the Paycheck Protection Program, or PPP, of the CARES Act. RealNetworks applied for forgiveness of its PPP loan in January 2021, and received notice that the PPP loan was forgiven in June 2021.
The inability to obtain additional debt, whether through draws on the revolving line of credit, if extended, or through a new debt facility, or the need to raise funds through other means, could negatively impact our liquidity and ability to invest in our growth initiatives. Moreover, we could be compelled to consider funding that would impact our governance structure. Our pursuit of debt or other sources of liquidity could impair our financial results and stock price.
We need to successfully monetize our new products and services in order to sustain and grow our businesses, and manage our cash resources.
In order to sustain our current level of business and to implement our growth initiatives, we must successfully monetize our new products and services, including through existing and new relationships with distribution partners, establishing new sales channels, and managing new supply chains. Our digital media products and services must be attractive and useful to distribution partners and end users. The successful acceptance and monetization of these products and services, therefore, is subject to unpredictable and volatile factors beyond our control, including end-user preferences, competing products and services, the rapid pace of change in the market, the effectiveness of our distribution channels, macro-economic conditions, and significant global crises. Any failure by us to timely and accurately anticipate consumers’ changing needs and preferences, emerging technological trends and data privacy norms, or changes in the competitive or regulatory landscape for our products and services could result in a failure to monetize our new products or the loss of market opportunities, both of which we have experienced at various times in our past.
Our growth initiatives are highly dependent on the performance of mobile telecommunications carriers, distributors, and resellers. We distribute our messaging platform services, such as KONTXT, through a limited number of mobile telecommunications carriers. Our SAFR sales channel includes distributors and resellers, as well as sales directly to end users. The financial condition, performance, and demand of our products and services through these mobile telecommunications carriers, distributors, and resellers could deteriorate, weakening our ability to sell our products and services, causing a material negative impact on our financial results. Furthermore, the growth of our SAFR business is inherently uneven and the timing of signing contracts and revenue recognition for SAFR can result in highly variable results over time, making it difficult to predict future results.
Moreover, in order to grow our new businesses, we must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether the products and services that we are developing or have introduced will meet the demands of the relevant market. As we have experienced, we may not realize a sufficient return, or may experience losses, on these investments. If this happens, it could cause further strain on our limited cash resources and negatively affect our ability to pursue other needed growth or strategic opportunities.
Sustaining and growing our businesses, and managing our cash resources, are subject to these risks inherent in developing, distributing and monetizing our new products and services. Our failure to manage these risks could further impair our operations and financial results to a material degree, and could cause an unsustainable depletion of our cash resources.
Our businesses, including in connection with our growth initiatives, face substantial competitive challenges that may impair our success, thus negatively impacting our future growth.
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Our digital media products and services, including both longstanding and new products/services, some of which are central to our growth initiatives, face a wide variety of competitors, many of which have longer operating histories, greater name or brand recognition, deeper and more expansive market penetration, more employees, and significantly greater resources than we do. In addition, current and potential competitors may include relatively new businesses that develop or use innovative technologies, products or features that could disrupt the market for technologies, products or features that we currently develop and market or seek to develop and market. In attempting to compete with any or all of these competitors, we may experience, as we have in the past, some or all of the following consequences, any of which would adversely affect our operating results and the trading price of our stock:
•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, including due to adverse publicity.
Our Consumer Media technologies for media playback and production (RealPlayer, RealMedia VB and RealMedia HD) compete with alternative media playback technologies and audio and video content formats that have obtained broad market penetration. RealMedia VB and RealMedia HD are codecs, technology that enables compression and decompression of the media content in a (usually proprietary) format. We license our codec technology primarily to computer, smartphone and other mobile device manufacturers, and also to other partners that can support our efforts to build a strong ecosystem, like content providers and integrated circuit developers. To compete effectively, codec technologies must appeal to, and be adopted for use by, a wide range of parties: producers and providers of media content, consumers of media content, and device manufacturers who pre-load codec technologies onto their devices. Our ability to sustain or grow this business, which has recently experienced downward pressure, is dependent on the successful promotion and adoption of our codec technologies to a wide and diverse target market, which is a complex and highly uncertain undertaking. If we are unable to compete successfully, our Consumer Media business could decline as it has in the recent past or on a more accelerated basis.
The market for our Mobile Services business is highly competitive and continues to rapidly evolve. Our SaaS services face competition from a proliferation of applications and services, many of which carriers can deploy or offer to their subscribers, or which consumers can acquire independently of their carrier. We expect pricing pressure in this business to continue to materially impact our operating results in this business. Our Mobile Services growth initiatives compete with a wide variety of companies, as small startups and well established, heavily resourced global companies race to develop AI-based technologies and launch products in the computer vision market. The success of these initiatives is highly dependent on our ability to differentiate our product offering within this highly competitive environment.
The branded services in our Games business compete with other developers, aggregators and distributors of mobile, online, and downloadable games. Our competitors vary in size and capabilities, some of which have high volume distribution channels and greater financial resources than we do; while others may be smaller and more able to quickly or efficiently adjust to market conditions. We also face significant price competition in the casual games market, as our competitors increasingly focus on free-to-play games or reduce prices more aggressively. We expect competition to continue to intensify in this market. Our games development studios compete primarily with other developers of mobile, online, and downloadable games, and must continue to develop popular and high-quality game titles. Our Games business must also continue to execute on opportunities to expand the play of our games on a variety of non-PC platforms, including mobile, in order to maintain our competitive position and to grow the business. Moreover, continued growth in our Games business is in part dependent on the availability of funds to invest in marketing, which availability cannot be assured.
Issues with the use of artificial intelligence, or AI, in our offerings could result in reputational harm or liability.
