REALNETWORKS, INC. This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections aboutRealNetworks' industry, products, management's beliefs, and certain assumptions made by management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to: •the potential impact of, and any potential developments related to, the proposed Merger, including the risk that the conditions to the consummation of the Merger are not satisfied or waived, litigation challenging the Merger, the impact on our stock price, business, financial condition and results of operations if the Merger is not consummated, and the potential negative impact to our business and employee relationships due to the Merger; •the expected benefits and other consequences of our growth plans, strategic initiatives, and restructurings; •our expected introduction, and related monetization, of new and enhanced products, services and technologies across our businesses, including our investment initiatives, SAFR and KONTXT; •future revenues, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations; •the effects of our past acquisitions and expectations for future acquisitions and divestitures; •plans, strategies and expected opportunities for future growth, increased profitability and innovation; •our expected financial position, including liquidity, cash usage and conservation, and the availability of funding or other resources; •the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses in theU.S. and in foreign jurisdictions, including recent and potential future regulatory and legal developments in the areas of artificial intelligence, privacy, cybersecurity and intellectual property; •the continuation and expected nature of certain customer and third party distributor relationships, including theU.S. government and the large, third party platforms that host our applications; •impacts of competition and certain customer and third party distributor relationships on the future financial performance and growth of our businesses; •our involvement in potential claims, legal proceedings and government investigations, and the potential outcomes and effects of such potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations; •the effects ofU.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and •the effect of economic and market conditions, including global pandemics and financial crises, on our business, prospects, financial condition or results of operations. These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in Item 1A entitled "Risk Factors."RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed byRealNetworks from time to time with theSecurities and Exchange Commission , particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. 18 --------------------------------------------------------------------------------
Overview
Our Business
RealNetworks invented the streaming media category in 1995 and continues to build on its foundation of digital media expertise and innovation. In recent years, we have leveraged our technical expertise and access to proprietary data sources to develop a new generation of AI-based products and solutions. These products and solutions are designed to help customers be safer and smarter, and for their companies to be more efficient and more successful. The main two products and key investment initiatives in our AI portfolio are SAFR, our AI-based computer vision platform, and KONTXT, our natural language processing-based (NLP) message classification and analysis platform. SAFR leverages the power of AI to enhance security, safety, convenience, and operational efficiencies with fast and accurate face recognition and additional person- and object-based AI capabilities. KONTXT is based on AI NLP analysis, allowing our customers to analyze and classify multiple billions of messages monthly in real time in order to protect end consumers from spam and fraud. Our focus on AI-based products and our data science resources allows us to be agile, continuously evolving, and rapidly creating new solutions to solve consumers' problems. In addition to our AI solutions, our consumer products also feature GameHouse Original Stories, a unique IP portfolio of free-to-play and subscription mobile games, used by millions of players. Our consumer products also include ringback tones, which we sell to consumers through mobile operators, and the renowned RealPlayer, which introduced streaming to the world in 1995 and today provides millions of people worldwide a powerful way to stream, download, store, organize, and experience the rapidly expanding universe of digital media content. We also create video compression and enhancement technology, which we primarily license to OEMs, including manufacturers of mobile devices, smart TVs, and set-top boxes. Our Segments
We manage our business and report revenue and operating income (loss) in three segments: (1) Consumer Media (2) Mobile Services, and (3) Games.
Within our Consumer Media segment, revenue is derived from the software licensing of our video compression and enhancement, or codec, technologies, including primarily from our prior-generation codec RealMedia Variable Bitrate, or RMVB, as well as our newer codec technology, RealMedia High Definition, or RMHD. We also generate revenue from the sale of our RealPlayer products, including RealPlayer Plus and related products. These products and services are delivered directly to consumers and through partners, such as OEMs and mobile device manufacturers. Our Mobile Services business generates revenue primarily from the sale of subscription services, which include our intercarrier messaging service and ringback tones, as well as through software licenses for the integration of our RealTimes platform and certain system implementations. We generate a significant portion of our revenue from sales within our Mobile Services business to a few mobile carriers and one service partner. Our Mobile Services segment also includes our AI-based growth initiatives, SAFR and KONTXT. Our Games business generates revenue primarily through the development, publishing, and distribution of casual games under the GameHouse and Zylom brands. Games are offered via mobile devices, digital downloads, and subscription play. We derive revenue from consumer purchases of in-game virtual goods within our free-to-play games and advertising on mobile games. In addition, we derive revenue from the sale of individual games and subscription offerings.RealNetworks allocates to its Consumer Media, Mobile Services, and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including, but not limited, to a portion of finance, IT, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items also include restructuring charges and stock compensation expense.
