EDGAR 10-K Filing

Company CIK: 1046327
Filing Year: 2022
Filename: 1046327_10-K_2022_0001046327-22-000016.json

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ITEM 1. BUSINESS
Item 1. Business
Overview
RealNetworks invented the streaming media category in 1995 and continues to build on its foundation of digital media expertise and innovation, creating a new generation of products and services to enhance and secure our daily lives. In recent years, we have increasingly focused on developing artificial intelligence (AI)-based products and services such as our Secure Accurate Facial Recognition (SAFR) computer vision platform and our KONTXT natural language processing-based message classification and analysis product. We provide our 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. For over 25 years, RealNetworks has advanced the renowned RealPlayer, which has provided millions of people worldwide a powerful way to download, store, organize, and experience the rapidly expanding universe of digital media content, regardless of format. Our SAFR computer vision platform, a key investment initiative for us, enables new applications for security, convenience, and analytics, and is optimized for live video. Our consumer products feature GameHouse Original Stories, a unique IP portfolio of free-to-play mobile games. Our consumer products also include ringback tones, which we license to mobile operators, and our video compression and enhancement technology, which we primarily license to OEMs, including manufacturers of mobile devices, smart TVs, and set-top boxes. Our product line also includes KONTXT, our AI-based platform for categorizing Application to Person (A2P) messages to help messaging aggregators and mobile carriers provide a better customer experience, strengthen customer loyalty, and drive new revenue through text message management, classification and anti-spam.
The monetization, distribution, and licensing of our technology products and services are heavily dependent on contracts with third parties, such as mobile carriers, system integrators, and device manufacturers.
We were incorporated in 1994 in the State of Washington. Our common stock is listed on the NASDAQ Stock Market under the symbol "RNWK."
In this Annual Report on Form 10-K ("10-K") for the year ended December 31, 2021, RealNetworks, Inc., together with its subsidiaries, is referred to as "RealNetworks," the "Company," "we," "us," or "our." "RealPlayer," "RMHD," "RealMedia," "GameHouse," "KONTXT," "SAFR" and other trademarks of ours appearing in this report are our property.
Segments
We report revenue and operating income (loss) in three segments: (1) Consumer Media, (2) Mobile Services, and (3) Games. RealNetworks allocates to its Consumer Media, Mobile Services, and Games 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 include restructuring charges and stock compensation expense.
As described in Note 4. Dispositions, in August 2020, we entered into a Support Agreement in connection with the execution by Napster of a definitive agreement pursuant to which Napster would become a wholly owned subsidiary of MelodyVR Group PLC. The transaction closed on December 30, 2020, resulting in our full disposition of our Napster stake. Effective on the execution of the Napster/MelodyVR merger agreement on August 25, 2020, Napster was treated as discontinued operations for accounting and disclosure purposes. As such, Napster's operating results for the years ended December 31, 2021 and 2020 conform to this presentation.
Consumer Media
In our Consumer Media segment, revenue is primarily derived from the licensing of our portfolio of video compression and enhancement technology, also known as codec technology. Codecs are an encoding and decoding technology designed to reduce the amount of bits required to stream or store media content, and modern codecs achieve significant savings in streaming bandwidth and storage costs. Our main codec products are RealMedia High Definition, which we refer to as RealMedia HD or RMHD, and RealMedia Variable Bitrate, or RMVB. Our codec technologies business is primarily focused on the Chinese market, where RMVB remains a prevalent, though declining, format.
We continue to develop and innovate our video compression and enhancement technology to meet or exceed user demands for increasing compression efficiency and visual quality. We license our codec technology to a variety of electronic equipment, microchip, and integrated circuit manufacturers who embed our codec in their products, including mobile devices, laptops, smart TVs and other devices. To ensure a robust ecosystem for our codec technologies, we also promote the use of our codec technology to producers of media content and users of RealPlayer, thus encouraging the widespread adoption by device manufacturers.
We also generate revenue through online sales to consumers of our RealPlayer subscription products, including our SuperPass service, which provides consumers with access to digital entertainment content for a monthly fee. The RealPlayer media player, our enduring yet continually evolving software product, includes features and services that enable consumers to discover, play, download, manage and edit digital video, stream audio and video, download and save photos and videos from the web, transfer and share content on social networks, and edit their own photo and video content. As part of our RealPlayer download process, we also offer distribution of third-party software products to consumers, which generates additional revenue.
Mobile Services
Mobile Services consists of the various products and services we provide to mobile and other service providers. In recent years, we have increasingly focused on AI-based and machine learning products and services such as SAFR and KONTXT.
Included in our SaaS offerings are our messaging products, which include our Metcalf intercarrier messaging service; KONTXT, our AI-based text message management, anti-spam, and classification product; and our ringback tone service. We provide these services to a large number of mobile carriers around the world, although a significant portion of our revenue for this segment results from contracts with a few mobile carriers and one service partner. We also offer business intelligence, subscriber management and billing for the carriers who make our offerings available to their customers. Also included in this segment is our computer vision platform, SAFR (Secure Accurate Facial Recognition) and our RealTimes platform.
Our Metcalf intercarrier messaging platform enables operators to send and receive SMS messages worldwide between networks and service providers, regardless of network technology, typically processing billions of SMS messages per day between users on hundreds of different networks. A portion of the revenue we earn from our intercarrier messaging service is based on a revenue-sharing arrangement with one service partner. Our next-generation AI-based mobile messaging platform, KONTXT, evaluates message streams sent from an application to a person (A2P) and classifies those messages into various categories allowing network operators and other service providers to create policies for prioritization and delivery of messages and blocking spam and fraudulent messages, resulting in more efficient text message delivery.
Our ringback tone services enable callers to hear subscriber-selected music or messages instead of the traditional electronic ringing sound while waiting for the person they have called to answer. We primarily offer ringback tone services via mobile carriers, where, in return for providing, operating and managing the ringback tone service for the carrier customers, we generally enter into revenue-sharing arrangements with the carriers based on monthly subscription fees, content download fees or a combination of such fees paid by subscribers.
Our photo and video sharing platform, RealTimes, is offered to wireless carriers for integration in their hosted cloud solutions. Within our Mobile Services group, we focus on leveraging current and prospective wireless carrier relationships to increase integration of the RealTimes platform.
Our computer vision platform, SAFR, detects faces and other types of objects by leveraging AI-based machine learning. We continue to invest in and build industry partnerships for SAFR, typically licensing it to technology partners, system integrators, third-party resellers, and directly to end customers. Our SAFR platform is a key investment initiative for us.
Games
Our Games segment is focused on the development, publishing, and distribution of casual games, which are offered via mobile devices, digital downloads, and subscription play. Casual games typically have simple graphics, rules and controls, are quick to learn, and often include time-management, board, card, puzzle, word and hidden-object games. Our primary focus is our free-to-play mobile games, most notably our Delicious Bed and Breakfast and our Delicious World games. These free-to-play games generate revenue from consumer purchases of in-game goods and from advertising displayed to consumers during play.
Our mobile games are digitally distributed through third-party application storefronts, such as the Apple App Store and Google Play, and are principally offered in North America, Europe and Latin America. Historically, we have also offered premium games that we typically introduce to consumers upon release on a free-trial basis. After reaching a certain level of game play, consumers then have the option of purchasing the full game. Although games previously offered for individual purchase will continue to be available, during 2019, we began to shift our strategy to free-to-play games and away from premium mobile games.
PC consumers can access and play both our Original Stories and hundreds of third-party games through individual purchases or a subscription service offered through our GameHouse and Zylom websites, and through websites owned or managed by third parties. Consistent with our mobile offerings, we have historically introduced new games by offering a free trial before purchase on an individual-game basis or as part of one of our subscription services.
See Note 18. Segment Information, in this 10-K for additional details on our segments and geographic concentrations.
Customers
Our customers include consumers, businesses, and governments located throughout the world. Sales to customers outside the U.S., primarily in Europe and Asia, were 37% and 36% of our revenue during the years ended December 31, 2021 and 2020, respectively. See Note 18. Segment Information, for details on geographic concentrations, and see Note 6. Allowance for Doubtful Accounts Receivable and Sales Returns, for details on customer revenue concentrations.
Research and Development
We devote a substantial portion of our resources to developing new products, enhancing existing products, expanding and improving our fundamental technology, and strengthening our technological expertise in all our businesses.
Sales, Marketing and Distribution
Our marketing programs are aimed at increasing brand awareness of our products and services and stimulating demand. We use a variety of methods to market our products and services, including paid search advertising, affiliate marketing programs, electronic and other online media, and email offers to qualified potential and existing customers, and providing product specific information through our websites. We also cross-market products and services offered by some of our businesses through the RealPlayer and Games marketing and distribution channels. We have subsidiaries and offices in several countries that market and sell our products outside the U.S.
Our products and services are marketed through direct and indirect channels. We use public relations, trade shows, events and speaking opportunities to market our products and services. We also use a variety of online channels, including social media, to promote and sell our products and services directly.
In our Consumer Media business, we market and sell our various RealPlayer services directly through our own websites such as Real.com, as well as indirectly through third party distribution partners. We also employ a sales team in China which works with distribution partners on marketing our codec technologies.
Our Mobile Services sales, marketing and business development teams work closely with many of our enterprise, infrastructure, wireless, broadband, media and governmental customers to identify new business opportunities for our entertainment applications, services and systems. Through ongoing communications with the product and marketing divisions of our customers, we tailor our SaaS offerings to their strategic needs and the needs of their subscribers.
In our Games business, we market directly from our GameHouse and Zylom websites and through third-party distribution channels, such as application storefronts, search engines, online portals, and content publishers.
Customer Support
Customer support is integral to the provision of nearly all of our consumer products and services. Consumers who purchase and use our consumer software products and services can get assistance primarily via the Internet or email, depending on the product or service. For some of our consumer products, we contract with third-party outsource support vendors to provide the primary staffing for our first-tier customer support globally. We also provide various support service options for our business customers and for software developers using our software products and associated services. Support service options include online support services and on-site support personnel covering technical and business-related support topics.
Competition
The market for software and services for digital media delivery over the Internet and wireless networks is intensely competitive. Many of our current and potential competitors have longer operating histories, greater name recognition or brand awareness, more employees or significantly greater resources than we do.
In our Consumer Media segment, our codec technology faces competition from other next-generation video codecs, and many of our competitors have come together in patent pools to market and license a shared codec solution that competes with our own codecs. This coalition of multiple companies, which include some of the largest global technology companies, benefits from a significant inherent market penetration and, thus, a substantial competitive advantage over us. In addition, our RealPlayer media player continues to face competition from alternative streaming media playback applications that have obtained very broad market penetration.
In our Mobile Services segment, our SaaS business competes with a large and diverse number of domestic and international companies, and each of our SaaS offerings tends to face competitors specific to that product or service. Our SaaS business continues to experience significant competitive pricing pressure from carriers and the proliferation of smartphone applications and services, some of which do not depend on our carrier customers for distribution to consumers. Many of our SaaS services require a high degree of integration with carrier or service provider networks and thus require a high degree of operational expertise. Our ability to enhance services with new features as the digital entertainment market evolves is critical to our competitive position, as is our knowledge of the consumer environment to which these services are targeted. Also within
our Mobile Services segment, our computer vision SAFR platform competes with a wide variety of companies, including small startups and well established, heavily resourced global companies. These competitors continue to develop technologies and launch products in the artificial intelligence and facial recognition markets.
Our Games business competes with a variety of distributors and publishers of casual games for PC and mobile platforms. Our in-house game development studios compete with other developers and publishers of mobile games based on our ability to create high quality games that resonate with consumers, and our ability to secure broad distribution.
Intellectual Property
We maintain patents in the U.S. and other jurisdictions relating to various aspects of our technology. We regularly analyze our patent portfolio and prepare additional patent applications on current and anticipated features of our technology, or sell or abandon patents or applications that are no longer relevant or valuable to our operations.
In addition to our patent portfolio, we have assembled, over time, an international portfolio of trademarks and service marks that covers certain of our products and services. We also have applications pending for additional trademarks and service marks in jurisdictions around the world, and have several unregistered trademarks. Many of our marks begin with the word “Real” (such as RealPlayer). We are aware of other companies that use “Real” in their marks alone or in combination with other words, and we do not expect to be able to prevent all third-party uses of the word “Real” for all goods and services.
Our ability to compete across our businesses partly depends on the superiority, uniqueness and value of the technology that we both develop and license 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 third parties, and protective contractual provisions. These efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology, or may not prevent the development and design by others of products or technologies similar to or competitive with those we develop.
Human Capital
Recognizing that our employees are the company’s most meaningful asset, RealNetworks is committed to employing great people, treating each other with respect, and strictly adhering to the highest ethical and legal principles in its business activities. Each of our business units - Mobile Services, Consumer Media, and Games - have unique brands and products tied together by a workforce that is focused on excellence and on providing industry-leading technologies, applications, and products. This structure strongly informs our corporate culture: We strive to run a lean, agile organization that prioritizes innovation in all facets of our work.