Certain of our growth initiatives are centered around AI-based products and solutions, of which our two main products are SAFR and KONTXT, and we expect these initiatives to comprise an increasing percentage of our go-forward business. As with many disruptive innovations, AI presents risks and challenges that could affect its adoption, and therefore our business. AI algorithms may be flawed. Datasets may be insufficient or contain biased information. Any inappropriate or controversial data practices by us, our distribution network, our end users, or others could impair the acceptance of AI solutions. These deficiencies could undermine the decisions, predictions, or analysis AI applications produce, subjecting us to competitive harm, legal liability, and brand or reputational harm. If we enable or offer AI solutions that are controversial because of their impact on privacy, employment, or other social issues, we may experience brand or reputational harm. Potential government regulation related to AI ethics may also increase the burden and cost of research and development in this area, subjecting us to brand or reputational harm, competitive harm or legal liability.
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Risks Related to our Operations
The distribution and license of our technology products and services are governed by contracts with third parties, the terms of which subject us to significant risks that could negatively impact our revenue, expenses and assumption of liability related to such contracts.
In our Consumer Media and Mobile Services segments, we distribute and license most of our technology products and services pursuant to contracts with third parties, such as mobile carriers and their partners, online service providers, and OEMs and device manufacturers, many of whom may have stronger negotiating leverage due to their size and reach. These contracts govern the calculation of revenue generated and expenses incurred, how we recognize revenue and expenses in our financial statements, and the allocation of risk and liabilities arising from the product or service or distribution thereof. Terms impacting revenue, over which we may have limited if any control, may involve revenue sharing arrangements, end user pricing, usage levels, and exclusivity, all of which significantly affect the level of revenue that we may realize from the relationship. Moreover, contract terms around marketing and promotion of our products and other expense allocation could result in us bearing higher expenses or achieving weaker performance than we had anticipated from the relationship.
In addition, although our contracts with third parties are typically for a fixed duration, they could be terminated early; and they may be renegotiated on less favorable terms or may not be renewed at all by the other party. We must, therefore, seek additional contracts with third parties on an ongoing basis to sustain and grow our business. We expect to face continuing and increased competition for the technology products and services we provide, and there is no assurance that the parties with which we currently have contracts will continue or extend current contracts on the same or more favorable terms, or that we will obtain alternative or additional contracts for our technology products and services. As we have experienced over the past several years relating to our technology sales in China, the further loss of existing contracts, the failure to enter new contracts, or the deterioration of customer creditworthiness or the terms in our contracts with third parties could continue to materially harm our operating results, financial condition, and cash flow.
Nearly all of our contracts in which we provide to another party services or rights to use our technology include some form of obligation by us to indemnify the other party for certain liabilities and losses incurred by them, including liabilities resulting from third party claims for damages that arise out of the use of our technology. These indemnification terms provide us with certain procedural safeguards, including the right to control the defense of the indemnified party. We have in the past incurred costs to defend and settle such claims. Claims against which we may be obligated to defend others pursuant to our contracts could in the future result in payments that could materially harm our business and financial results.
In our SAFR business we have contracted with the U.S. Government through the Small Business Innovation Research (SBIR) program. This subjects us to certain contracting rules, standards, and audits. If we fail to meet our obligations under such government contracts, we could face civil or criminal penalties, or administrative sanctions including suspension or debarment from future government business, termination of contract, refunding or suspension of payments, forfeiture of profits or payment of fines. In addition, future federal contracts may be subject to increased contracting rules, standards, and audits which could have an adverse impact on our operating results if we fail to meet these obligations.
In our Games segment, we rely on third-party platforms to distribute our games and collect revenue from players. We are subject to the standard terms and conditions that these platform providers have for application developers, which govern the content, promotion, distribution, operation of games and other applications on their platforms, as well as the terms of the payment processing services provided by the platforms, and which the platform providers can change unilaterally on short notice or without notice. If our platform providers do not perform their obligations in accordance with our platform agreements, our operations and financial condition could be adversely impacted.
Our operating results are difficult to predict and may fluctuate, which may contribute to weakness or volatility in our stock price.
The trading price for our common stock has been in steady decline for many years, though, particularly more recently, has also been vulnerable to significant volatility caused by general market conditions or unusual stock-specific trading activity. There can be no assurance that our common stock will not experience additional, and potentially more significant, volatility in the future caused by unpredictable external factors, including due to the broad range of causes described in these risk factors. In addition, as a result of the rapidly changing markets in which we compete, and restructuring, impairment and other one-time events specific to us or our consumers, our operating results may fluctuate or decline from period to period, which may contribute to weakness or volatility in our stock price. For example, the timing of contract signing and the rules for revenue recognition in our SAFR business produce results that are inherently variable and difficult to predict. Our results from this business are likely to be volatile and may not reflect a steady pace of growth, which could result in fluctuations in our stock price. Moreover, the general difficulty in forecasting our operating results and identifying meaningful performance metrics, especially when factoring in our growth initiatives, could result in actual results that differ materially from expected results, our published guidance, or analyst expectations, again causing weakness and volatility in our stock price and/or the trading volume of our shares. Compounding these internal factors are external factors, such as the significant instability in global financial markets experienced during the COVID-19 pandemic, that will impact our operating results and stock price, potentially driving
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our stock price to record lows as occurred in 2020 or to significant activity levels as occurred in early 2021. More recently, inflation rates in the U.S. have increased to levels not seen in several years, which may result in decreased demand for our products and services, increases in our operating costs including our labor costs, constrained credit and liquidity, reduced government spending and volatility in financial markets. The Federal Reserve has raised, and may again raise, interest rates in response to concerns over inflation risk. The global economy has slowed in recent periods, and the recent interest rate increases may result in further economic slowdowns, which could negatively affect our business and operating results.
The difficulty in forecasting our operating results may also cause over- or under-investment in certain growth initiatives, as such investment is often planned based on expected financial results, thus causing more severe fluctuations in operating results and, likely, further volatility in our stock price.