Pending Merger
OnJuly 27, 2022 , the Company entered into the Merger Agreement withGreater Heights and Merger Sub.Mr. Glaser and his affiliates currently beneficially own 38.5% of the Company's outstanding common stock. The Merger Agreement provides, among other things, that subject to the satisfaction or waiver of conditions set forth therein and in accordance with applicable law, the Company will be merged with and into Merger Sub, with Merger Sub continuing as the surviving entity in the merger and as a wholly owned subsidiary ofGreater Heights . At the effective time of the Merger, each share of the Company's Common Stock issued and outstanding as of immediately prior to such effective time of the Merger, other than shares held by the Founder Shareholders and any dissenting shares of the Company's Common Stock (which, for the avoidance of doubt, will be cancelled and retired without any consideration therefor), will be cancelled and retired and converted into the right to receive cash in an amount equal to$0.73 , without interest and subject to any applicable withholding taxes (subject to certain terms and conditions set forth in the Merger Agreement). 19 -------------------------------------------------------------------------------- Consummation of the Merger is subject to the satisfaction or waiver of customary closing conditions, including approval of the Merger Agreement by the Company's stockholders. The transaction is expected to close during the fourth quarter of 2022. For a summary of the proposed merger, see Note 13. Merger Agreement to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q, our Form 8-K filed with theSEC onJuly 28, 2022 , and our definitive proxy statement in connection with the solicitation of proxies to approve the Merger filed with theSEC onNovember 7, 2022 .
COVID-19
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 to be a global pandemic. As the virus spread throughout theU.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 ofSeptember 30, 2022 , we had$9.2 million in unrestricted cash and cash equivalents, compared to$27.1 million as ofDecember 31, 2021 . The 2022 decrease in cash and cash equivalents compared to the prior year end amount was primarily due to our ongoing cash used in operating activities, which totaled$16.4 million for the first nine months of 2022.
Condensed consolidated results were as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Total revenue $ 11,708 $ 14,332 $ (2,624) (18) % $ 36,840 $ 44,781 $ (7,941) (18) %
Cost of revenue 2,787 3,119 (332) (11) % 8,228 10,370 (2,142) (21) %
Gross profit 8,921 11,213 (2,292) (20) % 28,612 34,411 (5,799) (17) %
Gross margin 76 % 78 % 78 % 77 %
Operating expenses 15,734 17,672 (1,938) (11) % 45,301 52,759 (7,458) (14) %
Operating loss $ (6,813) $ (6,459) $ (354) (5) % $ (16,689) $ (18,348) $ 1,659 9 %
In the third quarter of 2022, our total consolidated revenue decreased $2.6
million as compared with the prior-year period. The decrease was due to lower
revenues in our Consumer Media, Games, and Mobile Services segments of $1.3
million , $0.7 million , and $0.5 million , respectively. See below for further
information regarding fluctuations by segment.