Guiding Management Principles
Part of the fabric of the organization and key to the operation of a performance-based environment are our management principles including commitment to innovation, delivering results, raising the bar in all facets of our work, being inclusive and respectful, being great teammates for each other, and embracing the journey by working hard and celebrating our successes. We consider our workforce a significant strength and actively seek opportunities to reinforce behaviors that exemplify our management principles. We celebrate employees whose work and actions reflect and embody our management principles with company-wide acknowledgment and awards.
Respectful and Safe Workplace
We want RealNetworks to be a workplace that is open, respectful and safe. RealNetworks encourages and expects the individual actions of its employees at all levels to be consistent with our commitment to a respectful workplace including annual reconfirmation of individual employees’ adherence to our Code of Business Conduct and Ethics. RealNetworks has been and will continue to be fully committed to providing a work environment free from unlawful discrimination or harassment. Our global policies include prohibition of harassment, threatened or actual workplace violence, or any conduct that undermines an employee’s integrity or creates an intimidating, hostile or offensive work environment even if it does not rise to the level of illegal harassment under the law.
RealNetworks is committed to providing a safe and healthy work environment for all employees in compliance with occupational health, safety, and environmental laws. To accomplish this, RealNetworks and its employees adhere to work practices that will prevent accidents, injuries, and illnesses. We consider safety and health issues to be the responsibility of every employee of RealNetworks and we strive to maintain a preventative and cooperative attitude relating to safety issues.
We have had a heightened focus on the safety of our employees and their families during the COVID-19 pandemic. In early March 2020, we quickly pivoted to a predominantly remote workforce and restricted employee travel. We have since followed guidance from local health experts to ensure our staff across the globe remain safe. We helped our employees with home office set up and added new system applications to foster virtual collaboration. We have also implemented mitigation
practices in all offices to ensure employees are safe when on-site. We will continue to prioritize the well-being of our employees as the pandemic continues.
Compensation and Benefits
We operate in a highly competitive, global, and technologically challenging environment. We provide competitive compensation and benefits programs for our employees. In addition to market competitive salaries, we offer additional compensation in the forms of bonuses and stock, which will vary based on job level and location.
Our U.S. benefit programs include a 401(k) plan with employer matching, medical, dental and vision insurance, health savings and flexible spending accounts, group and voluntary life and disability insurance, business/travel and accident coverage, subsidized transit programs, paid time off, paid family leave including bonding time for new parents, financial literacy programs, and employee assistance programs. Our benefit programs in our international locations are tailored to local practices and compliant with local labor laws.
Talent Acquisition and Retention
RealNetworks strives to attract and retain a highly skilled, highly talented, and diverse work force. We recognize that we operate in a highly competitive, globally diverse marketplace when it comes to finding top talent. As a result, talent acquisition and the retention of employees continue to be a priority initiative for RealNetworks, and the Company complies with all applicable local, state, federal, and international laws governing nondiscrimination in employment in every location in which RealNetworks operates. All applicants and employees are treated with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran status.
In 2020, we implemented an Affirmative Action Plan, or AAP, as required by our new U.S. government contractor status. As part of our AAP, we will conduct annual internal reporting and auditing to ensure we are providing equal employment and pay opportunities for all applicants and existing employees. Equally important, we hope that this regular focus on the diversity of our U.S. workforce will make for a more dynamic culture and inclusive workplace.
RealNetworks maintains a global, ongoing performance review program, and encourages mentoring, stretch assignments, and other opportunities for internal career and occupational growth. Our median employee tenure is just over 5 years. We have a long-demonstrated history of employee advancement and promotion from within the organization. We also provide a variety of tools and methods for employees to provide feedback to managers and company leadership including global and local town hall forums, employee surveys, performance review discussions, and anonymous reporting tools.
Corporate Giving
RealNetworks has a strong history of giving back to the community. In 2000, the Company created the RealNetworks Foundation, which in recent years has made general grants to multiple charities. The Foundation also makes ad hoc, emergency grants when deemed needed to support an urgent issue in the community. In addition, the Foundation's matching program supports the dollars and time that RealNetworks employees devote to eligible 501(c)(3) nonprofits.
RealNetworks also regularly supports participation by employees in activities of service to our local communities, including Day of Caring, local food drives and holiday toy and gift donations.
Employees
At December 31, 2021, we had approximately 281 employees, of which 88 were based in the Americas, 46 were based in Asia, and 147 were based in Europe. The number of our employees represented by unions is not significant.
Available Information
Our corporate Internet address is www.realnetworks.com. We make available free of charge on www.investor.realnetworks.com our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). However, the information found on our corporate website is not part of this or any other report.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
You should carefully consider the risks described below together with all of the other information included in this Form 10-K. 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, particularly if vaccination rates do not quickly increase or if additional, potent disease variants emerge. 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 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 particular, 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.
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, 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, matures August 1, 2022 and 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 has 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.
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 our current revolving line of credit 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, 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.
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.
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 our stock price to record lows as occurred in 2020 or to significant activity levels as occurred in early 2021.
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 will consider 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.
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.
Risks Related to Regulations and Other External Factors
Government regulation of the Internet, computer vision and facial recognition technologies, artificial intelligence 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, artificial intelligence 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;
•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;
•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.
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 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, 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 artificial intelligence, 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.
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
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 an acquisition of us.
Robert Glaser, our Chairman of the Board and Chief Executive Officer, 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 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 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.
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.
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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

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ITEM 2. PROPERTIES
Item 2. Properties
Our corporate and administrative headquarters and certain research and development and sales and marketing personnel are located at our facility in Seattle, Washington.
We lease properties primarily in the following locations that are utilized by all of our business segments, unless otherwise noted below, to house our research and development, sales and marketing, and general and administrative personnel:
Location Area leased
(sq. feet)
Lease expiration
Seattle, Washington (1) 73,000 February 2022 and August 2024
Eindhoven, Netherlands (2) 23,000 June 2022
(1)This facility is utilized only by headquarters. We have reduced our use of the facility by 63%. As discussed in Note 10. Restructuring and Other Charges, the lease for the space which we no longer occupy as of December 31, 2021 expires in February 2022.
(2)This facility is utilized only by our Games segment.
In addition, we lease smaller facilities in the U.S. and foreign countries, some of which support the operations of all of our business segments while others are dedicated to a specific business segment. We believe that our properties are in good condition, adequate and suitable for the conduct of our business. For additional information regarding our obligations under leases, see Note 15. Leases, in this 10-K.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
See Note 16. Commitments and Contingencies in this 10-K.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on The NASDAQ Stock Market under the symbol RNWK.
As of January 31, 2022, there were approximately 150 holders of record of our common stock. Most shares of our common stock are held by brokers and other institutions on behalf of shareholders.
The declaration and payment of any future dividends, as well as the amount thereof, are subject to the discretion of our board of directors and will depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by our board of directors. Accordingly, there can be no assurance that we will declare and pay any dividends in the future. No cash dividends were paid in 2021 or 2020.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
As described in Note 4. Dispositions, RealNetworks sold its Napster business on December 30, 2020.
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 December 31, 2021, we had $27.1 million in unrestricted cash and cash equivalents compared to $23.9 million as of December 31, 2020. The 2021 increase in cash and cash equivalents from December 31, 2020 was primarily due to the receipt of $20.1 million in net proceeds from the April 2021 underwritten public offering and the $2.0 million received from the release of the Napster escrow in the fourth quarter of 2021. Partially offsetting these increases were ongoing cash used in
operating activities, which totaled $15.0 million for the year ended December 31, 2021 and the $2.5 million cash payment to settle our contingent consideration liability for our January 2019 purchase of Napster.
The following discussion reflects RealNetworks' results from continuing operations. Consolidated results of operations were as follows (dollars in thousands):
2021 2020 2021-2020
Change %
Change
Total revenue $ 58,183 $ 68,062 $ (9,879) (15) %
Cost of revenue 13,756 16,465 (2,709) (16) %
Gross profit 44,427 51,597 (7,170) (14) %
Gross margin 76 % 76 % - %
Total operating expenses 65,300 56,621 8,679 15 %
Operating loss $ (20,873) $ (5,024) $ (15,849) NM
2021 compared with 2020
In 2021, our consolidated revenue decreased by $9.9 million, or (15)%. The decrease in revenue was primarily due to decreases in our Games, Mobile Services, and Consumer Media segments of $4.5 million, $3.1 million, and $2.3 million, respectively. See below for further information regarding fluctuations by segment. Gross margin of 76% was unchanged from the prior year.
Operating expenses increased by $8.7 million in 2021 compared with 2020 primarily due to a higher benefit in 2020 related to the fair value adjustment of the contingent consideration liability in the amount of $7.6 million, and higher stock-based compensation of $2.8 million, partially offset by a $2.0 million decrease in salaries and other people-related costs and a $0.9 million decrease in marketing fees. See Note 5. Fair Value Measurements for additional information on the change in the contingent consideration liability.
Segment Operating Results
Consumer Media
Consumer Media segment results of operations were as follows (dollars in thousands):
2021 2020 2021-2020
Change %
Change
Total revenue $ 10,301 $ 12,581 $ (2,280) (18) %
Cost of revenue 1,816 2,273 (457) (20) %
Gross profit 8,485 10,308 (1,823) (18) %
Gross margin 82 % 82 % - %
Total operating expenses 7,427 8,889 (1,462) (16) %
Operating income $ 1,058 $ 1,419 $ (361) (25) %
Total Consumer Media revenue decreased by $2.3 million, or 18% as compared to the prior year, due to decreased advertising and other revenue of $1.0 million, decreased software license revenues of $0.9 million, and decreased subscription service revenues of $0.4 million.
Software License
For our software license revenues, the $0.9 million decrease was primarily due to the timing of contract renewals and shipments to existing customers.
Subscription Services
For our subscription services revenues, the decrease of $0.4 million was primarily due to further declines in our legacy subscription products, which we expect to continue.
Advertising and Other
For our advertising and other revenues, the decrease of $1.0 million was due to the non-recurring recognition of previously deferred third-party software product distribution revenue in 2020 in the amount of $0.6 million, and $0.4 million related to declining installs.
Cost of revenue decreased by $0.5 million, or 20%. This was primarily due to reductions in salaries and other people related expenses.
Operating expenses decreased by $1.5 million, or 16%, compared to the prior year, primarily due to lower salaries and people related expenses and professional fees of $0.6 million and lower infrastructure costs of $0.2 million. Also contributing to the decrease was $0.3 million lower spend for Scener. Scener was deconsolidated from RealNetworks, Inc. as of June 30, 2021.
Mobile Services
Mobile Services segment results of operations were as follows (dollars in thousands):
2021 2020 2021-2020
Change %
Change
Total revenue $ 23,788 $ 26,889 $ (3,101) (12) %
Cost of revenue 5,720 6,725 (1,005) (15) %
Gross profit 18,068 20,164 (2,096) (10) %
Gross margin 76 % 75 % 1 %
Total operating expenses 24,299 24,787 (488) (2) %
Operating loss $ (6,231) $ (4,623) $ (1,608) (35) %
Mobile Services revenue declined by $3.1 million, or 12%, and was primarily driven by a decrease of $4.4 million in subscription services revenue, offset by an increase of $1.3 million in software license revenue.
Software license
For our software license revenues, the $1.3 million increase was the result of revenue from sales of our SAFR product.
Subscription service
For our subscription services, the $4.4 million decrease was due primarily to lower revenues from our ringback tones business of $4.3 million, resulting from terminated contracts and lower subscribers.
Cost of revenue decreased by $1.0 million or 15% as compared to the prior year, due primarily to decreases of $0.6 million resulting from terminated ringback tone contracts, and reductions in salaries and benefits of $0.4 million related to headcount reductions.
Operating expenses decreased by $0.5 million or 2% primarily due to decreased salaries, benefits and other people related costs of $1.4 million, lower infrastructure costs of $0.5 million, partially offset by higher professional fees of $1.6 million, driven by AI-based growth initiatives.
Games
Games segment results of operations were as follows (dollars in thousands):
2021 2020 2021-2020
Change %
Change
Total revenue $ 24,094 $ 28,592 $ (4,498) (16) %
Cost of revenue 6,192 7,451 (1,259) (17) %
Gross profit 17,902 21,141 (3,239) (15) %
Gross margin 74 % 74 % - %
Total operating expenses 19,463 19,936 (473) (2) %
Operating income (loss) $ (1,561) $ 1,205 $ (2,766) NM
Games revenue decreased by $4.5 million, or 16% as compared to the prior year due to decreases of $2.8 million in product sales, $1.2 million in subscription services revenues, and $0.5 million in advertising revenue.
Subscription Services
Our subscription sales decreased $1.2 million as a result of lower subscribers in 2021 as compared to 2020.
Product sales
Our product sales decreased $2.8 million as a result of lower in-game purchases of $2.1 million and lower sales of games of $0.7 million compared to 2020.