Further, because our common stock is listed on the Nasdaq Global Select Market, we must meet Nasdaq's continued listing requirements, in particular, financial requirements that include maintaining a minimum bid price of at least $1.00. On February 18, 2022, the Company received a letter from the Listing Qualifications Department of the Nasdaq Global Market indicating that, based upon the closing bid price of our common stock for the 30 consecutive business day period from January 4, 2022 through February 15, 2022, we did not meet the minimum bid price of $1.00 per share required for continued listing on Nasdaq. We have a compliance period of 180 calendar days ending August 17, 2022 in which to regain compliance. In order to regain compliance with Nasdaq’s minimum bid price requirement, our common stock must maintain a minimum closing bid price of $1.00 for at least ten consecutive business days prior to August 17, 2022.
The letter has no immediate impact on the listing of our common stock, which will continue to be listed and traded on Nasdaq during the 180-day compliance period. Our Board of Directors is considering the implementation of various measures intended to support compliance. In the event that we do not regain compliance by this date, we may be eligible for a second compliance period pursuant to Nasdaq’s rules.
Although we expect to restore our compliance with the listing requirements, we can provide no assurance that any action taken by us would be successful, or that any such action would stabilize the market price or improve the liquidity of our common stock. Should a delisting occur, a shareholder would likely find it significantly more difficult to dispose of our common stock, or to obtain accurate quotations as to the value of our common stock, and our ability to raise future capital through the sale of our common stock could be severely limited.
Any impairment to our goodwill, definite-lived, and right-of-use operating lease assets could result in a material charge to our earnings.
In accordance with GAAP, we test goodwill for possible impairment on an annual basis or more frequently in the event of certain indications of possible impairment. We review definite-lived and operating lease assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in a reporting unit’s fair value, changes in our operating plans and forecasts, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of our business, a significant sustained decline in our market capitalization and other factors. If we were to determine that an impairment had occurred, we would be required to record an impairment charge, which could have a material negative, and unanticipated, impact on our financial results.
Continued loss of revenue from our subscription services is likely to cause further harm to our operating results.
Our operating results have been and will continue to be adversely impacted by the loss of subscription revenue related to our more traditional products and services. Subscribers cancel their subscriptions to our services for many reasons, including a perception that they do not use the services sufficiently or that the service does not provide enough value, a lack of attractive or exclusive content generally or as compared with competitive service offerings, or because customer service issues are not satisfactorily resolved. Revenue from our SuperPass subscription service, for example, has continued to decline over several periods, due to changes in consumer preferences and changes on our part to focus on other products and services we offer, and we expect this trend to continue.
Given our declining revenue and operating losses, including the COVID-19 pandemic and related impacts to global financial markets, management has concluded that substantial doubt exists concerning our ability to continue as a going concern.
Our unrestricted cash and cash equivalents balance at June 30, 2022 was $14.4 million, $5.5 million of which was held by our foreign subsidiaries, and our operating loss for the six months ended June 30, 2022 was $9.9 million. Due to our history of declining revenue and operating losses, as well as our near-term expectations of net negative cash flows from operating activities, including the COVID-19 pandemic and the impacts to global financial markets, management has concluded that substantial doubt is deemed to exist about the company’s ability to continue as a going concern through the next 12 months. Our financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern will require us to improve cash flow by implementing some combination of the following: reduce operating expenses; improve working capital; sell businesses, product lines or assets; effectuate strategic alliances; efficiently repatriate cash; or obtain outside investment. Our limited cash resources and our potential inability to
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continue as a going concern may materially adversely affect our share price, inhibit our ability to obtain outside investment or strategic alliances.
Difficulty recruiting and retaining key personnel could significantly impair our operations or jeopardize our ability to meet our growth objectives.
Our success depends substantially on the contributions and abilities of certain key personnel, and we cannot provide assurance that we will be able to retain them in the near term or recruit them in the future. In 2020, we experienced a significant level of executive turnover, as we have experienced in the past and could experience in the future, which could impact our ability to retain key personnel. Also, qualified individuals are in high demand and competition for such qualified personnel in our industry, particularly engineering talent, is extremely intense, and we may incur significant costs to attract or retain them. Changes in immigration or other policies in the U.S. or other jurisdictions that make it more difficult to hire and retain key talent, or to assign individuals to any of our locations as needed to meet business needs, could adversely affect our ability to attract key talent or deploy individuals as needed, and thereby adversely affect our business and financial results. Further, the increased availability of work-from-home arrangements by other organizations in the competing environment primarily driven by the COVID-19 pandemic, repeated restructuring of our businesses and related cost-reduction efforts, as well as declines and volatility in our stock price, may cause instability in our workforce that will make it more difficult to retain and recruit key personnel. Given these factors, there can be no assurance that we will be able to attract and retain the key personnel necessary to sustain our business or support future growth.
Acquisitions and divestitures involve costs and risks that could harm our business and impair our ability to realize potential benefits from these transactions.
As part of our business strategy, we have acquired and sold technologies and businesses in the past and expect that we will continue to do so in the future. The failure to adequately manage transaction costs and address the financial, legal and operational risks raised by acquisitions and divestitures of technology and businesses could harm our business and prevent us from realizing the benefits of these transactions. In addition, we may identify and acquire target companies, but those companies may not be complementary to our current operations and may not leverage our existing infrastructure or operational experience, which may increase the risks associated with completing acquisitions.
For example, our January 18, 2019 acquisition of a controlling interest in Napster represented a significant acquisition for RealNetworks. To effectuate the acquisition and incorporate Napster's financial results into our financial statements, we incurred significant transaction-related costs throughout fiscal year 2019 and early in 2020. Moreover, the 2020 sale of our Napster stake in connection with the merger of Napster and MelodyVR resulted in further significant transaction-related expenses, certain ongoing indemnification obligations, and the payment of a portion of proceeds to a third party.