Cost of revenue decreased by
Operating expenses decreased by$1.9 million in the quarter endedSeptember 30, 2022 as compared with the prior-year period. The decrease was primarily due to lower salaries and other people-related costs of$2.2 million , lower restructuring charges of$0.9 million , and lower marketing fees of$0.6 million . The decreases were partially offset by higher professional fees of$1.9 million . The higher professional service fees in the quarter endedSeptember 30, 2022 were primarily due to the Company's engagement of legal and financial advisorswho assisted the special committee of our Board of Directors in evaluatingMr. Glaser's acquisition proposal and the pending Merger. We expect to incur additional significant expenses in connection with the completion of the pending Merger. For the nine months endedSeptember 30, 2022 , our total consolidated revenue decreased$7.9 million as compared with the year-earlier period. The decrease was due to lower revenues in our Games, Mobile Services, and Consumer Media segments of$3.0 million ,$2.8 million and$2.1 million , respectively. 20 -------------------------------------------------------------------------------- Cost of revenue decreased by$2.1 million for the nine months endedSeptember 30, 2022 as compared with the year-earlier period, due to decreases in our Mobile Services, Games and Consumer Media segments of$1.2 million ,$0.8 million , and$0.2 million respectively. Operating expenses decreased by$7.5 million in the nine months endedSeptember 30, 2022 as compared with the year-earlier period. The decrease was due primarily to lower restructuring charges of$4.3 million , lower salaries and other people-related costs of$4.6 million , and lower marketing expenses of$1.5 million . These decreases were partially offset by the$1.0 million benefit in the nine months endedSeptember 30, 2021 related to the fair value adjustment of the contingent consideration liability that was settled in the second quarter of 2021. The decreases were also offset by higher professional fees of$2.1 million . The higher professional service fees in the nine months endedSeptember 30, 2022 were primarily due toMr. Glaser's acquisition proposal and the pending Merger. 21 --------------------------------------------------------------------------------
Segment Operating Results
Consumer Media
Consumer Media segment results of operations were as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue $ 1,415 $ 2,763 $ (1,348) (49) % $ 6,025 $ 8,133 $ (2,108) (26) %
Cost of revenue 374 418 (44) (11) % 1,194 1,393 (199) (14) %
Gross profit 1,041 2,345 (1,304) (56) % 4,831 6,740 (1,909) (28) %
Gross margin 74 % 85 % 80 % 83 %
Operating expenses 1,371 1,495 (124) (8) % 4,240 6,028 (1,788) (30) %
Operating income (loss) $ (330) $ 850 $ (1,180) NM $ 591 $ 712 $ (121) (17) %
Total Consumer Media revenue for the quarter ended September 30, 2022 decreased
$1.3 million as compared to the same quarter in 2021. The decrease was due to
lower software license revenues.
Software License
In the quarter ended
Subscription Services
For our subscription services revenues, the
Operating expenses for the quarter ended
Total Consumer Media revenue for the nine months endedSeptember 30, 2022 decreased$2.1 million as compared to the same period in 2021. The decrease was due to lower software license revenues, lower subscription service revenues, and lower product sales. Software License For the nine months endedSeptember 30, 2022 , the decrease in software license revenue of$1.6 million was due primarily to the timing of contract renewals and shipments to existing customers.
Subscription Services
For our subscription services revenue, the
Product Sales
The decrease in product sales of
Cost of revenue for the nine months ended
Operating expenses for the nine months ended
22
--------------------------------------------------------------------------------Mobile Services
Mobile Services segment results of operations were as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2022 2021 $ Change % Change 2022 2021 $Change % Change Revenue$ 5,226 $ 5,772 $ (546) (9) %$ 15,323 $ 18,108 $ (2,785) (15) % Cost of revenue 1,116 1,282 (166) (13) % 3,126 4,291 (1,165) (27) % Gross profit 4,110 4,490 (380) (8) % 12,197 13,817 (1,620) (12) % Gross margin 79 % 78 % 80 % 76 % Operating expenses 5,950 5,890 60 1 % 19,126 18,367 759 4 % Operating loss$ (1,840) $ (1,400) $ (440) (31) %$ (6,929) $ (4,550) $ (2,379) (52) % Total Mobile Services revenue decreased by$0.5 million in the quarter endedSeptember 30, 2022 compared with the prior-year period. The revenue decrease was primarily due to lower subscription services revenues of$1.1 million offset in part by higher software license revenues of$0.5 million .
Software License
For our software license revenue, the increase in revenue for the quarter endedSeptember 30, 2022 as compared to the prior-year period was due to higher sales of our SAFR product of$0.6 million .
Subscription Services
The decline in our subscription service revenue of$1.1 million in the quarter endedSeptember 30, 2022 as compared to the prior-year period was primarily due to lower revenues from our intercarrier messaging service of$0.8 million and our ring back tones business of$0.4 million , offset in part by higher revenues from our KONTXT messaging platform business of$0.1 million .
Cost of revenue decreased by
Operating expenses increased by$0.1 million for the quarter endedSeptember 30, 2022 compared with the prior-year period primarily due to our AI-based growth initiatives. Total Mobile Services revenue decreased by$2.8 million in the nine months endedSeptember 30, 2022 compared with the prior-year period. The revenue decrease was due to lower subscription services revenues of$2.4 million , and lower software license revenues of$0.4 million .
Software License
For our software license revenue, the decrease in revenue for the nine months endedSeptember 30, 2022 as compared to the prior-year period was due primarily to lower sales of our legacy RealTimes platform of$0.2 million .