Advertising and other
Our advertising and other revenues decreased $0.5 million as compared to the prior-year primarily as a result of decreases in advertising revenue from free-to-play mobile games.
Cost of revenue decreased by $1.3 million, or 17%, due to lower app store fees and royalties.
Operating expenses decreased by $0.5 million, primarily due to lower marketing fees of $0.9 million, partially offset by higher professional fees of $0.4 million.
Corporate
Corporate segment results of operations were as follows (dollars in thousands):
2021 2020 2020-2019
Change %
Change
Cost of revenue $ 28 $ 16 $ 12 75 %
Total operating expenses 14,111 3,009 11,102 NM
Operating income (loss) $ (14,139) $ (3,025) $ (11,114) NM
Operating expenses increased by $11.1 million, primarily due to $7.6 million related to the change in fair value of the contingent consideration liability. See Note 5. Fair Value Measurements for additional information. Also contributing to the increase from the prior year is $2.8 million in higher stock-based compensation expense primarily due to modifications of certain equity awards that will be cash settled.
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 (dollars in thousands):
2021 2020 2021-2020
Change %
Change
Research and development $ 23,132 $ 24,319 $ (1,187) (5) %
Sales and marketing 22,520 21,042 1,478 7 %
General and administrative 17,559 17,331 228 1 %
Fair value adjustments to contingent consideration liability (1,040) (8,600) 7,560 (88) %
Restructuring and other charges 3,129 2,529 600 24 %
Total consolidated operating expenses $ 65,300 $ 56,621 $ 8,679 15 %
Research and development expenses decreased by $1.2 million, or 5%, in the year ended 2021 as compared to 2020 primarily due to a decrease in salaries and other people related costs of $1.9 million, partially offset by higher professional service fees of $0.4 million and higher infrastructure costs of $0.3 million.
Sales and marketing expenses increased by $1.5 million, or 7%, in the year ended 2021, compared with 2020. The increase was primarily due to higher stock-based compensation expense of $2.2 million and higher professional service fees of $1.0 million. These increases were partially offset by lower marketing expenses of $0.8 million, lower salaries and other people related costs of $0.5 million and lower infrastructure related expense of $0.2 million.
General and administrative expenses increased by $0.2 million, or 1%, in the year ended 2021, compared with 2020. The increase was primarily due to higher stock-based compensation and other people related costs of $0.9 million, partially offset by lower infrastructure related expense of $0.5 million.
The fair value adjustments to the contingent consideration liability changed by $7.6 million in the year ended 2021, compared with 2020. This liability was settled in the second quarter of 2021. See Note 5. Fair Value Measurements for additional information.
Restructuring and other charges consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts, including amounts related to our operating leases. For additional details on these charges, see Note 10. Restructuring and Other Charges.
Other Income (Expenses)
Other income (expenses), net was as follows (dollars in thousands):
2021 2020 2021-2020
Change
Interest expense $ (168) $ (20) $ (148)
Interest income 34 38 (4)
Gain (loss) on equity and other investments, net (4,927) 111 (5,038)
Gain on forgiveness of Paycheck Protection Program loan 2,897 - 2,897
Other income (expense), net 2,024 (164) 2,188
Total other income (expense), net $ (140) $ (35) $ (105)
Gain (loss) on equity and other investments, net for the year ended December 31, 2021 includes the unrealized loss of $7.0 million on our holdings of Napster shares, as further discussed in Note 4. Dispositions. Also included in the total is our dilution gain of $6.0 million and equity loss recognition of $3.8 million related to Scener for 2021 as further discussed in Note 19. Related Party Transactions
During the second quarter of 2021, the Company received notice from our participating bank that our request for forgiveness of the principal and interest on our PPP loan was approved, and we recognized a non-cash gain of $2.9 million within Other income (expense) on the consolidated statement of operations.
On June 30, 2021, RealNetworks deconsolidated Scener Inc., previously a consolidated subsidiary of RealNetworks, and recognized a non-cash gain of $2.0 million within Other income (expense) on the consolidated statement of operations. The remaining fluctuations in Other income (expense), net primarily relate to foreign exchange gains and losses.
Income Taxes
During the years ended December 31, 2021 and 2020, we recognized income tax expense from continuing operations of $0.5 million and $0.1 million, respectively, related to U.S. and foreign income taxes.
In general, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as discontinued operations. However, an exception to the general rule is provided in Topic 740 when there is a pre-tax loss from continuing operations and there are items charged or credited to other categories, including discontinued operations, in the current year. Pursuant to Topic 740, the gain from discontinued operations in 2020 was considered in determining the $0.1 million tax expense allocated to the loss from continuing operations.
The income tax expense from continuing operations for the years ended December 31, 2021 and 2020 was largely the result of foreign withholding taxes and income taxes in foreign jurisdictions.
We assess the likelihood that our deferred tax assets will be recovered based upon our consideration of many factors, including the current economic climate, our expectations of future taxable income, our ability to project such income, and the appreciation of our investments and other assets. We maintain a partial valuation allowance of $131.5 million for our deferred tax assets due to uncertainty regarding their realization as of December 31, 2021. The net increase in the valuation allowance since December 31, 2020 of $3.2 million was the result of an increase in current year deferred tax assets, for which the Company maintains a valuation allowance.
We generate income in a number of foreign jurisdictions, some of which have higher tax rates and some of which have lower tax rates relative to the U.S. federal statutory rate. Changes to the blend of income between jurisdictions with higher or lower effective tax rates than the U.S. federal statutory rate could affect our effective tax rate. For the year ended December 31, 2021, 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.
For each of the years ended December 31, 2021 and 2020, RealNetworks had $0.7 million in uncertain tax positions. The unrecognized tax benefits are due to federal research and development tax credit carryforward risks. As of December 31, 2021, there are no unrecognized tax benefits remaining that would affect our effective tax rate if recognized, as the offset would increase the valuation allowance. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.
We file numerous consolidated and separate income tax returns in the U.S. including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal income tax examinations for tax years before 2013 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.
Liquidity and Capital Resources
The following summarizes working capital, cash and cash equivalents, and restricted cash (in thousands):
December 31,
2021 2020
Working capital, excluding cash and cash equivalents $ (3,952) $ 1,148
Cash and cash equivalents 27,109 23,940
Restricted cash equivalents 1,630 1,630
The 2021 decrease in working capital, excluding cash and cash equivalents from December 31, 2020 was primary due to the $7.0 million decline in the fair value of our investment in Napster. This decline was partially offset by our $2.5 million 2021 cash settlement of the Napster contingent consideration liability. Both of these items are described in Note 5. Fair Value Measurements.
Cash and cash equivalents increased $3.2 million from December 31, 2020 due primarily to the $20.1 million of net proceeds from the April 2021 equity offering and the $2.0 million received from the release of the Napster escrow in the fourth quarter of 2021 described in Note 4. Dispositions. Partially offsetting these increases were ongoing cash used in operating activities, which totaled $15.0 million for the year ended 2021, and the $2.5 million cash payment for settlement of the Napster contingent consideration liability.
As of December 31, 2021, approximately $5.6 million of the $27.1 million of cash and cash equivalents was held by our foreign subsidiaries outside the U.S.
The following summarizes cash flow activity from continuing operations (in thousands):
Years Ended December 31,
2021 2020
Cash used in operating activities $ (15,041) $ (8,083)
Cash used in investing activities (1,302) (408)
Cash provided by financing activities 17,962 11,034
Cash used in operating activities was $7.0 million higher in the year ended December 31, 2021 as compared to 2020. Cash used in operations was higher primarily due to our higher operating loss recorded for year 2021 compared to the prior year.
For the year ended December 31, 2021, cash used in investing activities of $1.3 million was due to the impact of the deconsolidation of Scener in the amount of $0.8 million and $0.5 million due to fixed asset purchases.
For the year ended December 31, 2020, cash used in investing activities of $0.4 million was due to fixed asset purchases.
Financing activities for the year ended December 31, 2021 provided cash totaling $18.0 million. This cash inflow was due to the net proceeds from the equity offering of $20.1 million and $0.3 million from the 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 Napster contingent consideration liability.
Financing activities for the year ended December 31, 2020 provided cash totaling $11.0 million. This cash inflow was due to the $10.0 million in cash proceeds from the issuance of Series B Preferred Stock and $2.9 million in proceeds from the PPP loan. As discussed in Note 9. Debt, we received forgiveness of our obligations for the PPP loan in the second quarter of 2021. Additionally, Scener, a former subsidiary of RealNetworks, received $2.1 million in funds from the issuance of SAFE Notes. See Note 5. Fair Value Measurements for more information on the SAFE Notes. These inflows were partially offset by repayment on our revolving credit facility of $3.9 million.
While we currently have no planned significant capital expenditures for 2022 other than those in the ordinary course of business, we do have contractual commitments for future payments related to office leases. See Note 15. Leases for additional details.
RealNetworks is a party to a Loan Agreement with a third-party financial institution which matures August 1, 2022, as discussed in Note 9. Debt. Under the Agreement, as amended, borrowings may not exceed $6.5 million and are reduced by a $1.0 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. The Loan Agreement contains customary covenants, including financial covenants, minimum EBITDA levels to be updated annually, and maintaining a minimum balance of unrestricted cash at the bank. We are in the process of negotiating the customary covenants for 2022, and we do not expect the resulting revisions to have a material effect on the Loan Agreement. At December 31, 2021, we had no outstanding draws on the revolving line of credit.
During the second quarter of 2021, we settled the contingent consideration associated with the Napster interests acquired by RealNetworks in January 2019. The payment included cash of $2.5 million and the transfer of 47.8 million ordinary shares of Napster Group, valued at the December 2020 Napster sale closing date.
In April 2021, we completed an underwritten public offering of 8,250,000 shares of our common stock at a price to the public of $2.70 per share. The aggregate gross proceeds from the offering were $22.3 million. Of these proceeds, we received $20.1 million after deducting underwriting discounts, commissions, and legal and other fees. The proceeds are expected to be used for general corporate purposes and working capital.
In February 2020, we entered into a Series B Preferred Stock Purchase Agreement with Mr. Glaser, Chairman of the Board and Chief Executive Officer of RealNetworks, pursuant to which Mr. Glaser invested approximately $10.0 million in RealNetworks in exchange for the issuance to him of 8,064,516 shares of Series B Preferred Stock. The Series B Preferred Stock is non-voting and is convertible into common stock on a one-to-one basis, provided, however, that no conversion is permitted in the event that such conversion would cause Mr. Glaser’s beneficial ownership of our common stock to exceed the 38.5% threshold set forth in our Second Amended and Restated Shareholder Rights Plan dated November 30, 2018. The Series B Preferred Stock has no liquidation preference and no preferred dividend.
In the near term, we expect to see continued net negative cash flow from operating activities. We believe that our unrestricted current cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Notwithstanding this availability of cash, management has considered and will continue to evaluate implementation of a variety of cash conservation measures.
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, or the renewal of our
existing, credit facility. Such sources of funding may or may not be available to us at 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.
We have contractual obligations for Long-term lease liabilities, which are recorded on our balance sheet. For details on future minimum lease payments please refer to Note 15. Leases. Please also refer to Note 16. Commitments and Contingencies for details on legal matters. For income tax liabilities for uncertain tax positions, we cannot make a reasonably reliable estimate of the amount and period of any related future payments. As of December 31, 2021, we had $0.7 million of gross unrecognized tax benefits for uncertain tax positions.
We do not maintain accruals associated with certain guarantees, as discussed in Note 17. Guarantees; those guarantee obligations constitute off-balance sheet arrangements.
Critical Accounting Policies and Estimates
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 policies and estimates are as follows:
•Revenue recognition;
•Valuation of definite-lived assets, right-of-use operating lease assets, and goodwill; and
•Accounting for income taxes.
Revenue Recognition. We recognize revenue from contracts with customers as control of the promised good or service is transferred. Please refer to Note 3. Revenue Recognition for further details regarding our recognition policies.
Valuation of Definite-Lived Assets, Right-of-Use Operating Lease Assets, and Goodwill.
We review definite-lived assets and right-of-use operating lease assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows the assets are expected to generate. If definite-lived assets or right-of-use operating lease assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value.
We test goodwill for impairment on an annual basis, in our fourth quarter, or more frequently if circumstances indicate reporting unit carrying values may exceed their fair values. As part of this test, we first perform a qualitative assessment to determine if the fair value of a reporting unit is more likely than not less than the reporting unit's carrying amount including goodwill. If this assessment indicates impairment is more likely than not, we then compare the carrying value of the reporting unit to the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, we then calculate the implied estimated fair value of goodwill for the reporting unit and compare it to the carrying amount of goodwill for the reporting unit. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to implied estimated value.