Transaction-related costs and financial risks related to completed and potential future purchase or sale transactions may harm our financial position, reported operating results, or stock price. Previous acquisitions have resulted in significant expenses, including amortization of purchased technology, amortization of acquired identifiable intangible assets and incurring charges for the impairment of goodwill and other intangible assets, which are reflected in our operating expenses. New acquisitions and any potential additional future impairment of the value of purchased assets, including goodwill, could have a material negative impact on our future operating results. In compliance with GAAP, we evaluate these assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that our goodwill or definite-lived assets may not be recoverable, include reduced future revenue and cash flow estimates due to changes in our forecasts, and unfavorable changes to valuation multiples and discount rates due to changes in the market. If we were to conclude that any of these assets were impaired, we would have to recognize an impairment charge that could materially impact our financial results.
Purchase and sale transactions also involve operational risks that could harm our existing operations or prevent realization of anticipated benefits from a transaction. These operational risks include:
• 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.
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Risks Related to Regulations and Other External Factors
Government regulation of the Internet, computer vision and facial recognition technologies, AI and other related technologies exposes us to regulatory risks and unfavorable developments resulting from any changes in the regulatory landscape or in the industry or broader market conditions in which RealNetworks operates.
We are subject to regulations and laws specific to the marketing, sale and delivery of goods and services. These laws and regulations, which continue to evolve, cover taxation, user privacy, data collection and protection, cybersecurity, copyrights, electronic contracts, sales procedures, automatic subscription renewals, credit card processing procedures, consumer protections, digital games distribution, AI technologies and services, broadband Internet access, and content restrictions. We cannot guarantee that we have been or will be fully compliant in every jurisdiction, as it is not entirely clear how existing laws and regulations governing issues such as privacy, data protection, taxation and consumer protection apply or will be enforced with respect to the products and services we sell. Moreover, as Internet commerce continues to evolve, increasing regulation and/or enforcement efforts by federal, state and foreign agencies and the prospects for private litigation claims related to our data collection, privacy policies or other e-commerce practices become more likely. In addition, the adoption of any laws or regulations or the imposition of other legal requirements that adversely affect our ability to market, sell, and deliver our products and services could decrease our ability to offer or customer demand for our service offerings, resulting in lower revenue. Moreover, both in the U.S. and worldwide, obligations relating to privacy, data protection, and cybersecurity are rapidly evolving. Certain jurisdictions have and more jurisdictions may impose stricter laws relating to privacy, data protection or cybersecurity that may impact accepted business practices and impose obligations that may conflict with each other or may conflict with our policies, practices, or features of our products and services. For example, the European Union adopted the General Data Protection Regulation, or GDPR, effective as of May 2018 regarding the collecting, handling, and storage of personal data, and California has adopted the California Consumer Privacy Act of 2018 and will substantially expand privacy protection when the California Privacy Rights Act of 2020 goes into effect on January 1, 2023. We cannot provide assurance that the changes that we have adopted to our business practices will be compliant or that new compliance frameworks such as these or other obligations relating to privacy, data protection, or cybersecurity will not require us to modify our policies, practices, or features of our goods or services, results in claims, complaints, or demands of private parties or investigations, other proceedings by regulatory authorities, or fines or other liabilities, or otherwise have a negative impact on our financial results.
In addition, through the operation of our SAFR product, we are subject to regulations and laws generally and specifically applicable to the provision of facial recognition technology. New laws and regulations are under discussion and those that exist are untested, thus we cannot guarantee that we have been or will be fully compliant in every jurisdiction. Moreover, the voluntary development of norms, standards, and best practices by companies providing facial recognition and similar technology could require modifications to our technology or practices that may be costly or incompatible with our financial model.
In the future, and as we pursue further sales of our SAFR product to governmental agencies, regulations, or changes in laws and regulations or their existing interpretations or applications, could require us to further change our business practices, raise compliance costs or other costs of doing business and result in additional historical or future liabilities for us, resulting in adverse impacts on our business and our operating results. Moreover, as we seek to increase our sales to government entities, we may experience increased costs that relate to compliance with government regulations, including increased costs related to compliance with government data security regulations.
As a consumer-facing business, we receive complaints from our customers regarding our consumer marketing efforts and our customer service practices. Some of these customers may also complain to government agencies, and from time to time, those agencies have made inquiries to us about these practices. In addition, we may receive complaints or inquiries directly from governmental agencies that have not been prompted by consumers. We cannot provide assurance that governmental agencies will not bring future claims, as they have on occasion in the past, regarding our marketing, or consumer services or other practices.
We face financial and operational risks associated with doing business in non-U.S. jurisdictions and operating a global business, that have in the past and could in the future have a material adverse impact on our business, financial condition and results of operations.
A material portion of our revenue is derived from sales outside of the U.S. and most of our employees are located outside of the U.S. Consequently, our business and operations depend significantly on global and national economic conditions and on applicable trade regulations and tariffs. For example, our business in China could be negatively affected by an actual or perceived lack of stability or consistency in U.S.-China trade policy. The growth of our business is also dependent in part on successfully managing our international operations. Our non-U.S. sales, purchases and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:
•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 funds, whether as a result of tax laws or otherwise;
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•high inflation rates;
•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 in complying with global laws related to the collection, storage, use, transfer, and other processing of customer and employee data;
•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 including as a result of U.S. and other sanctions against Russia as a result of the Russian conflict with Ukraine;
•impact of changes in immigration or other policies impacting our ability to attract, hire, and retain key talent;
•potential implications resulting from the outbreak of disease on a global scale or localized in countries in which we do business or have employees;
•global supply chain interruptions, and
•difficulties in managing a global enterprise, including staffing, collecting accounts receivable, and managing suppliers, distributors, and representatives.