Subscription Services
The decline in our subscription service revenue of$2.4 million in the nine months endedSeptember 30, 2022 as compared to the prior-year period was due primarily to lower revenues from our ringback tones business of$1.2 million and ICM messaging platform business of$1.4 million , offset in part by higher revenues from our KONTXT messaging platform business of$0.4 million .
Cost of revenue decreased by
Operating expenses increased
23
--------------------------------------------------------------------------------Games
Games segment results of operations were as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue $ 5,067 $ 5,797 $ (730) (13) % $ 15,492 $ 18,540 $ (3,048) (16) %
Cost of revenue 1,288 1,414 (126) (9) % 3,883 4,671 (788) (17) %
Gross profit 3,779 4,383 (604) (14) % 11,609 13,869 (2,260) (16) %
Gross margin 75 % 76 % 75 % 75 %
Operating expenses 3,648 4,844 (1,196) (25) % 11,473 14,791 (3,318) (22) %
Operating income (loss) $ 131 $ (461) $ 592 128 % $ 136 $ (922) $ 1,058 NM
Total Games revenue decreased by $0.7 million for the quarter ended September
30, 2022 as compared with the prior-year period primarily due to a decrease of
$0.5 million in product sales revenue, and lower subscription service revenue of
$0.3 million .
Subscription Services
Our subscription sales decreased
Product Sales
Our product sales decreased
Cost of revenue decreased
Operating expenses decreased$1.2 million in the quarter endedSeptember 30, 2022 when compared with the prior-year period primarily due to lower marketing expenses of$0.5 million , lower people-related costs of$0.4 million and lower professional fees of$0.1 million .
Total Games revenue decreased by
Subscription Services
Our subscription sales decreased
Product Sales
Our product sales decreased
Cost of revenue decreased
Operating expenses decreased$3.3 million in the nine months endedSeptember 30, 2022 when compared with the prior-year period due primarily to lower marketing expenses of$1.5 million , lower people-related costs of$1.4 million and lower professional service fees of$0.5 million .
Corporate
Corporate results of operations were as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Cost of revenue $ 9 $ 5 $ 4 80 % $ 25 $ 15 $ 10 67 %
Operating expenses 4,765 5,443 (678) (12) % 10,462 13,573 (3,111) (23) %
Operating loss $ (4,774) $ (5,448) $ 674 12 % $ (10,487) $ (13,588) $ 3,101 23 %
Operating expenses decreased by
24
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in part by higher professional service fees of
Operating expenses decreased by$3.1 million for the nine months endedSeptember 30, 2022 compared with the year-earlier period, primarily due to lower restructuring costs of$4.3 million and salaries and benefits of$2.5 million . These decreases were partially offset by the$1.0 million benefit in the nine months endedSeptember 30, 2021 related to the fair value adjustment of the contingent consideration liability, which was settled in the second quarter of 2021. The decreases were also offset by higher professional service fees of$3.1 million , primarily due toMr. Glaser's acquisition proposal and the pending Merger.
Consolidated Operating Expenses
Our operating expenses consist primarily of salaries and related personnel costs
including stock-based compensation, consulting fees associated with product
development, sales commissions, professional service fees, advertising costs,
changes in the fair value of the contingent consideration liability, and
restructuring charges. Operating expenses were as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Research and development $ 4,870 $ 5,250 $ (380) (7) % $ 16,000 $ 17,818 $ (1,818) (10) %
Sales and marketing 4,726 7,177 (2,451) (34) % 13,810 17,573 (3,763) (21) %
General and administrative 6,020 4,228 1,792 42 % 14,918 13,502 1,416 10 %
Fair value adjustments to
contingent consideration liability - - - NM - (1,040) 1,040 (100) %
Restructuring and other charges 118 1,017 (899) (88) % 573 4,906 (4,333) (88) %
Total consolidated operating
expenses $ 15,734 $ 17,672 $ (1,938) (11) % $ 45,301 $ 52,759 $ (7,458) (14) %
Research and development expenses decreased by
Research and development expenses decreased$1.8 million for the nine months endedSeptember 30, 2022 as compared with the year-earlier period, primarily due to a reduction in salaries and other people related costs. Sales and marketing expenses decreased by$2.5 million in the quarter endedSeptember 30, 2022 as compared with the prior-year period, due to a reduction in salaries and other people related costs of$1.5 million , lower marketing expense of$0.6 million and lower professional service fees of$0.3 million . Sales and marketing expenses decreased$3.8 million for the nine months endedSeptember 30, 2022 as compared with the year-earlier period, primarily due to lower marketing expenses of$1.5 million , a reduction in salaries and other people related costs of$1.4 million , and a$0.9 million decrease in professional service fees. General and administrative expenses increased by$1.8 million