The impairment analysis of definite-lived assets, right-of-use operating lease assets, and goodwill may be based upon estimates and assumptions relating to our future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital. Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, and their resulting impact on the estimates and assumptions relating to the value of our definite-lived, right-of-use lease, and goodwill assets could result in the need to perform an impairment analysis in future periods which could result in a significant impairment. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary from period to period. Changes in these estimates and assumptions could materially affect the estimate of future cash flows and related fair values of these assets and result in significant impairments, which could have a material adverse effect on our financial condition or results of operations. For further discussion, please see the risk factor entitled, "Any impairment to our goodwill, definite-lived, and right-of-use operating lease assets could result in a material charge to our earnings" under Item 1A Risk Factors.
Accounting for Income Taxes.
We must make assumptions, judgments and estimates to determine the current and deferred provision for income taxes, deferred tax assets and liabilities and any valuation allowance to be recorded against deferred tax assets. Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation
of current tax laws and possible outcomes of future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and future tax audits could materially impact the amounts provided for income taxes in our consolidated financial statements.
Each reporting period we must periodically assess the likelihood that our deferred tax assets will be recovered from future sources of taxable income, and to the extent that recovery is not more likely than not, a valuation allowance must be established. The establishment of a valuation allowance and increases to such an allowance result in either increases to income tax expense or reduction of income tax benefit in the statement of operations and comprehensive income. In certain instances, changes in the valuation allowance may be allocated directly to the related components of shareholders' equity on the consolidated balance sheet. Factors we consider in making such an assessment include, but are not limited to, past performance and our expectation of future taxable income, macroeconomic conditions and issues facing our industry, existing contracts, our ability to project future results and any appreciation of our investments and other assets.
As of December 31, 2021, approximately $5.6 million of the $27.1 million of cash and cash equivalents are held by our foreign subsidiaries outside the U.S. We have reevaluated our historical assertion that undistributed foreign earnings were indefinitely reinvested and for which deferred taxes were not provided. As a result of the enactment of the Tax Act and as of December 31, 2021, we are no longer indefinitely reinvesting substantially all of the Company's foreign earnings outside of the U.S. As a result of this change, we have recorded deferred taxes of $1.0 million as of December 31, 2021 to reflect local country and foreign withholding taxes associated with a future repatriation of such foreign earnings.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. 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.
Investment Risk. As of December 31, 2021, we had an equity investment in common shares of a foreign publicly traded technology company. These common shares were acquired as a portion of the proceeds received in the sale of Napster. The equity investment is subject to fluctuation in the market price as well as being exposed to changes in foreign currency exchange rates. A hypothetical 10% increase/decrease in the common share price or foreign currency exchange rate would result in an increase/decrease of the value of the equity investment of approximately $0.4 million.
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 December 31, 2021 would not result in a material impact on our financial position, results of operations or cash flows.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
REALNETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
2021 December 31,
ASSETS
Current assets:
Cash and cash equivalents $ 27,109 $ 23,940
Trade accounts receivable, net of allowances 9,556 10,229
Deferred costs, current portion 49 196
Investments 1,755 9,965
Prepaid expenses and other current assets 3,166 3,480
Total current assets 41,635 47,810
Equipment, software, and leasehold improvements, at cost:
Equipment and software 29,464 30,726
Leasehold improvements 2,750 2,776
Total equipment, software, and leasehold improvements 32,214 33,502
Less accumulated depreciation and amortization 30,744 31,631
Net equipment, software, and leasehold improvements 1,470 1,871
Operating lease assets 3,992 7,937
Restricted cash equivalents 1,630 1,630
Other assets 2,878 4,150
Deferred costs, non-current portion - 74
Deferred tax assets, net 727 909
Goodwill 16,976 17,375
Total assets $ 69,308 $ 81,756
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 2,578 $ 2,750
Accrued and other current liabilities 13,286 17,850
Deferred revenue, current portion 2,614 2,122
Total current liabilities 18,478 22,722
Deferred revenue, non-current portion 183 45
Deferred tax liabilities, net 1,132 1,129
Long-term lease liabilities 2,300 6,837
Long-term debt - 2,895
Other long-term liabilities 1,142 2,241
Total liabilities 23,235 35,869
Commitments and contingencies (Note 16.)
Shareholders’ equity:
Preferred stock, $0.001 par value:
Series A: authorized 200 shares, no shares issued or outstanding
- -
Series B: authorized 8,100 shares; issued and outstanding 8,065 shares in 2021 and 2020 8 8
Undesignated series: authorized 51,700 shares
- -
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 47,257 shares in 2021 and 38,424 shares in 2020
47 38
Additional paid-in capital 678,381 655,606
Accumulated other comprehensive loss (61,520) (60,641)
Accumulated deficit (570,843) (548,862)
Total shareholders’ equity 46,073 46,149
Noncontrolling interests - (262)
Total equity 46,073 45,887
Total liabilities and equity $ 69,308 $ 81,756
See accompanying notes to consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
2021 2020
Net revenue $ 58,183 $ 68,062
Cost of revenue 13,756 16,465
Gross profit 44,427 51,597
Operating expenses:
Research and development 23,132 24,319
Sales and marketing 22,520 21,042
General and administrative 17,559 17,331
Fair value adjustments to contingent consideration liability (1,040) (8,600)
Restructuring and other charges 3,129 2,529
Total operating expenses 65,300 56,621
Operating loss (20,873) (5,024)
Other income (expenses):
Interest expense (168) (20)
Interest income 34 38
(Loss) gain on equity and other investments, net (4,927) 111
Gain on forgiveness of Paycheck Protection Program loan 2,897 -
Other income (expense), net 2,024 (164)
Total other expenses, net (140) (35)
Loss from continuing operations before income taxes (21,013) (5,059)
Income tax expense 479 55
Net loss from continuing operations (21,492) (5,114)
Net loss from discontinued operations, net of tax (733) (206)
Net loss (22,225) (5,320)
Net loss attributable to noncontrolling interest of continuing operations (244) (284)
Net loss attributable to noncontrolling interest of discontinued operations - (184)
Net loss attributable to RealNetworks $ (21,981) $ (4,852)
Net loss from continuing operations attributable to RealNetworks $ (21,248) $ (4,830)
Net loss from discontinued operations attributable to RealNetworks (733) (22)
Net loss attributable to RealNetworks $ (21,981) $ (4,852)
Net loss per share attributable to RealNetworks - Basic:
Continuing operations $ (0.48) $ (0.13)
Discontinued operations (0.02) -
Total net loss per share - Basic $ (0.50) $ (0.13)
Net loss per share attributable to RealNetworks- Diluted:
Continuing operations $ (0.48) $ (0.13)
Discontinued operations (0.02) -
Total net loss per share - Diluted $ (0.50) $ (0.13)
Shares used to compute basic net loss per share 44,277 38,272
Shares used to compute diluted net loss per share 44,277 38,272
See accompanying notes to consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Years Ended December 31,
2021 2020
Net loss $ (22,225) $ (5,320)
Comprehensive income (loss):
Foreign currency translation adjustments (879) 909
Total other comprehensive income (loss) (879) 909
Comprehensive loss including noncontrolling interests (23,104) (4,411)
Comprehensive loss attributable to noncontrolling interests (244) (468)
Comprehensive loss attributable to RealNetworks $ (22,860) $ (3,943)
See accompanying notes to consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
2021 2020
Cash flows from operating activities:
Net loss from continuing operations $ (21,492) $ (5,114)
Adjustment to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization 749 944
Stock-based compensation 4,224 1,420
Loss (gain) on equity and other investments, net 4,927 (111)
Loss on impairment of operating lease asset 2,461 1,055
Gain on release of operating lease liabilities (3,596) -
Deferred income taxes, net 201 (191)
Foreign currency (gain) loss (23) 330
Gain on deconsolidation of subsidiary (1,961) -
Gain on forgiveness of Paycheck Protection Program loan (2,897) -
Fair value adjustments to contingent consideration liability (1,040) (8,600)
Net change in certain operating assets and liabilities:
Trade accounts receivable 523 2,587
Prepaid expenses, operating lease and other assets 2,332 3,716
Accounts payable (83) (1,342)
Accrued, lease and other liabilities 634 (2,777)
Net cash used in operating activities - continuing operations (15,041) (8,083)
Net cash used in operating activities - discontinued operations - (2,555)
Net cash used in operating activities (15,041) (10,638)
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements (466) (408)
Deconsolidation of subsidiary (836) -
Net cash used in investing activities - continuing operations (1,302) (408)
Net cash provided by (used in) investing activities - discontinued operations 2,048 (2,160)
Net cash provided by (used in) investing activities 746 (2,568)
Cash flows from financing activities:
Proceeds from issuance of common stock 534 -
Proceeds from issuance of preferred stock - 10,000
Proceeds from equity offering, net of costs 20,114 -
Tax payments from shares withheld upon vesting of restricted stock (186) (26)
Payment of contingent consideration liability (2,500) -
Proceeds from notes payable and long-term debt - 2,876
Repayments of notes payable and long-term debt - (3,922)
Other financing activities - 2,106
Net cash provided by financing activities - continuing operations 17,962 11,034
Net cash provided by financing activities - discontinued operations - 4,945
Net cash provided by financing activities 17,962 15,979
Effect of exchange rate changes on cash, cash equivalents and restricted cash (498) 618
Net increase in cash, cash equivalents and restricted cash 3,169 3,391
Cash, cash equivalents, and restricted cash, beginning of year 25,570 22,179
Cash, cash equivalents, and restricted cash, end of year $ 28,739 $ 25,570
REALNETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(In thousands)
Supplemental disclosure of cash flow information:
Continuing operations:
Cash received from income tax refunds $ 45 $ 2,169
Cash paid for income taxes $ 540 $ 1,063
Non-cash investing activities:
Decrease in accrued purchases of equipment, software, and leasehold improvements $ (48) $ (44)
Acquisition of investments from sale of Napster $ - $ 9,268
Discontinued operations:
Cash received from income tax refunds $ - $ 33
Cash paid for income taxes $ - $ 331
Cash paid for interest expense $ - $ 317
See accompanying notes to consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Preferred Stock Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated
Deficit Total
Shareholders’
Equity Non-controlling Interests Total Equity
Shares Amount Shares Amount
Balances, December 31, 2019 - $ - 38,227 $ 38 $ 644,070 $ (61,323) $ (544,010) $ 38,775 $ (502) $ 38,273
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 - - 197 - (26) - - (26) - (26)
Issuance of Preferred B Stock 8,065 8 - - 9,992 - - 10,000 - 10,000
Stock-based compensation - - - - 1,420 - - 1,420 - 1,420
Other comprehensive income - - - - - 909 - 909 - 909
Net loss - - - - - - (4,852) (4,852) (468) (5,320)
Other equity transactions (1)
- - - - 150 (227) - (77) 708 631
Balances, December 31, 2020 8,065 $ 8 38,424 $ 38 $ 655,606 $ (60,641) $ (548,862) $ 46,149 $ (262) $ 45,887
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 - - 583 1 348 - - 349 - 349
Issuance of common stock from equity offering, net of costs - - 8,250 8 20,106 - - 20,114 - 20,114
Stock-based compensation - - - - 2,222 - - 2,222 - 2,222
Other comprehensive loss - - - - - (879) - (879) - (879)
Net loss - - - - - - (21,981) (21,981) (244) (22,225)
Deconsolidation of subsidiary - - - - 99 - - 99 506 605
Balances, December 31, 2021 8,065 $ 8 47,257 $ 47 $ 678,381 $ (61,520) $ (570,843) $ 46,073 $ - $ 46,073
(1) In 2020, Other equity transactions pertains to the sale of Napster to MelodyVR. See Note 4. Dispositions for additional details.
See accompanying notes to consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2021 and 2020
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.
Rhapsody International, Inc. (doing business as Napster) offers a comprehensive set of digital music products and services designed to provide consumers with broad access to digital music. Napster was held-for-sale and treated as discontinued operations for accounting and disclosure purposes as of the third quarter of 2020. The sale of Napster was completed during the fourth quarter of 2020. The results of operations and cash flows for these discontinued operations were segregated from the results of continuing operations and segment results, and Napster’s operating results and financial condition were recast to conform to this presentation. The notes to the consolidated financial statements, unless otherwise indicated, are on a continuing operations basis. See Note 4. Dispositions for additional details regarding the sale of Napster.
Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services and the ability to generate related revenue and cash flow.
In this Annual Report on Form 10-K for the year ended December 31, 2021 (10-K), RealNetworks, Inc. and subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”.
Basis of Presentation. The consolidated financial statements include the accounts of the Company and its subsidiaries in which it has a more than 50% voting interest. Noncontrolling interests primarily represent third-party ownership in the equity of Scener Inc. ("Scener"), which was deconsolidated on June 30, 2021, and are reflected separately in the Company's financial statements. See Note 19. Related Party Transactions for additional details. Intercompany balances and transactions have been eliminated in consolidation.
Liquidity and Capital Resources. The Company continues to incur operating losses from continuing operations, including net operating losses of $20.9 million, and $5.0 million for the years ended December 31, 2021 and 2020, respectively. The Company had an accumulated deficit of $570.8 million and $548.9 million as of December 31, 2021 and 2020, respectively. The Company believes that its cash and cash equivalents of $27.1 million as of December 31, 2021 is adequate to fund the Company's operations for at least one year from the date these financial statements were issued.