Because consumers may consider the purchase of our digital entertainment products and services to be a discretionary expenditure, their decision whether to purchase our products and services may be influenced by macroeconomic factors that affect consumer spending such as unemployment, access to credit, negative financial news, and declines in income. In addition, mobile telecommunication carriers and other business partners may reduce their business or advertising spending with us or for our products and services they distribute to users in the face of adverse macroeconomic conditions, such as financial market volatility, government austerity programs, tight credit, and declines in asset values. We have in the past recorded material asset impairment charges due in part to weakness in the global economy, and we may need to record additional impairments to our assets in future periods in the event of renewed weakness and uncertainty in the global or a relevant national economy. Accordingly, any significant weakness in the national and/or global economy could materially impact our business, financial condition and results of operations in a negative manner.
Our international operations involve risks inherent in doing business globally, including difficulties in managing operations due to distance, language, cultural differences, local economic conditions, outbreak of diseases, different or conflicting laws and regulations, taxes, and exchange rate fluctuations. The functional currency of our foreign subsidiaries is typically the local currency of the country in which each subsidiary operates. We translate our subsidiaries’ revenues into U.S. dollars in our financial statements, and continued volatility in foreign exchange rates may result in lower reported revenue or net assets in future periods. If we do not effectively manage any of the risks inherent in running our international businesses, our operating results and financial condition could be harmed. As another example, the COVID-19 pandemic has resulted in travel and work restrictions globally, and may further disrupt our ability to produce and sell products. As a result of the ongoing remote work environment, we face continued challenges in marketing new products, which in the past have relied on the intangible benefits of an in-person demo and sales experience. We continue to monitor the impacts of the pandemic to our business, as well as rapidly evolving expectations regarding its severity and duration. We are unable to predict the full effects of this pandemic on our operations and financial results. Additionally, we face uncertainty from the collateral effects of sanctions and other actions taken against Russia as a result of the Russian conflict with Ukraine. While our direct business with customers in Russia is not material, the macroeconomic effects of sanctions or other actions against Russia now or in the future could negatively affect our business. For example, we have operations, as well as current and potential new customers, in Europe. If economic conditions in Europe and other key markets for our platform continue to remain uncertain or deteriorate further, it could adversely affect our customers’ ability or willingness to subscribe to our platform, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscriptions or affect renewal rates, all of which could harm our operating results. These effects include increases in the cost of energy and in inflation generally.
Our business is conducted in accordance with existing international trade relationships, and trade laws and regulations. Changes in geopolitical relationships and laws or policies governing the terms of foreign trade, such as the recent rise in protectionist politics and economic nationalism, could create uncertainty regarding our ability to operate and conduct commercial relationships in affected jurisdictions, which could have a material adverse effect on our business and financial results. Additionally, our global operations may also be adversely affected by political events, domestic or international terrorist events and hostilities or complications due to natural or human-caused disasters. These uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.
We may be unable to adequately protect our proprietary rights or leverage our technology assets, and may face risks associated with third-party claims relating to intellectual property rights associated with our products and services.
Our ability to compete across our businesses partly depends on the superiority, uniqueness and value of our technology, including both internally developed technology and technology licensed from third parties. To protect our proprietary rights, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and
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third parties, and protective contractual provisions. Our efforts to protect our intellectual property rights may not assure our ownership rights in our intellectual property, protect or enhance the competitive position of our products, services and technology, or effectively prevent misappropriation of our technology.
From time to time, we receive claims and inquiries from third parties alleging that our technology used in our business may infringe the third parties’ proprietary rights. These claims, even if not meritorious, could force us to make significant investments of time, attention and money in defense, and give rise to monetary damages, penalties or injunctive relief against us. We may be forced to litigate, to enforce or defend our patents, trademarks or other intellectual property rights, or to determine the validity and scope of other parties' proprietary rights in intellectual property. To resolve or avoid such disputes, we may also be forced to enter into royalty or licensing agreements on unfavorable terms or redesign our product features, services and technology to avoid actual or claimed infringement or misappropriation of technology. Any such dispute would likely be costly and distract our management, and the outcome of any such dispute (such as additional licensing arrangements or redesign efforts) could fail to improve our business prospects or otherwise harm our business or financial results.
Disputes regarding the validity and scope of patents or the ownership of technologies and rights associated with streaming media, digital distribution, and online businesses are common and likely to arise in the future. We also routinely receive challenges to our trademarks and other proprietary intellectual property that we are using in our business activities. We are likely to continue to receive claims of third parties against us, alleging contract breaches, infringement of copyrights or patents, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition or violations of privacy rights.
Introduction of new technology and changes in consumer behavior could harm our business and results of operations.
The expectations and needs of technology consumers are constantly evolving. Our future success depends on a variety of factors, including our continued ability to innovate and introduce new products and services, enhance and integrate our products and services in a timely and cost-effective manner, extend our core technology into new applications, and anticipate emerging standards, business models, software delivery methods and other technological developments.
The introduction of, or limitations on, certain technologies may reduce the effectiveness of our products. For example, some of our products rely on tracking, third-party cookies or other identifiers to help our customers more effectively advertise and detect and prevent fraudulent activity. Consumers can control the use of these technologies through their browsers, operating systems, device settings or “ad-blocking” software or applications. Increased use of such methods, software or applications could harm our business.
Our success in the media and entertainment industry depends on our ability to adapt to shifting patterns of content consumption. The ways in which consumers view content, and technology and business models in our industry, continue to evolve rapidly, and new distribution platforms, as well as increased competition from new entrants and emerging technologies, have added to the complexity of maintaining predictable revenue streams. Moreover, Internet-connected devices and operating systems controlled by third parties increasingly contain features that allow device users to disable functionality that allows for the delivery of advertising on their devices, including through Apple’s Identifier for Advertising, or IDFA, or Google’s Advertising ID, or AAID, for Android devices. Device and browser manufacturers may include or expand these features as part of their standard device specifications. For example, Apple Inc. has imposed new requirements for consumer disclosures regarding privacy practices, and has implemented a new application tracking transparency framework that requires opt-in consent for certain types of tracking. This transparency framework was launched in April 2021. This transparency framework has and may continue to negatively impact the effectiveness of our advertising practices. We are further dependent on the interoperability of our sites with popular mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems that degrade the functionality of our sites or give preferential treatment to competitive products could adversely affect the usage of our sites on mobile devices. In the event that it is more difficult for our customers to access and use our sites on their mobile devices, or if our customers choose not to access or to use our sites on their mobile devices or to use mobile products that do not offer access to our sites, our customer growth could be harmed and our business, financial condition and operating results may be materially and adversely affected.