in the quarter endedSeptember 30, 2022 as compared with the prior-year period, primarily due to higher professional service fees of$2.2 million , primarily related toMr. Glaser's acquisition proposal and the pending Merger. This increase was offset in part by lower salaries and other people-related costs of$0.4 million . General and administrative expenses increased by$1.4 million for the nine months endedSeptember 30, 2022 as compared with the year-earlier period, primarily due to higher professional service fees of$3.0 million , primarily related toMr. Glaser's acquisition proposal and the pending Merger, partially offset by lower people-related costs of$1.4 million . The fair value adjustment to the contingent consideration liability was a$1.0 million benefit in the nine months endedSeptember 30, 2021 . This liability was settled in the second quarter of 2021. Restructuring and other charges consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts. For additional details on these charges, see Note 8. Restructuring and Other Charges. 25 --------------------------------------------------------------------------------
Other Income (Expense)
Other income (expense), net was as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2022 2021 $ Change 2022 2021 $ Change
Interest expense $ (3) $ (27) $ 24 $ (47) $ (146) $ 99
Interest income 7 7 - 21 27 (6)
Loss on equity and other investments, net (207) (1,229) 1,022 (806) (6,070) 5,264
Gain on forgiveness of Paycheck Protection
Program loan - - - - 2,897 (2,897)
Other income, net 364 46 318 651 2,066 (1,415)
Total other income (expense), net $ 161 $ (1,203) For the quarter and nine months endedSeptember 30, 2022 , the Loss on equity and other investments, net, was$0.2 million and$0.8 million , respectively. These amounts are related to Scener as further discussed in Note 12.Related Party Transactions. The$1.2 million and$6.1 million Loss on equity and other investments, net, for the quarter and nine months endedSeptember 30, 2021 , respectively, primarily reflects unrealized losses on equity securities for the shares acquired from the sale of Napster inDecember 2020 . These shares were acquired by a third-party in the first quarter of 2022. OnJune 30, 2021 , we deconsolidated Scener, previously a consolidated subsidiary ofRealNetworks , and recognized a non-cash gain of$2.0 million within Other income, net on the condensed consolidated statement of operations. The remaining fluctuations in Other income, net primarily relates to foreign exchange gains and losses. Income Taxes
We recognized income tax expense of
As of
The majority of our tax expense is due to income in our foreign jurisdictions. In addition, we have not benefited from losses in theU.S. and certain foreign jurisdictions as of the third quarter of 2022. We generate income in a number of foreign jurisdictions, some of which have higher or lower tax rates relative to theU.S. federal statutory rate. Our tax expense could fluctuate significantly on a quarterly basis to the extent income is less than anticipated in countries with lower statutory tax rates and more than anticipated in countries with higher statutory tax rates. For the quarter and nine months endedSeptember 30, 2022 , decreases in tax expense from income generated in foreign jurisdictions with lower tax rates in comparison to theU.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 theU.S. federal statutory rate. The effect of differences in foreign tax rates on the Company's tax expense for the quarter endedSeptember 30, 2022 was minimal. We file numerous consolidated and separate income tax returns in theU.S. , including federal, state and local returns, as well as in foreign jurisdictions. With few exceptions, we are no longer subject toUnited States federal income tax examinations for tax years prior to 2013 or state, local or foreign income tax examinations for years prior to 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.
New Accounting Pronouncements
See Note 2. Recent Accounting Pronouncements, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q.
Liquidity and Capital Resources
The following summarizes working capital, excluding cash and cash equivalents, cash and cash equivalents, and restricted cash equivalents (in thousands):
September 30,
2022 December 31, 2021
Working capital, excluding cash and cash equivalents $ (2,950) $ (3,952)
Cash and cash equivalents 9,156 27,109
Restricted cash equivalents 1,500 1,630
Cash and cash equivalents decreased from
26
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As of
The following summarizes cash flow activity (in thousands):
Nine
Months Ended
2022 2021
Cash used in operating activities $ (16,363) $ (11,416)
Cash used in investing activities (806) (1,116)
Cash provided by (used in) financing activities (102) 17,962
Cash used in operating activities was $4.9 million higher in the nine months
ended September 30, 2022 as compared to the same period in 2021, due primarily
to a higher amount of incremental cash used to fund the net change in working
capital.