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 business. It is difficult to predict the near-term and long-term impacts that the pandemic will have on our results from operations, financial condition, liquidity and cash flows. In the preparation of our financial statements, certain estimates and assumptions regarding these impacts have been made, which could change in future periods and which could differ from actual outcomes.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand and highly-liquid investments with original maturities of three months or less.
Trade Accounts Receivable. Trade accounts receivable consist of amounts due from customers and do not bear interest. The allowance for doubtful accounts and sales returns is our estimate of the amount of probable credit losses and returns in our existing accounts receivable. We determine the allowances based on analysis of historical bad debts, customer concentrations, changes in customer credit-worthiness, return history and current economic trends. We review the allowances for doubtful accounts and sales returns quarterly. Past due balances over 90 days and specified other balances are reviewed individually for
collectability. All other balances are reviewed on an aggregate basis. Account balances are written off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance sheet credit exposure related to our customers.
Investments. Investments are equity securities for which there is a determinable fair market value. See Note 5. Fair Value Measurements for additional information.
Unrealized gains and losses from the change in fair market value, as well as realized gains and losses from sales, are recorded to Gain on equity and other investments, net on the consolidated statements of operations. Realized and unrealized gains and losses on investments are determined using the specific identification method.
Concentration of Credit Risk. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We maintain cash and cash equivalents that may exceed the insured limits by the Federal Deposit Insurance Corporation. However, we reduce this credit risk by placing cash and cash equivalents with major financial institutions that the Company assesses to be of high-credit quality.
We derive a portion of our revenue from a large number of individual consumers spread globally. We also derive revenue from several large customers. If the financial condition or results of operations of any one of the large customers deteriorates substantially, our operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. We do not generally require collateral and we maintain an allowance for estimated credit losses on customer accounts when considered necessary.
Depreciation and Amortization. Depreciation of equipment and software, as well as amortization of leasehold improvements is computed using the straight-line method over the lesser of the estimated useful lives of the assets or the related lease term. The useful life of equipment and software is generally three to five years.
Depreciation and amortization expense of these assets during the years ended December 31, 2021 and 2020 was $0.7 million and $0.9 million, respectively.
Equity Method Investment. We use the equity method in circumstances where we have the ability to exert significant influence, but not control, over an investee or joint venture. We initially record our investment based on a fair value analysis of the investment. We record our percentage interest in the investee's recorded income or loss and changes in the investee's capital under this method, which will increase or decrease the reported value of our investment.
We evaluate impairment of an investment accounted for under the equity method if events and circumstances warrant. An impairment charge would be recorded if a decline in the fair value of an equity investment below its carrying amount were determined to be other than temporary. In determining if a decline is other than temporary, we consider factors such as the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investee or joint venture, the near-term and longer-term operating and financial prospects of the investee or joint venture and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery.
Deferred Costs. Included in deferred costs are financing fees associated with our revolving line of credit. These fees are amortized over the term of the credit agreement. Amortization of the financing fees are recorded in interest expense, within other income (expenses).
We also defer certain costs on projects for service revenues and system sales. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll and related costs for employees and other third parties. Deferred costs are capitalized during the implementation period. We recognize such costs as a component of cost of revenue, the timing of which is dependent upon the revenue recognition policy by contract. At each balance sheet date, we review deferred costs to ensure they are ultimately recoverable.
Definite-Lived Tangible and Right-of-Use Operating Lease Assets. Definite-lived tangible assets include equipment, software, leasehold improvements. Definite-lived assets are amortized on a straight line basis over their estimated useful lives.
Operating leases are included in Operating lease assets, Other current liabilities, and Long-term lease liabilities on our consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We review these assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. If the carrying amount of an asset group is not recoverable, an impairment loss is recognized if the carrying amount of the asset group exceeds its estimated fair value, which is generally determined as the present value of estimated future cash flows to a market participant. Our impairment analysis is based on significant assumptions of future results, including operating and cash flow projections. Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, could result in the need to record an impairment charge in future periods.
Goodwill. Assets acquired and liabilities assumed in a business acquisition are measured at fair value under the purchase accounting method and any goodwill is recognized as the excess of the total purchase price over the fair value of assets acquired and liabilities assumed. We test goodwill for impairment on an annual basis, in our fourth quarter, or more frequently if circumstances indicate reporting unit carrying values may exceed their fair values. Circumstances that may indicate a reporting unit's carrying value exceeds its fair value include, but are not limited to: poor economic performance relative to historical or projected future operating results; significant negative industry, economic or company specific trends; changes in the manner of our use of the assets or the plans for our business; and loss of key personnel.
When evaluating goodwill for impairment, based upon our annual test or due to changes in circumstances described above, we first perform a qualitative assessment to determine if the fair value of a reporting unit is more likely than not less than the reporting unit's carrying amount including goodwill. If this assessment indicates impairment is more likely than not, we then compare the carrying value of the reporting unit to the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, we then calculate the implied estimated fair value of goodwill for the reporting unit and compare it to the carrying amount of goodwill for the reporting unit. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to implied estimated value. Significant judgment is required in determining the reporting units and assessing fair value of the reporting units.
Fair Value. Fair value is the price that would be received from selling an asset or paid in transferring a liability in an orderly transaction between market participants at the measurement date. Our fair value measurements consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
Fair values are determined based on three levels of inputs:
•Level 1: Quoted prices in active markets for identical assets or liabilities
•Level 2: Directly or indirectly observed inputs for the asset or liability, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active
•Level 3: Significant unobservable inputs that reflect our own estimates of assumptions that market participants would use
Research and Development. Costs incurred in research and development are expensed as incurred. Software development costs are capitalized when a product’s technological feasibility has been established through the date the product is available for general release to customers. Other than internal use software, we have not capitalized any software development costs, as technological feasibility is generally not established until a working model is completed, at which time substantially all development is complete.
Revenue Recognition. We recognize revenue from contracts with customers as control of the promised good or service is transferred. Please refer to Note 3. Revenue Recognition for further details regarding our recognition policies.
Advertising Expenses. We expense the cost of advertising and promoting our products as incurred. These costs are included in sales and marketing expense and totaled $5.2 million in 2021 and $5.9 million in 2020.
Foreign Currency. The functional currency of the Company’s foreign subsidiaries is generally the currency of the country in which the subsidiary operates. Assets and liabilities of foreign operations are translated into U.S. dollars using rates of exchange in effect at the end of the reporting period. The net gain or loss resulting from translation is shown as translation adjustment and included in Accumulated Other Comprehensive Income (AOCI) in shareholders’ equity. Income and expense accounts are translated into U.S. dollars using average rates of exchange. Gains and losses from foreign currency transactions are included in other income (expense), net on the consolidated statements of operations.
Accounting for Taxes Collected from Customers. Our revenues are reported net of sales and other transaction taxes that are collected from customers and remitted to taxing authorities.
Income Taxes. We compute income taxes using the asset and liability method, under which deferred income taxes are provided for temporary differences between financial reporting basis and tax basis of our assets and liabilities and operating loss and tax credit carryforwards. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the appropriate taxing jurisdictions. Adjustments to the valuation allowance could be required in the future if we estimate that the amount of deferred tax assets to be realized is more or less than the net amount we have recorded. Any increase or decrease in the valuation allowance could have the effect of increasing or decreasing the income tax provision in the statement of operations.
Deferred tax assets and liabilities and operating loss and tax credit carryforwards are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are expected to be recovered or settled.
We file numerous consolidated and separate income tax returns in the U.S. including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal income tax examinations for tax years before 2013 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize accrued interest and penalties related to uncertain tax positions as a component of income tax expense.
Stock-Based Compensation. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. We use the Black-Scholes option-pricing model or other appropriate valuation models such as Monte Carlo simulation to determine the fair value of stock-based option awards. The fair value of restricted stock awards is based on the closing market price of our common stock on the grant date of the award. Generally, we recognize the compensation cost for awards on a straight-line basis for the entire award, over the applicable vesting period. For performance-based awards, expense is recognized when it is probable the performance goal will be achieved, however if the likelihood becomes improbable, that expense is reversed.
The valuation models for stock-based option awards require various judgmental assumptions including volatility in our common stock price and expected option life. If any of the assumptions used in the valuation models change significantly, stock-based compensation expense for new awards may differ materially in the future from the amounts recorded in the consolidated statements of operations. For all awards, we also estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.
Net Loss Per Share. Basic net loss per share (EPS) is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net loss by the weighted average number of common and dilutive potential common shares outstanding during the period.
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.
Note 3. Revenue Recognition
Performance Obligations
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.
Our software licensing revenue stream generates revenue through the on-premises licensing of our codec technologies and integrated RealTimes platform. We recognize revenue upfront at the point in time when the software is made available to the customer. In cases where a sale or usage-based royalty is promised in exchange for a license of our codec technologies, revenue is recognized as the subsequent usage occurs for the contractual amount owed by the customer for that usage, as is allowed under the licensing of intellectual property section of Topic 606. Software licensing in our Mobile Services segment is invoiced on a monthly basis either based on usage of the respective product, or on a fixed fee basis. Our Consumer Media licensing is invoiced either quarterly or annually based on the usage of the respective product, or on a fixed fee basis. For each of these, the timing of payment generally does not vary significantly from the timing of invoice, however, certain of our long-term Consumer Media licensing contracts have extended payment schedules which may exceed one year.
Our subscription services revenue stream allows customers to use hosted software over the respective contract period without taking possession of the technology. The stream is primarily comprised of our intercarrier messaging service, ringback tones, PC-based and mobile games subscriptions, and our RealPlayer and SuperPass services. Revenues related to subscription service products are recognized ratably over the contract period, or as we have the right to invoice as a practical expedient when that amount corresponds directly with the value to the customer of our performance completed to date. Consumer subscription products are paid in advance, typically on a monthly or quarterly basis. Subscription services offered to businesses are invoiced on a monthly basis, generally based upon the amount of usage for the previous month, and the timing of payment generally does not vary significantly from the timing of invoice.
Our product sales revenue stream includes purchases of in-game virtual goods, mobile and wholesale games, as well as our RealPlayer product. Proceeds from sales of in-game virtual goods are initially recorded in deferred revenue and are recognized as revenues over 30 days, our estimate of the time period that end users benefit from these purchases and our related performance obligation is satisfied. Retail purchases are recognized and paid for at the point in time the product is made available to the end user. For games which are sold through third-party application storefronts, we evaluate the transaction for gross or net revenue recognition. As we typically are the primary obligor in our third-party transactions, we recognize revenues gross of any app store fees. We then receive monthly payments from the respective app store for all purchases within the respective month.
Other revenues consist primarily of advertising and the distribution of third-party products, which are recognized and paid on a cost per impression or cost per download basis.
Disaggregation of Revenue
The following table presents our disaggregated revenue by source and segment (in thousands):
Year ended December 31, 2021
Consumer Media Mobile Services Games
Business Line
Software License $ 5,076 $ 6,397 $ -
Subscription Services 3,158 17,391 9,606
Product Sales 1,306 - 11,058
Advertising and Other 761 - 3,430
Total $ 10,301 $ 23,788 $ 24,094
Year ended December 31, 2020
Consumer Media Mobile Services Games
Business Line
Software License $ 5,957 $ 5,110 $ -
Subscription Services 3,586 21,779 10,794
Product Sales 1,301 - 13,879
Advertising and Other 1,737 - 3,919
Total $ 12,581 $ 26,889 $ 28,592
The following table presents our disaggregated revenue by sales channel (in thousands):
Year ended December 31, 2021
Consumer Media Mobile Services Games
Sales Channel
Business to Business $ 5,838 $ 23,450 $ 3,928
Direct to Consumer 4,463 338 20,166
Total $ 10,301 $ 23,788 $ 24,094
Year ended December 31, 2020
Consumer Media Mobile Services Games
Sales Channel
Business to Business $ 7,693 $ 26,495 $ 4,664
Direct to Consumer 4,888 394 23,928
Total $ 12,581 $ 26,889 $ 28,592
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 December 31, 2021 and 2020 our balance of long-term accounts receivable was $0.2 million and $0.6 million, respectively, and is included in other long-term assets on our consolidated balance sheets. The decrease in this balance from December 31, 2020 to December 31, 2021 is primarily due to the timing of expected cash receipts. During the year ended December 31, 2021, we recorded no impairments to our contract assets.
We record deferred revenue when cash payments are received in advance of our completion of the underlying performance obligation. As of December 31, 2021 and 2020, we had deferred revenue balances of $2.8 million and $2.2 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 years ended December 31, 2021 and 2020, we did not record any material true-ups to our consolidated financial statements.