Disruptions or failures of, or cybersecurity attacks on, our systems or networks, or those of our third-party service providers, may cause such systems and networks to fail, become unavailable, unsecured or perform poorly, or may lead to disclosure of sensitive customer data.
Our ability to provide our products and services to our customers and operate our business depends on the continued operation and security of our information systems and networks and those of our service providers. A significant or repeated reduction in the performance, security or availability of our information systems and network infrastructure or those of our service providers could harm our ability to conduct our business, and harm our reputation and ability to attract and retain users, customers, advertisers and content providers. Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate.
We have on occasion experienced system errors and failures that caused interruption in availability of products or content or an increase in response time. Problems with our systems or networks, or third-party systems and networks that we utilize,
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could result from a failure to adequately maintain and enhance these systems and networks, natural disasters and similar events, power failures, intentional actions to disrupt systems and networks and many other causes.
We sell many of our products and services through online sales transactions directly with consumers, and their credit card information is collected and stored by our payment processors. The systems of our third party service providers may not prevent future improper access to or use, disclosure or other processing of credit card information, personal information or other information relating to individuals, or other sensitive or confidential information that we or our third-party service providers process. A security breach, incident, or cyberattack impacting us or our third-party service providers–including any such matter that leads to the disclosure or other unauthorized processing of consumer account information, or any event that leads to the perception that any such matter has occurred; any failure by us to comply with our posted privacy policy or existing or new privacy legislation; or any other actual or asserted obligations relating to privacy, data protection or cybersecurity, could result in unauthorized access to, damage to, disablement or encryption of, use or misuse of, disclosure of, modification of, destruction of, or loss of our data or our customers' data–could disrupt our ability to operate our products and services; could harm our reputation; could impact the market for our products and services; or could subject us to claims, demands, litigation, regulatory investigations and other proceedings, resulting in potentially significant fines and other liabilities. Further, because there are many different security attack techniques and such techniques continue to evolve and are generally not detected until after an incident has occurred, we may be unable to implement adequate preventative measures, anticipate attempted security breaches or other security incidents, or react in a timely manner.
Security breaches, ransomware and other computer malware, phishing, and cyberattacks have become more prevalent and sophisticated in recent years, making it increasingly difficult to successfully defend against them or implement adequate preventive measures. Furthermore, we currently hold contracts with both U.S. and foreign governments, including the U.S. military, and expect to expand our portfolio of government contracts going forward, which may increase the risk that we will become a target for such attacks. As the risk of attack increases, our costs associated with network security and other aspects of cyber security may also increase. Our security measures or those of our third-party service providers could fail and result in unauthorized access to, damage to, disablement or encryption of, use or misuse of, disclosure of, modification of, destruction of, or loss of the data that we or they maintain or otherwise process. In addition, our remediation efforts may not be successful. We also may face difficulty or delay in identifying, remediating, and otherwise responding to cyberattacks and other security breaches and incidents. Furthermore, concerns about our practices or the ultimate use of our products and services with regard to the collection, use, retention, security, or disclosure or other processing of personal information or other matters relating to privacy, data protection or cybersecurity, including with respect to AI, could make us a more attractive target for malicious attacks and increase the resulting damage to our reputation and negative effect on our operating results if a cyberattack or other security breach occurs or is perceived to have occurred.
We cannot ensure that any limitation of liability provisions we may have in our customer and user agreements, contracts with third-party vendors and service providers, and other contracts relating to a security compromise or breach or other privacy or security incident would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim.
Moreover, our insurance coverage may not provide adequate coverage for liabilities we incur or indemnification claims we receive relating to any privacy or security incident or breach, or an insurer may deny coverage of claims. In the future, we may not be able to secure insurance for such matters on commercially reasonable terms, or at all. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our business, financial condition, and results of operations.
Changes in regulations applicable to the Internet and e-commerce that increase the taxes on the services we provide could materially harm our business and operating results.
As Internet commerce continues to evolve, increasing taxation by state, local or foreign tax authorities becomes more likely. For example, taxation of electronically delivered products and services or other charges imposed by government agencies may also be imposed. We collect transactional taxes and we believe we are compliant and current in all jurisdictions where we have a collection obligation for transaction taxes. Any regulation imposing greater taxes or other fees for products and services could result in a decline in the sale of products and services and the viability of those products and services, harming our business and operating results. A successful assertion by one or more states or foreign tax authorities that we should collect and remit sales or other taxes on the sale of our products or services could result in substantial liability for past sales.
In those countries where we have a tax obligation, we collect and remit value-added tax, or VAT, on sales of “electronically supplied services” provided to European Union and United Kingdom residents. The collection and remittance of VAT subjects us to additional currency fluctuation risks.
Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters and changes in personnel responsible for internal controls could significantly affect our financial results or financial condition.
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We prepare our financial statements in conformity with GAAP. GAAP accounting principles are subject to interpretation or changes by the Financial Accounting Standards Board, or FASB, and the SEC, and new accounting pronouncements and varying interpretations of accounting standards and practices have occurred in the past and are expected to occur in the future. Moreover, our financial statements require the application of judgments and estimates regarding a wide range of matters that are relevant to our business, such as revenue recognition, and asset impairment and fair value determinations. Changes in accounting standards or practices, or in our judgments and estimates underlying accounting standards and practices, could harm and/or materially impact our operating results and/or financial condition.