Cash used by investing activities for the nine months ended September 30, 2022
included fixed asset purchases of $0.2 million . Also, for the nine months ended
September 30, 2022 , cash used by investing activities included an investment of
$0.6 million into Scener in exchange for additional preferred stock. Since its
inception, Scener has continued to record operating losses. See Note 12. Related
Party Transactions for additional information about Scener.
Cash used by investing activities for the nine months ended September 30, 2021
consisted of fixed asset purchases of $0.3 million . Also, for the nine months
ended September 30, 2021 , cash used by investing activities included the impact
of the deconsolidation of Scener.
Cash used in financing activities for the nine months ended September 30, 2022
was insignificant. Cash provided by financing activities for the nine months
ended September 30, 2021 was $18.0 million . This cash inflow was due to the net
proceeds from the April 2021 equity offering of $20.1 million and $0.4 million
issuance of common stock related to exercising of stock options, net of tax
payments for shares withheld upon vesting of restricted stock, partially offset
by the $2.5 million cash payment for settlement of the contingent consideration
liability.
Two customers accounted for more than 10% of trade accounts receivable as of
September 30, 2022 , with the customers accounting for 19% and 10% each. One
customer accounted for more than 10% of trade accounts receivable at
December 31, 2021 , with the customer accounting for 23% of trade accounts
receivable. Two customers accounted for 28% of consolidated revenue, or
$10.2 million , during the nine months ended September 30, 2022 . Two customers
accounted for 30% of consolidated revenue, or $13.5 million , during the nine
months ended September 30, 2021 .
While we currently have no planned significant capital expenditures for the remainder of 2022 other than those in the ordinary course of business, we do have contractual commitments for future payments related to office leases.
We expect to incur additional professional fees in connection with the pending Merger. Additionally, if the Merger Agreement is terminated under certain specified circumstances, we may be required to pay termination fees as discussed in Note 13. Merger Agreement.RealNetworks is a party to a Loan Agreement with a third-party financial institution for a revolving line of credit, as discussed in Note 7. Debt. Under the Loan Agreement, as amended, borrowings may not exceed$6.5 million and are reduced by a$0.4 million standby letter of credit entered into with the bank in connection with certain lease agreements. The borrowing base for the Revolver is comprised of eligible accounts receivable and direct to consumer deposits. EffectiveAugust 1, 2022 , the Revolver was extended toAugust 1, 2024 . Based on the amount of eligible accounts receivable and direct to consumer deposits, the amount available for borrowing as ofSeptember 30, 2022 was$3.7 million . AtSeptember 30, 2022 , we had no outstanding draws on the Revolver. We have evaluated our current liquidity position in light of our history of declining revenue and operating losses as well as our near-term expectations of net negative cash flows from operating activities, which includes our ongoing expenses related to the pending Merger. Our operating forecast is subject to inherent risks and uncertainties and is partly dependent on factors that are outside of our control, including the ongoing effects of the coronavirus pandemic and related impacts on global commerce and financial markets. These conditions raise substantial doubt about our ability to continue as a going concern within 12 months of the date of this filing. We intend to use our existing unrestricted cash balances and draw on the current availability of our Revolver in the near future. However, these sources of funds may not be sufficient to meet our short-term working capital needs. We have active plans to mitigate these conditions. Specifically, we plan to reduce negative cash flow through operating expense reductions. In addition, we are evaluating various strategic opportunities, which may include selling certain businesses or product lines, soliciting external investment into certain of our businesses, or seeking other strategic partnerships. Our plans are subject to inherent risks and uncertainties. Accordingly, there can be no assurance that our plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.
For our anticipated cash needs for working capital and capital expenditures within and beyond the next 12 months, we may seek to raise additional funds through public or private equity financing, or through other sources such as our existing
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credit facility. Such sources of funding may or may not be available to us on
commercially reasonable terms. The sale of additional equity securities could
result in dilution to our shareholders. In addition, in the future, we may enter
into cash or stock acquisition transactions or other strategic transactions that
could reduce cash available to fund our operations or result in dilution to
shareholders.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Our critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year endedDecember 31, 2021 . Due to the coronavirus pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
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