Practical Expedients
For those contracts for which we recognize revenue at the amount to which we have the right to invoice for service performed, we do not disclose the value of any unsatisfied performance obligations. We also do not disclose the remaining unsatisfied performance obligations which have an original duration of one year or less. Additionally, we immediately expense sales commissions when incurred as the amortization period would have been less than one year. These costs are recorded within sales and marketing expense.
Note 4. Dispositions
Napster
RealNetworks acquired an additional 42% interest in Rhapsody International, Inc. (doing business as Napster) on January 18, 2019, which brought our ownership of Napster's outstanding stock to 84%, which gave us a majority voting interest. For fiscal periods following the closing of the acquisition, we consolidated Napster's financial results into our financial statements, where Napster was reported as a separate segment. RealNetworks, Inc. entered into a Support Agreement dated August 25, 2020 by and among Napster and MelodyVR Group PLC, referred to as MelodyVR, an English public limited company. The Support Agreement was executed in connection with an Agreement and Plan of Merger, or Merger Agreement, by and among Napster, MelodyVR, and a wholly owned subsidiary of MelodyVR. The transaction was completed on December 30, 2020. Pursuant to the Merger Agreement, on the closing date, MelodyVR's subsidiary merged with and into Napster, with Napster surviving as a wholly owned subsidiary of MelodyVR. Other than as Securityholder Representative, RealNetworks was not a party to the Merger Agreement.
MelodyVR paid consideration of approximately $26 million to certain holders of debt and equity of Napster, comprised of $12 million in cash, shares of MelodyVR, and a $3 million 18-month indemnity escrow. Of the cash consideration, approximately $5.3 million was used to fully repay the advance to Napster on the revolving line of credit, pay Napster's transaction expenses, and pay amounts to certain of Napster's common stockholders. Additionally, $2.5 million of the cash proceeds and 47.8 million MelodyVR shares were used by RealNetworks to settle a contingent consideration obligation associated with our January 2019 acquisition from a third party of both a 42% stake in Napster and a $5 million loan to Napster. Net of these items, RealNetworks retained approximately $4.2 million in cash and 173.3 million shares of MelodyVR, as well as the right to any funds released from the $3 million escrow account. The shares of MelodyVR that RealNetworks received were not to be sold or transferred, except in limited circumstances, for a period of approximately one year from the close of the transaction.
In March 2021, MelodyVR changed its name to Napster Group PLC (the "Napster Group") and the stock symbol was changed from MVR to NAPS.
Effective on the execution of the Agreement and Plan of Merger on August 25, 2020, Napster was treated as discontinued operations and held-for-sale for accounting and disclosure purposes and subsequently sold in December 2020. As such, Napster’s operating results and financial condition were recast to conform to this presentation.
The following table summarizes the net loss from discontinued operations for the year ended December 31, 2020:
Revenue $ 96,185
Cost of revenue 73,318
Gross profit 22,867
Operating expenses 24,734
Operating loss (1,867)
Other income (expenses) 2,175
Income (loss) from discontinued operations before income taxes 308
Income tax expense 514
Net loss from discontinued operations (206)
Noncontrolling interests in net income (loss) from discontinued operations (184)
Net loss from discontinued operations attributable to RealNetworks $ (22)
We recorded a gain on the sale of Napster in the amount of $1.9 million in 2020, which was recorded to Net loss from discontinued operations on the Consolidated Statements of Operations and included in Other income (expense) in the above table.
The following table summarizes the gain recognized for the year ended December 31, 2020 from the sale of Napster:
Net proceeds received(1)
$ 22,849
Net assets disposed (20,935)
Gain on sale of Napster 1,914
(1) Proceeds received were net of transaction costs, funds to minority shareholders and fair value adjustments to MelodyVR stock.
The final gain on the sale of Napster was reduced primarily by claims against the $3.0 million indemnity escrow. Of this escrow amount, $2.0 million of cash was received by RealNetworks in the fourth quarter of 2021, $0.2 million in claims against the escrow were recognized in the first quarter of 2021, and the remaining $0.7 million was written off in the fourth quarter of
2021. The $0.7 million loss was recorded to Net loss from discontinued operations, net of tax on the Consolidated Statement of Operations.
Note 5. Fair Value Measurements
Items Measured at Fair Value on a Recurring Basis
The following tables present information about our financial assets that have been measured at fair value on a recurring basis as of December 31, 2021 and 2020, and indicates the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands).
Fair Value Measurements as of Amortized Cost as of
December 31, 2021 December 31, 2021
Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 27,109 $ - $ - $ 27,109 $ 27,109
Investments - - 1,755 1,755 N/A
Restricted cash equivalents 1,630 - - 1,630 1,630
Total assets $ 28,739 $ - $ 1,755 $ 30,494 N/A
Fair Value Measurements as of Amortized Cost as of
December 31, 2020 December 31, 2020
Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 23,940 $ - $ - $ 23,940 $ 23,940
Investments - - 9,965 9,965 N/A
Restricted cash equivalents 1,630 - - 1,630 1,630
Total assets $ 25,570 $ - $ 9,965 $ 35,535 N/A
Accrued and other current liabilities:
Napster acquisition contingent consideration $ - $ - $ 4,800 $ 4,800 N/A
Other long-term liabilities
Simple Agreements for Future Equity - - 2,106 2,106 N/A
Total liabilities $ - $ - $ 6,906 $ 6,906 N/A
Restricted cash equivalents as of December 31, 2021 and 2020 primarily relate to maintaining a minimum balance of unrestricted cash at the bank in connection with our Loan Agreement. See Note 9. Debt for additional details.
Investments as of December 31, 2021 and December 31, 2020 are comprised of Napster Group ordinary shares received as a portion of the consideration from our December 30, 2020 Napster disposition, as described in Note 4. Dispositions. The fair value of these equity securities was calculated using the closing price of the shares as of December 31, 2021. For reporting periods prior to December 31, 2021, the shares were discounted for a lack of liquidity due to the 12-month contractual restriction on selling or transferring the shares and were therefore considered to be within Level 3 of the fair value hierarchy. During the fourth quarter of 2021, Napster Group announced its intent to dispose of Rhapsody to a private company which was completed in late January 2022. We have concluded that it is appropriate to continue to consider the fair value determination of the shares as of December 31, 2021 as Level 3 because of the pending go-private transaction as of December 31, 2021, our holding a large amount of Napster Group shares, and the thinly traded nature of the shares. For the year ended December 31, 2021 for these shares, we recognized an unrealized loss of $7.0 million in Loss on equity and other investments, net on the consolidated statement of operations. For the year ended December 31, 2020 we recognized an unrealized gain of $0.7 million.
During the second quarter of 2021, the Company settled the Napster contingent consideration liability. Accrued and other current liabilities as of December 31, 2020 included the estimated fair value of the contingent consideration for the Napster acquisition, which was determined using a fair value measurement categorized within Level 3 of the fair value hierarchy. The valuation methodology of the contingent consideration at December 31, 2020 was based on RealNetworks' contractual obligation to pay the seller of the Napster interests acquired by RealNetworks in January 2019.
In the third quarter of 2020, Scener, received $2.1 million in cash in exchange for the issuance of convertible securities, each a Simple Agreement for Future Equity. The conversion of these securities, or SAFE Notes, was contingent upon the occurrence of specific future capital-raising events by Scener. The future contingent events also contemplated the possibility of Scener having to pay back the original cash investment to each investor. The SAFE Notes were recorded at fair value and within Other long-term liabilities on our consolidated balance sheets until June 30, 2021, the date of Scener's deconsolidation
from RealNetworks, as further discussed in Note 19. Related Party Transactions. The valuation analysis model for the fair value of the SAFE Notes as of December 31, 2020 used significant unobservable inputs that reflected our own estimates of assumptions that market participants would use. Significant unobservable inputs to the valuation analysis model included the underlying conversion date for the SAFE Notes, Scener's capitalization prior to conversion of the SAFE Notes, an 80% discount rate as defined in the SAFE Note agreements, conversion price, conversion shares and an annual present value rate. All of the inputs were subject to significant judgment.
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 as discussed in Note 15. Leases, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis in 2021 or 2020.
Note 6. Allowance for Doubtful Accounts Receivable and Sales Returns
Activity in the allowance for doubtful accounts receivable (in thousands):
Years ended December 31,
2021 2020
Balance, beginning of year $ 598 $ 484
Addition (reduction) to allowance (319) 117
Amounts written off - (30)
Effects of foreign currency translation (13) 27
Balance, end of year $ 266 $ 598
Activity in the allowance for sales returns (in thousands):
Years ended December 31,
2021 2020
Balance, beginning of year $ 31 $ 32
Reduction to allowance - (1)
Balance, end of year $ 31 $ 31
Total, Allowance for Doubtful Accounts Receivable and Sales Returns $ 297 $ 629
One customer individually comprised more than 10% of trade accounts receivable at December 31, 2021, with the customer accounting for 23% of trade accounts receivable. Two customers individually comprised more than 10% of trade accounts receivable at December 31, 2020, with the customers accounting for 19% and 10% each.
Two customers accounted for 30%, or $17.6 million, of consolidated revenue during the year ended December 31, 2021, in the Mobile Services segment.
Two customer accounted for 25%, or $17.3 million, of consolidated revenue during the year ended December 31, 2020, in our Mobile Services segment.
Note 7. Goodwill
Changes in goodwill (in thousands):
December 31,
2021 2020
Balance, beginning of year
Goodwill $ 328,028 $ 327,561
Accumulated impairment losses (310,653) (310,653)
17,375 16,908
Effects of foreign currency translation (399) 467
(399) 467
Balance, end of year
Goodwill 327,629 328,028
Accumulated impairment losses (310,653) (310,653)
$ 16,976 $ 17,375
Goodwill by segment (in thousands):
December 31,
2021 2020
Consumer Media $ 580 $ 580
Mobile Services 2,111 2,188
Games 14,285 14,607
Total goodwill $ 16,976 $ 17,375
No impairments of goodwill were recorded in 2021 or 2020.
Note 8. Accrued and Other Current Liabilities
Accrued and other current liabilities (in thousands):
December 31, 2021 December 31, 2020
Royalties and other fulfillment costs $ 1,189 $ 1,149
Employee compensation, commissions and benefits 5,761 4,512
Sales, VAT and other taxes payable 1,056 1,231
Operating lease liabilities - current 2,113 3,373
Napster acquisition contingent consideration - 4,800
Other 3,167 2,785
Total accrued and other current liabilities $ 13,286 $ 17,850
Note 9. Debt
The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, established the Paycheck Protection Program (PPP) to provide a direct incentive for small businesses to keep workers on their payroll. Through the PPP, participating banks write loans to eligible businesses and loan amounts are forgiven to the extent that employee retention criteria are met and proceeds are used to cover eligible costs over a 24-week measurement period following loan funding. In April 2020, following an assessment of eligibility and approval of its Board of Directors, RealNetworks issued a promissory note to a participating bank in the principal amount of $2.9 million pursuant to the PPP. The note had a maturity of 2 years, an interest rate of 1.0%, no pre-payment penalty, a ten-month deferment period starting after the 24-week measurement period, and was eligible for forgiveness pursuant to PPP guidelines. In April 2020, the Secretary of the Treasury and Small Business Administration (SBA) announced that the government will review all PPP loans of more than $2.0 million before there is forgiveness. We applied for forgiveness in January 2021. On June 19, 2021, the Company received notice from our participating bank that our request for forgiveness was approved and our PPP loan principal and interest were deemed paid in full. Upon the forgiveness of our obligations of the PPP promissory note, we recognized a gain of $2.9 million in Other income (expense), net on the condensed consolidated statement of operations in the second quarter of 2021.
In August 2019, RealNetworks and Napster entered into a Loan and Security Agreement (Loan Agreement) with a third-party financial institution. Under the terms of the Loan Agreement, the bank extended a revolving line of credit (Revolver) not to exceed $10.0 million in the aggregate. In December 2020, at the time of closing the sale of Napster, as further described in Note 4. Dispositions, certain terms of the Loan Agreement were amended, including the removal of Napster as a party to the lending agreement.
In February 2021, we entered into an amendment with the bank on our Revolver, whereby the borrowing base for the Revolver is comprised of eligible accounts receivable and direct to consumer deposits. Borrowings may not exceed $6.5 million and are reduced by a $1.0 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 Revolver matures August 1, 2022.
We paid and capitalized $0.6 million of financing fees to enter into the Revolver in August 2019, and the financing fees are being amortized over the term of the credit agreement. The unamortized fees are included in Deferred costs, current on our consolidated balance sheets.
Note 10. Restructuring and Other Charges
Restructuring and other charges in 2021 and 2020 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. Also included in Restructuring and other charges in 2021 was a non-cash gain on release of operating lease liabilities. This release of liabilities related to the 2021 termination of a portion of our lease at our corporate headquarters for which the related operating lease asset was previously impaired.