Our disclosure controls and procedures (DCPRs) are designed to ensure that information required to be disclosed in reports we file is accumulated and communicated to management and recorded, processed, summarized and reported as specified in the rules and forms of the SEC. In addition, we perform annual system and process evaluation and testing of our internal controls over financial reporting (ICFRs). Changes in our staffing, including turnover and reductions in the number of personnel participating in our DCPRs and ICFRs processes, may increase the likelihood that any errors and/or fraud go undetected and result in inaccurate financial information being issued.
We may be subject to additional income tax assessments and changes in applicable tax regulations could adversely affect our financial results.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, income taxes payable, and net deferred tax assets. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in our historical financial statements. An audit or litigation can result in significant additional income taxes payable in the U.S. or foreign jurisdictions which could have a material adverse effect on our financial condition and results of operations.
Risks Related to our Governance and Capital Structure
The announcement and pendency of the Merger Agreement may have an adverse effect on our business results, and a failure to complete the Merger could have a material and adverse effect on our business, results of operations, financial condition, cash flows, and stock price.
The Merger Agreement is subject to a number of conditions that must be fulfilled in order to complete the Merger, including approval by our stockholders (not including the Founder Shareholders). These conditions to the consummation of the Merger may not be fulfilled and, accordingly, the Merger may not be completed or may be significantly delayed. In addition, if the Merger is not completed by the date that is 90 days following the effectiveness of the proxy statement filed in connection therewith, either Greater Heights or the Company may choose to terminate the Merger Agreement if the failure to consummate the transactions contemplated by the Merger Agreement is not primarily caused by any failure to fulfill any obligation under the Merger Agreement by the party electing to terminate the Merger Agreement. Furthermore, the consummation of the Merger may be significantly delayed due to various factors, including the receipt of a competing acquisition proposal, regulatory or litigation related to the Merger.
If the Merger is not consummated or is significantly delayed, our ongoing business, financial condition and results of operations may be materially adversely affected. We have incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed or is significantly delayed, we would have recognized these expenses without realizing the expected benefits of the Merger.
Additionally, our business may have been and may in the future be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. If the Merger Agreement is terminated, our stockholders cannot be certain that we will be able to find a party willing to engage in a transaction on more attractive terms than the Merger Agreement, or at all, and our results of operations may be adversely impacted by the costs incurred, and by the diversion of management attention, in connection with the Merger. Moreover, the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Merger will be completed. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the Merger, could have a material adverse effect on our business, financial condition and results of operations.
While the merger is pending, we are subject to business uncertainties and contractual restrictions that could harm our business relationships, financial condition, operating results, cash flows, and business.
Uncertainty about the effect of the Merger may have an adverse effect on our business, financial condition and results of operations. These uncertainties may impair our ability to attract, retain and motivate key personnel and maintain relationships with third parties pending the consummation of the Merger. Additionally, these uncertainties could cause third parties with whom we deal to seek to change, or fail to extend, existing business relationships with us.
The pursuit of the Merger and preparation for a potential closing thereof may place a burden on our management and internal resources. Significant diversion of management attention away from ongoing business concerns and any difficulties
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encountered in the closing process could have a material adverse effect on the Company’s business, financial condition and results of operations.
In addition, the Merger Agreement restricts us from taking certain actions without Greater Heights’ consent while the Merger is pending. If the Merger is not completed, our inability to take such actions while the Merger is pending could have a material adverse effect on our business, financial condition and results of operations.
Litigation may arise in connection with the merger, which could be costly, prevent consummation of the merger, divert management’s attention and otherwise materially harm our business.
While we believe that any claims that are or may be asserted by purported shareholder plaintiffs related to the Merger would be without merit, the results of any such potential legal proceedings are difficult to predict and could delay or prevent the Merger from being competed in a timely manner. Moreover, any litigation could be time consuming and expensive, could divert our management’s attention away from our regular business and, any lawsuit adversely resolved against us or members of our board of directors, could have a material adverse effect on our business, financial condition and results of operations.
One of the conditions to the consummation of the Merger is the absence of any law enacted, issued or promulgated by a governmental authority or any issuance or granting of any decree, ruling injunction or other order (whether temporary, preliminary or permanent) by a governmental authority that has the effect of restraining, enjoining or otherwise prohibiting the consummation of the Merger. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a regulatory authority issues an order or other directive having the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger, then such injunctive or other relief may prevent the Merger from becoming effective in a timely manner or at all, which could have the adverse consequences set forth above.
The Merger Agreement limits our ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire the Company for greater consideration than what Greater Heights has agreed to pay pursuant to the Merger Agreement.
The Merger Agreement contains provisions that make it more difficult for us to sell our business to a party other than Greater Heights. The Merger Agreement provides that the Company must comply with customary non-solicitation restrictions, including certain restrictions on its ability to solicit alternative acquisition proposals from third parties, to provide non-public information to third parties and to engage in negotiations with third parties regarding alternative acquisition proposals. Subject to certain customary “fiduciary out” exceptions, the Company’s board of directors is required to recommend that the Company stockholders adopt the Merger Agreement and to call a meeting of the Company stockholders to vote on a proposal to adopt the Merger Agreement.
The Merger Agreement also allows either the Company or Greater Heights to terminate the Merger Agreement in certain circumstances, including a recommendation change by the Company’s board and a failure to obtain requisite stockholder approval. If the Merger Agreement is terminated under certain circumstances as provided in the Merger Agreement, the Company could be required to pay Greater Heights a termination fee equal to one of (i) $1,043,971, (ii) $521,981.50, or (iii) the lesser of (A) Greater Heights’ fees and expenses incurred in connection with the Merger Agreement and the Merger and (B) $500,000. While both the Company and Greater Heights believe these provisions and agreements are reasonable and customary and are not preclusive of other offers, the restrictions, including the added expense of the termination fees that may become payable by the Company to Greater Heights in certain circumstances, might discourage a third party that has an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition, even if that party were prepared to pay consideration with a higher per share value than the consideration payable in the Merger pursuant to the Merger Agreement.