Restructuring charges are as follows (in thousands):
Employee Separation Costs Asset Related and Other Costs Total
Costs incurred and charged to expense for the year ended December 31, 2021 $ 2,151 $ 978 $ 3,129
Costs incurred and charged to expense for the year ended December 31, 2020 $ 1,288 $ 1,241 $ 2,529
Changes to the accrued restructuring liability for 2021 and 2020 (in thousands):
Employee Separation Costs Asset Related and Other Costs Total
Accrued liability as of December 31, 2019 $ 110 $ 174 $ 284
Costs incurred and charged to expense for the year ended December 31, 2020, excluding noncash charges 1,288 - 1,288
Cash payments (1,052) (174) (1,226)
Accrued liability as of December 31, 2020 346 - 346
Costs incurred and charged to expense for the year ended December 31, 2021, excluding noncash charges 1,932 1,475 3,407
Cash payments (1,962) - (1,962)
Accrued liability as of December 31, 2021 $ 316 $ 1,475 $ 1,791
Of the total accrual at December 31, 2021, $1.4 million is included in Accrued and other current liabilities and $0.4 million is included in Other long-term liabilities on the Consolidated Balance Sheet.
Note 11. Shareholders’ Equity
Accumulated Other Comprehensive Loss
Changes in components of accumulated other comprehensive loss (in thousands):
Years Ended December 31,
2021 2020
Foreign currency translation
Accumulated other comprehensive loss, beginning of period $ (60,641) $ (61,323)
Translation adjustments (879) 909
Napster disposition - (227)
Net current period other comprehensive income (loss) (879) 682
Accumulated other comprehensive loss balance, end of period $ (61,520) $ (60,641)
Preferred Stock. Each share of Series A preferred stock entitles the holder to one thousand votes and dividends equal to one thousand times the aggregate per share amount of dividends declared on the common stock. There are no shares of Series A preferred stock outstanding.
In February 2020, Mr. Glaser, Chairman of the Board and Chief Executive Officer of RealNetworks, invested approximately $10.0 million in RealNetworks in exchange for the issuance to him of 8,064,516 shares of Series B preferred stock. The Series B preferred stock is non-voting and is convertible into common stock on a one-to-one basis subject to the limitation described in Note 19. Related Party Transactions. The Series B preferred stock has no liquidation preference and no preferred dividends.
Undesignated preferred stock will have rights and preferences that are determinable by the Board of Directors if and when determination of a new series of preferred stock has been established.
Common Stock. In April 2021, we completed an underwritten public offering of 8,250,000 shares of common stock at a price to the public of $2.70 per share. The aggregate gross proceeds from the offering were $22.3 million. Of these proceeds, we received approximately $20.1 million, after deducting underwriting discounts, commissions, and legal and other fees. The proceeds are expected to be used for general corporate purposes and working capital.
Note 12. Employee Stock and Benefit Plans
Equity Compensation Plans. Under our equity incentive plans, we may grant various types of equity awards to employees and Directors. We have granted time-vest and performance-vest stock options and time-vest and performance-vest restricted stock. Generally, options vest based on continuous employment, over a four-year period. The options generally expire seven years from the date of grant and are exercisable at the market value of the common stock at the grant date. Time-vest restricted stock awards generally vest based on continuous employment over a two or four-year period. Performance-based awards vest if the specified performance targets are met and the grantee remains employed over the required period. The performance targets for these awards are generally based on the achievement of company-specific financial results. For these performance-based awards, expense is recognized when it is probable the performance goal will be achieved.
We issue new shares of common stock upon exercise of stock options and the vesting of restricted stock. As of December 31, 2021, there were 2.3 million shares of common stock authorized for future equity awards. Each restricted stock unit granted reduces, and each restricted stock unit forfeited or canceled increases, the shares available for future grant by a factor of 1.6 shares. Each stock option granted reduces, and each stock option forfeited or canceled increases, the shares available for future grant by a factor of one share.
Stock-based compensation expense recognized in our consolidated statements of operations includes amounts related to stock options and restricted stock, and was as follows (in thousands):
Years Ended December 31,
2021 2020
Total stock-based compensation expense $ 4,224 $ 1,420
The total stock-based compensation amounts disclosed above are recorded in the respective line items within operating expenses in the consolidated statements of operations. Included in the expense for 2021 was $2.0 million of stock-based compensation, resulting from certain equity award modifications that will be cash settled. At December 31, 2021, $1.3 million of this liability was recorded in Accrued and other current liabilities and $0.7 million was recorded in Other long-term liabilities within our consolidated balance sheets. Also included in the expense for 2021 was stock-based compensation recorded for 2020 incentive bonuses paid in fully vested restricted stock units, which were authorized and granted in the first quarter of 2021. No stock-based compensation was capitalized as part of the cost of an asset as of December 31, 2021 or 2020. As of December 31, 2021, we had $2.2 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 three years.
As discussed in Note 1. Description of Business and Summary of Significant Accounting Policies, the valuation models for stock option awards require various highly judgmental assumptions. The assumption for the expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, including the contractual terms, vesting schedules, and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of our common stock for the related expected term. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to the expected term of the stock options. The dividend yield is estimated at zero because we do not currently anticipate paying dividends in the foreseeable future.
The fair value of options granted used the following weighted average assumptions:
Years ended December 31,
2021 2020
Expected dividend yield - % - %
Risk-free interest rate 0.59 % 0.37 %
Expected term (years) 3.9 4.8
Volatility 71 % 45 %
Restricted stock unit and award activity was as follows (shares are in thousands):
Number of Shares Weighted Average Grant Date Fair Value Per Share Total Grant Date Fair Value of Vested Awards (000's)
Nonvested shares, December 31, 2019 845 $ 2.24
Granted 1,446 1.49
Vested (218) 1.89 $ 412
Forfeited/Canceled (270) 2.38
Nonvested shares, December 31, 2020 1,803 $ 1.65
Granted 886 2.26
Vested (392) 2.38 $ 933
Forfeited/Canceled (211) 2.00
Nonvested shares, December 31, 2021 2,086 $ 1.74
At December 31, 2021, the aggregate intrinsic value of restricted stock awards was $2.0 million and the weighted average remaining contractual term was approximately two years.
Stock option activity (shares are in thousands):
Options Outstanding Weighted Average Grant Date Fair Value
Number
of Shares
Weighted
Average
Exercise Price
Outstanding, December 31, 2019 7,471 $ 4.25
Options granted at common stock price 2,382 1.26 $ 0.47
Options exercised - -
Options canceled (3,354) 4.59
Outstanding, December 31, 2020 6,499 $ 2.97
Options granted at common stock price 1,737 2.13 $ 1.12
Options exercised (258) 2.07
Options canceled (1,499) 3.77
Outstanding, December 31, 2021 6,479 $ 2.60
Exercisable, December 31, 2021 3,276 $ 3.33
Vested and expected to vest, December 31, 2021 5,149 $ 2.80
As of December 31, 2021, the weighted average remaining contractual life of the options was as follows: outstanding options 4.7 years; exercisable options 3.3 years; and vested and expected to vest options 4.3 years. As of December 31, 2021, there was no aggregate intrinsic value for our outstanding, exercisable, and vested and expected to vest options, respectively.
The aggregate intrinsic value of stock options exercised in 2021 was $0.4 million, and for 2020 was zero.
Retirement Savings Plan. We have a salary deferral plan (401(k) Plan) that covers substantially all employees. Eligible employees may contribute a portion of their eligible compensation to the plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. We match a percentage of employee contributions up to certain limits. During the years ended December 31, 2021 and 2020, we contributed $0.2 million and $0.3 million, respectively, in matching contributions. We can terminate the matching contributions at our discretion. We have no other post-employment or post-retirement benefit plans.
Note 13. Income Taxes
Components of income (loss) from continuing operations before income taxes (in thousands):
Years ended December 31,
2021 2020
United States operations $ (17,998) $ (8,241)
Foreign operations (3,015) 3,182
Loss before income taxes $ (21,013) $ (5,059)
Components of income tax expense (benefit) (in thousands):
Years ended December 31,
2021 2020
Current:
United States federal $ 117 $ 202
State and local 54 20
Foreign 125 530
Total current 296 752
Deferred:
United States federal 9 (495)
Foreign 174 (202)
Total deferred 183 (697)
Total income tax expense $ 479 $ 55
Income tax expense differs from “expected” income tax expense (computed by applying the U.S. federal income tax rate of 21% in 2021 and 2020) from continuing operations before income taxes due to the following (in thousands):
Years ended December 31,
2021 2020
United States federal tax benefit at statutory rate $ (4,413) $ (1,062)
State taxes, net of United States federal tax expense (benefit) 599 (807)
Change in valuation allowance 5,383 2,545
Non-deductible stock compensation 585 1,406
Impact of non-U.S. jurisdictional tax rate difference (188) (169)
Research and development tax credit (156) (183)
Non-U.S. withholding tax 93 229
Change in indefinite reinvestment assertion 76 (8)
Contingent consideration (218) (1,806)
PPP Loan Forgiveness (608) -
Other (674) (90)
Total income tax expense $ 479 $ 55
Net deferred tax assets, which are recorded at December 31, 2021 and December 31, 2020 using a 21% tax rate, are comprised of the following (in thousands):
December 31,
2021 2020
Deferred tax assets:
United States federal net operating loss carryforwards $ 70,564 $ 67,451
Deferred expenses 297 314
Research and development tax credit carryforwards 13,025 13,350
Right of use asset 771 2,103
Stock-based compensation 1,547 1,498
State net operating loss carryforwards 9,611 8,516
Foreign net operating loss carryforwards 27,433 27,589
Deferred revenue 36 27
Equipment, software, and leasehold improvements 1,402 1,841
Intangibles 6,066 7,392
Other 2,770 1,370
Gross deferred tax assets 133,522 131,451
Less valuation allowance (131,522) (128,314)
Gross deferred tax assets, net of valuation allowance $ 2,000 $ 3,137
Deferred tax liabilities:
Other intangible assets $ (146) $ (158)
Lease liability (668) (1,579)
Undistributed foreign earnings (954) (937)
Other (637) (683)
Gross deferred tax liabilities (2,405) (3,357)
Net deferred tax liabilities $ (405) $ (220)
As of December 31, 2021, we maintained a valuation allowance of $131.5 million for our deferred tax assets that we believe are not more likely than not to be realized. The net change in valuation allowance was a $3.2 million increase and a $32.5 million decrease during the years ended December 31, 2021 and 2020, respectively. The net increase in the valuation allowance since December 31, 2020 of $3.2 million was primarily the result of an increase in current year deferred tax assets for which the Company maintains a valuation allowance.
RealNetworks' U.S. federal net operating loss carryforwards totaled $336.0 million and $321.2 million at December 31, 2021 and 2020, respectively. The increase is mainly due to net operating loss carryforwards from the current year U.S. taxable loss. The remaining net operating loss carryforwards as of December 31, 2021 are from prior U.S. taxable losses and from acquired subsidiaries. These net operating loss carryforwards expire between 2024 and 2037.
Income tax receivables were $0.0 million and $0.1 million at December 31, 2021 and 2020.
RealNetworks' U.S. federal research and development tax credit carryforward totaled $13.0 million and $13.4 million at December 31, 2021 and 2020. The research and development credit carryforwards expire between 2022 and 2041.
As of December 31, 2018, the Company no longer intends to indefinitely reinvest substantially all of the Company's foreign earnings outside of the U.S. We have a recorded deferred tax liability of $1.0 million and $0.9 million as of December 31, 2021 and 2020, respectively, for local country and foreign withholding taxes associated with the repatriation of such foreign earnings.
In both of the years ended December 31, 2021 and 2020, RealNetworks had $0.7 million in uncertain tax positions. The unrecognized tax benefits are due to federal research and development tax credit carryforward risks. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.
We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2021, we have no accrued interest or penalties related to uncertain tax positions.
Reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits (in thousands):
Years ended December 31,
2021 2020
Balance, beginning of year $ 655 $ 5,020
Increases related to prior year tax positions - 77
Decreases related to prior year tax positions (18) (4,564)
Increases related to current year tax positions 104 122
Balance, end of year $ 741 $ 655
Note 14. Loss Per Share
Basic net loss per share (EPS) is computed by dividing net loss attributable to RealNetworks by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net 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):
Years ended December 31,
2021 2020
Net loss from continuing operations attributable to RealNetworks $ (21,248) $ (4,830)
Net loss from discontinued operations attributable to RealNetworks (733) (22)
Net loss attributable to RealNetworks $ (21,981) $ (4,852)
Weighted average common shares outstanding used to compute basic EPS 44,277 38,272
Dilutive effect of stock based awards and Series B Preferred Stock - -
Weighted average common shares outstanding used to compute diluted EPS 44,277 38,272
Net loss per share attributable to RealNetworks - Basic:
Continuing operations $ (0.48) $ (0.13)
Discontinued operations (0.02) -
Total net loss per share - Basic $ (0.50) $ (0.13)
Net loss per share attributable to RealNetworks - Diluted:
Continuing operations $ (0.48) $ (0.13)
Discontinued operations (0.02) -
Total net loss per share - Diluted $ (0.50) $ (0.13)
Approximately 4.4 million and 6.8 million shares of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS for the years ended December 31, 2021 and 2020, respectively, because of their antidilutive effect.
During 2020, 8.1 million shares of Series B preferred stock were issued. The Series B Preferred Stock is convertible into common stock on a one-to-one basis subject to the limitation described in Note 19. Related Party Transactions. During the years ended December 31, 2021 and December 31, 2020, these shares were also excluded from the calculation of diluted EPS because of their antidilutive effect.
Note 15. Leases
We have commitments for future payments related to office facilities leases. We determine if an arrangement is a lease at inception. Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available in determining the present value of future payments. Operating lease assets also exclude lease incentives and initial direct costs incurred. Some of our leases include options to extend or terminate the lease. Our leases generally include one or more options to renew; however, the exercise of lease renewal options is at our sole discretion. For nearly all of our operating leases, upon adoption of the new guidance, we have not assumed any options to extend will be exercised as part of our calculation of the lease liability.
We have operating leases for office space and data centers with remaining lease terms of 1 year to 4 years.
We recorded $2.5 million, and $1.1 million of lease asset impairment charges in 2021 and 2020, respectively, for office space previously vacated. In 2021 we also recorded a non-cash gain of $3.6 million on release of operating lease liabilities, related to the 2021 termination of a portion of our lease at our corporate headquarters for which the related operating lease asset was previously impaired. These amounts were recognized in restructuring and other charges on the consolidated statements of operations.
In 2021 and 2020, we entered into amendments that extended certain office leases, resulting in right-of-use assets obtained in exchange for lease obligations of $1.1 million and $0.9 million, respectively.
Details related to lease expense and supplemental cash flow were as follows (in thousands):
Years Ended December 31,
2021 2020
Operating lease expense $ 3,058 $ 4,118
Variable lease expense 646 711
Sublease income (548) (1,330)
Net lease expense $ 3,156 $ 3,499
Operating cash outflows for lease liabilities $ 4,109 $ 4,356
Details related to lease term and discount rate were as follows:
December 31,
2021 December 31,
Weighted-average remaining lease term (in years) 2 years 3 years
Weighted-average discount rate 4.73 % 4.95 %
Future minimum lease payments as of December 31, 2021 are as follows (in thousands):
Office
Leases
2022 $ 2,310
2023 1,390
2024 967
2025 195
2026 -
Total minimum payments (a)
4,862
Less: Imputed interest 449
Present value of total minimum payments (b)
$ 4,413
(a) Total minimum payments exclude executory costs, inclusive of insurance, maintenance, and taxes, of $1.8 million; minimum payments also have not been reduced by sublease rentals of $0.1 million due in the future under subleases.
(b) $2.3 million is included in Long-term lease liabilities and $2.1 million is included in Accrued and other current liabilities on the consolidated balance sheets.
Note 16. 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 recorded a liability related to this matter as of December 31, 2021, 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 17. Guarantees
In the ordinary course of business, RealNetworks is subject to potential obligations for standard warranty and indemnification provisions that are contained within many of our customer license and service agreements. Our warranty provisions are consistent with those prevalent in our industry, and we do not have a history of incurring losses on warranties; therefore, we do not maintain accruals for warranty-related obligations. With regard to indemnification provisions, nearly all of our carrier contracts obligate us to indemnify our carrier customers for certain liabilities that may be incurred by them. We have received in the past, and may receive in the future, claims for indemnification from some of our carrier customers.
Note 18. 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 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 (Secure Accurate Facial Recognition); 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 games 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, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items include restructuring charges and stock compensation charges.
RealNetworks reports the three reportable segments based on factors such as how we manage our operations and how our 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.
Segment results for the years ended December 31, 2021 and 2020 were as follows (in thousands):
Consumer Media
2021 2020
Revenue $ 10,301 $ 12,581
Cost of revenue 1,816 2,273
Gross profit 8,485 10,308
Operating expenses 7,427 8,889
Operating income (loss) $ 1,058 $ 1,419
Mobile Services
2021 2020
Revenue $ 23,788 $ 26,889
Cost of revenue 5,720 6,725
Gross profit 18,068 20,164
Operating expenses 24,299 24,787
Operating income (loss) $ (6,231) $ (4,623)
Games
2021 2020
Revenue $ 24,094 $ 28,592
Cost of revenue 6,192 7,451
Gross profit 17,902 21,141
Operating expenses 19,463 19,936
Operating income (loss) $ (1,561) $ 1,205
Corporate
2021 2020
Cost of revenue $ 28 $ 16
Operating expenses 14,111 3,009
Operating income (loss) $ (14,139) $ (3,025)
Our customers consist primarily of consumers and corporations located in the U.S., Europe and various foreign countries (Rest of the World). Revenue by geographic region (in thousands):
Years ended December 31,
2021 2020
United States $ 36,494 $ 43,704
Europe 9,133 9,375
Rest of the World 12,556 14,983
Total $ 58,183 $ 68,062
Long-lived assets (consists of equipment, software, leasehold improvements, operating lease assets, and goodwill) by geographic region (in thousands):
December 31,
2021 2020
United States $ 14,402 $ 18,318
Europe 6,682 7,638
Rest of the World 1,354 1,227
Total long-lived assets $ 22,438 $ 27,183
Note 19. Related Party Transactions
The sale of Napster closed on December 30, 2020. For additional details, see Note 4. Dispositions.
In February 2020, we entered into a Series B Preferred Stock Purchase Agreement with Mr. Glaser, Chairman of the Board and Chief Executive Officer of RealNetworks, pursuant to which Mr. Glaser invested approximately $10.0 million in RealNetworks in exchange for the issuance to him of 8,064,516 shares of Series B Preferred Stock. The Series B Preferred Stock is non-voting and is convertible into common stock on a one-to-one basis, provided, however, that no conversion is permitted in the event that such conversion would cause Mr. Glaser’s beneficial ownership of our common stock to exceed the 38.5% threshold set forth in our Second Amended and Restated Shareholder Rights Plan dated November 30, 2018. The Series B Preferred Stock has no liquidation preference and no preferred dividends.
In July 2020, Mr. Glaser invested $0.7 million into a former RealNetworks subsidiary, Scener. Scener is developing a platform that transforms the experience of viewing video entertainment into a social, connected playground. The July 2020 funding was in addition to $0.8 million that Mr. Glaser had previously directly invested in 2019. In August 2020, this same subsidiary entered into agreements and received $1.4 million in cash from outside investors. The 2020 investments were in the form of SAFEs, as described in Note 5. Fair Value Measurements.
Effective June 30, 2021, RealNetworks no longer had a controlling interest in Scener and deconsolidated Scener Inc. We now account for our remaining interest in Scener using the equity method of accounting. As a result of the deconsolidation of Scener, we recognized a gain of $2.0 million in Other income (expense), net on the condensed consolidated statement of operations.
In December 2021, Scener had a qualifying equity financing which also triggered the conversion of the SAFE notes to equity. As a result, RealNetworks' ownership in Scener's outstanding equity decreased to approximately 46% and we recognized a dilution gain of $6.0 million. Additionally, we recorded our share of losses in Scener of $3.8 million for the year ended December 31, 2021. These amounts are recorded in (Loss) gain on equity and other investments, net, on the consolidated statement of operations. At December 31, 2021 the carrying value of our investment in Scener was $2.2 million and is included in Other assets on the consolidated balance sheets.
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
RealNetworks, Inc.
Seattle, Washington
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of RealNetworks, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Business-to-Business Software Licensing, Subscription Services, and Product Sales
As described in Note 3 to the consolidated financial statements, the Company generates revenue from various sources including software licensing, subscription services, product sales, and advertising. Certain of the Company’s revenue agreements relating to software licensing, subscription services, and product sales with business-to-business customers contain multiple performance obligations and the Company must identify those performance obligations and recognize revenue at a point in time or over time depending on the nature of the performance obligation.
We identified the process of the identification of performance obligations and the recognition of revenue for business-to-business software licensing, subscription services, and product sales based on the nature of each performance obligation as a critical audit matter. Auditing these transactions was challenging and complex due to the volume of contracts and unique contract terms requiring significant effort to assess and identify the performance obligations within these agreements which determines the pattern of revenue recognition for each performance obligation.
The primary procedures we performed to address this critical audit matter included:
•Evaluating management’s accounting policies and practices, including the reasonableness of management’s judgments and assumptions related to evaluation of performance obligations and their pattern of revenue recognition.
•Examining a sample of revenue contracts and other source documents to test management’s identification of significant terms and application of their revenue recognition policy by: (i) identifying each distinct performance obligation and (ii) assessing the determination of the appropriate pattern of revenue recognition for each performance obligation.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2020.
Spokane, Washington
February 25, 2022

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of the principal executive officer and principal financial officer, has evaluated the effectiveness of our “disclosure controls and procedures” (as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that we file or submit under the Exchange Act (1) is recorded, processed, summarized, and reported within the time period specified in the Securities and Exchange Commission rules and forms and (2) is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, our management concluded that, as of December 31, 2021, RealNetworks maintained effective internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Our management, with the participation of the principal executive officer and principal financial officer, has evaluated the changes to our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2021 as required by paragraph (d) of Rules 13a-15 and 15d-15 of the Exchange Act and has concluded that there were no such changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to the information contained in part in the sections captioned “Proposal 1-Election of Directors,” “Board of Directors,” and “Voting Securities and Principal Holders” of the Proxy Statement relating to RealNetworks’ 2022 Annual Meeting of Shareholders or in an amendment to this 10-K, to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2021.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the information contained in the section captioned “Executive Compensation” of the Proxy Statement relating to RealNetworks’ 2022 Annual Meeting of Shareholders or in an amendment to this 10-K, to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item is incorporated by reference to the information contained in the section captioned “Voting Securities and Principal Holders” of the Proxy Statement relating to RealNetworks’ 2022 Annual Meeting of Shareholders or in an amendment to this 10-K, to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2021.
Equity Compensation Plans
As of December 31, 2021, we had awards outstanding under three equity compensation plans. These plans, which have been approved by our shareholders, with the exception of the RealNetworks, Inc. 2020 Inducement Equity Plan (2020 Plan), include the RealNetworks, Inc. 1996 Stock Option Plan, as amended and restated (1996 Plan) and the RealNetworks, Inc. 2005 Stock Incentive Plan, as amended and restated (2005 Plan). In addition, we maintain the RealNetworks, Inc. 2007 Employee Stock Purchase Plan, as amended and restated October 2010 (2007 ESPP).
All new equity awards are issued under the 2005 Plan, except for certain qualifying inducement awards that are awarded under the 2020 Plan. In 2007, our shareholders approved the 2007 ESPP.
The following table aggregates the data from our plans (in thousands):
Plan Category Number of Securities
to be Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
(in 000’s)(a)
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
(in 000’s)(c)
Equity compensation plans approved by security holders 7,360 $ 2.60 1,180 (1)(2)
Equity compensation plans not approved by security holders 1,205 $ 6.35 1,160
Total 8,565 $ 2.60 2,340 (3)
(1)On January 1, 2008, the 2007 ESPP became effective; the Company suspended the 2007 ESPP effective January 1, 2020. Column (c) above excludes an aggregate of 0.1 million shares of the Company’s common stock that are authorized for issuance pursuant to the 2007 ESPP.
(2)Includes shares available for future issuances pursuant to the RealNetworks, Inc. 2007 Director Compensation Stock Plan (2007 Director Plan), a sub-plan that operates and is administered under the 2005 Plan. Under the 2007 Director Plan, outside directors may elect to receive all or a portion of their quarterly director compensation in shares of the Company’s common stock in lieu of cash. Shares issued to directors under the 2007 Director Plan are issued from the shares reserved under the 2005 Plan.
(3)The total securities in column (a) include 6,479 stock options and 2,086 restricted stock units and awards. The weighted average exercise prices in column (b) relate to the stock options only; restricted stock units and awards have no exercise price.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the information contained in the section captioned “Executive Compensation-Policies and Procedures with Respect to Related Person Transactions” and “Election of Directors-Director Independence” of the Proxy Statement relating to RealNetworks’ 2022 Annual Meeting of Shareholders or in an amendment to this 10-K, to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the information contained in the section captioned “Proposal 2-Ratification of Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement relating to RealNetworks’ 2022 Annual Meeting of Shareholders or in an amendment to this 10-K, to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2021.
PART IV.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Index to Consolidated Financial Statements
The following consolidated financial statements of RealNetworks, Inc. and subsidiaries are filed as part of this report:
Consolidated Balance Sheets - December 31, 2021 and 2020
Consolidated Statements of Operations and Comprehensive Loss - Years Ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows - Years Ended December 31, 2021 and 2020
Consolidated Statements of Shareholders’ Equity - Years Ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Spokane, Washington; PCAOB ID#243)
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted since they are either not required, not applicable, or because the information required is included in the consolidated financial statements or the notes thereto.
(a)(3) Index to Exhibits
See Index to Exhibits below.