Our Chairman of the Board and Chief Executive Officer beneficially owns 38.5% of our common stock, which gives him significant control over certain major decisions on which our shareholders may vote or which may discourage our acquisition by a third party.
Mr. Glaser beneficially owns 38.5% of our common stock. As a result, Mr. Glaser and his affiliates will have significant influence to:
•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.
Furthermore, on February 10, 2020, we entered into a Series B Preferred Stock Purchase Agreement with Mr. Glaser pursuant to which Mr. Glaser invested approximately $10.0 million in RealNetworks in exchange for the issuance to him of approximately 8 million shares of our Series B Preferred Stock, par value $0.001 per share. The rights, preferences, limitations, and powers of the Series B Preferred Stock are set forth in and governed by the designation of rights and preferences of Series B Preferred Stock filed with the Secretary of State of the State of Washington. Those rights, preferences, limitations, and
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powers include the right to proportional adjustment and the right to any dividends or distributions declared with regard to our common stock, but the Series B Preferred Stock has no voting or consent rights, has no liquidation preference, has no preferred dividend, and has limitations on transferability. Each share of Series B Preferred Stock is convertible into one share of our common stock, however no conversion is permitted in the event that it would cause Mr. Glaser’s beneficial ownership of our common stock to exceed the 38.5% threshold set forth in our shareholder rights plan dated November 30, 2018.
The stock ownership of Mr. Glaser, as well as his unsolicited, non-binding proposal to acquire the Company, may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of RealNetworks, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.
Provisions of our charter documents, shareholder rights plan, and Washington law could discourage our acquisition by a third party.
Our articles of incorporation provide for a strategic transactions committee of the board of directors. Without the prior approval of this committee, and subject to certain limited exceptions, the board of directors does not have the authority to:
•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.
Mr. Glaser has special rights under our articles of incorporation to appoint or remove members of the strategic transactions committee at his discretion that could make it more difficult for RealNetworks to be sold or to complete another change of control transaction without Mr. Glaser’s consent. RealNetworks has also entered into an agreement providing Mr. Glaser with certain contractual rights relating to the enforcement of our charter documents and Mr. Glaser’s roles and authority within RealNetworks. These rights and his role as Chairman of the Board of Directors, together with Mr. Glaser’s significant beneficial ownership, create unique potential for concentrated influence of Mr. Glaser over potentially material transactions involving RealNetworks and decisions regarding the future strategy and leadership of RealNetworks. Pursuant to its authority in the articles of incorporation to limit the powers of the committee, the strategic transactions committee resolved to not require its approval of the Merger.
We adopted a shareholder rights plan in December 1998, which was amended and restated in December 2008, amended in April 2016 and February 2018, and again amended and restated in November 2018. The plan provides that shares of our common stock have associated preferred stock purchase rights, the exercise of which would make the acquisition of RealNetworks by a third party more expensive to that party, having the effect of discouraging third parties from acquiring RealNetworks without the approval of our board of directors, which has the power to redeem these rights and prevent their exercise. The Company's Board of Directors approved an amendment and supplement to the Rights Plan (the "Rights Amendment") which prevents the approval, execution, delivery or performance of the Merger Agreement, or the consummation of the Merger, from, among other things, being subject to the terms of the Rights Plan. The Rights Amendment further provides that the rights will expire in their entirety immediately prior to the effective time of the Merger without any payment being made in respect thereof.
Washington law imposes restrictions on some transactions between a corporation and certain significant shareholders. The foregoing provisions of our charter documents, shareholder rights plan, our agreement with Mr. Glaser, and Washington law, as well as our charter provisions that provide for a classified board of directors and the availability of “blank check” preferred stock, could have the effect of making it more difficult or more expensive for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions may therefore have the effect of limiting the price that investors might be willing to pay in the future for our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3. Default Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
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Item 5. Other Information
None
Item 6. Exhibits
See Index to Exhibits below.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| REALNETWORKS, INC. | |||||||||||
| By: | /s/ Brian McClain | ||||||||||
| Brian McClain | |||||||||||
| Title: | Interim Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | ||||||||||
Dated: August 12, 2022
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INDEX TO EXHIBITS
Exhibit Number | Description | ||||
| 2.1 | |||||
| 4.1 | |||||
| 4.2 | |||||
| 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 | ||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||||
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Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert Glaser, certify that:
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 12, 2022 | ||||||||||
| /s/ Robert Glaser | |||||||||||
| Robert Glaser | |||||||||||
| Title: | Chairman and Chief Executive Officer | ||||||||||
| (Principal Executive Officer) | |||||||||||
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian McClain, certify that:
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 12, 2022 | ||||||||||
| /s/ Brian McClain | |||||||||||
| Brian McClain | |||||||||||
| Title: | Interim Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | ||||||||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Robert Glaser, Chairman of the Board of Directors and Chief Executive Officer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended June 30, 2022 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.
| Date: | August 12, 2022 | ||||||||||
| By: | /s/ Robert Glaser | ||||||||||
| Name: | Robert Glaser | ||||||||||
| Title: | Chairman and Chief Executive Officer | ||||||||||
| (Principal Executive Officer) | |||||||||||
A signed original of this written statement required by Section 906 has been provided to RealNetworks, Inc. and will be retained by RealNetworks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Brian McClain, Interim Chief Financial Officer and Treasurer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended June 30, 2022 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.
| Date: | August 12, 2022 | |||||||||||||
| By: | /s/ Brian McClain | |||||||||||||
| Name: | Brian McClain | |||||||||||||
| Title: | Interim Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | |||||||||||||
A signed original of this written statement required by Section 906 has been provided to RealNetworks, Inc. and will be retained by RealNetworks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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