RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Quarter Ended
June 30,

Six Months Ended
June 30,

2018

2017

2018

2017

 (in thousands, except per share data)

 Net revenue

$

15,724

$

21,605

$

35,374

$

41,296

 Cost of revenue

4,625

6,287

9,761

12,856

           Gross profit

11,099

15,318

25,613

28,440

 Operating expenses:

       Research and development

7,652

7,584

15,346

14,933

       Sales and marketing

4,883

5,496

10,880

12,651

       General and administrative

5,339

5,254

10,940

10,557

       Restructuring and other charges

187

150

688

1,714

       Lease exit and related benefit

(129)

—

(454)

—

           Total operating expenses

17,932

18,484

37,400

39,855

 Operating loss

(6,833)

(3,166)

(11,787)

(11,415)

 Other income (expenses):

       Interest income, net

111

109

198

237

       Equity in net loss of Napster

—

(349)

—

(1,097)

       Other income (expense), net

(42)

(13)

(83)

(239)

           Total other income (expense), net

69

(253)

115

(1,099)

 Loss from continuing operations before income taxes

(6,764)

(3,419)

(11,672)

(12,514)

 Income tax expense

166

360

436

815

Loss from continuing operations

(6,930)

(3,779)

(12,108)

(13,329)

Net income from discontinued operations, net of tax

—

393

—

519

 Net loss

$

(6,930)

$

(3,386)

$

(12,108)

$

(12,810)

Net income (loss) per share - Basic:

Continuing operations

$

(0.18)

$

(0.10)

$

(0.32)

$

(0.35)

Discontinued operations

—

0.01

—

0.01

Net loss per share - Basic

$

(0.18)

$

(0.09)

$

(0.32)

$

(0.34)

Net income (loss) per share - Diluted:

Continuing operations

$

(0.18)

$

(0.10)

$

(0.32)

$

(0.35)

Discontinued operations

—

0.01

—

0.01

Net loss per share - Diluted

$

(0.18)

$

(0.09)

$

(0.32)

$

(0.34)

 Shares used to compute basic net income (loss) per share

37,577

37,103

37,514

37,067

 Shares used to compute diluted net income (loss) per share

37,577

37,103

37,514

37,067

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

June 30,
 2018

December 31,
 2017

 (in thousands)

ASSETS

 Current assets:

 Cash and cash equivalents

$

39,080

$

51,196

 Short-term investments

3,053

8,779

 Trade accounts receivable, net

13,127

12,689

 Deferred costs, current portion

375

426

 Prepaid expenses and other current assets

5,250

3,715

  Current assets of discontinued operations

—

17,456

   Total current assets

60,885

94,261

 Equipment and software

41,793

46,417

 Leasehold improvements

3,511

3,536

   Total equipment, software, and leasehold improvements

45,304

49,953

 Less accumulated depreciation and amortization

42,083

46,093

   Net equipment, software, and leasehold improvements

3,221

3,860

 Restricted cash equivalents

1,880

2,400

 Other assets

5,844

5,588

 Deferred costs, non-current portion

679

955

 Deferred tax assets, net

1,036

1,047

 Other intangible assets, net

215

325

 Goodwill

17,120

13,060

 Total assets

$

90,880

$

121,496

 LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:

 Accounts payable

$

2,744

$

3,785

 Accrued and other current liabilities

12,261

12,365

 Commitment to Napster

2,750

2,750

 Deferred revenue, current portion

2,155

3,097

Current liabilities of discontinued operations

—

17,107

 Total current liabilities

19,910

39,104

 Deferred revenue, non-current portion

353

443

 Deferred rent

1,023

982

 Deferred tax liabilities, net

170

19

 Other long-term liabilities

1,054

1,775

 Total liabilities

22,510

42,323

 Shareholders' equity

68,370

79,173

 Total liabilities and shareholders' equity

$

90,880

$

121,496

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended
June 30,

2018

2017

 (in thousands)

 Cash flows from operating activities:

 Net loss

$

(12,108)

$

(12,810)

 Adjustments to reconcile net loss to net cash used in operating activities:

  Depreciation and amortization

1,231

1,757

  Stock-based compensation

1,614

2,297

  Equity in net loss of Napster

—

1,097

  Deferred income taxes, net

(12)

(40)

  Fair value of warrants granted in 2015 and 2017, net of subsequent mark to market adjustments in 2018 and 2017

50

(417)

  Net change in certain operating assets and liabilities

(3,505)

(5,830)

    Net cash used in operating activities

(12,730)

(13,946)

 Cash flows from investing activities:

  Purchases of equipment, software, and leasehold improvements

(580)

(417)

  Purchases of short-term investments

—

(13,905)

  Proceeds from sales and maturities of short-term investments

5,726

32,617

  Acquisition, net of cash acquired

(4,192)

—

  Advance to Napster

—

(1,500)

  Net cash provided by investing activities

954

16,795

 Cash flows from financing activities:

  Proceeds from issuance of common stock (stock options and stock purchase plan)

114

130

  Tax payments from shares withheld upon vesting of restricted stock

(243)

(192)

 Net cash used in financing activities

(129)

(62)

 Effect of exchange rate changes on cash, cash equivalents and restricted cash

(731)

1,347

 Net increase (decrease) in cash, cash equivalents and restricted cash

(12,636)

4,134

 Cash, cash equivalents and restricted cash, beginning of period

53,596

36,421

 Cash, cash equivalents and restricted cash, end of period

$

40,960

$

40,555

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

2018

2017

 Q2

Q1

 Q4

 Q3

 Q2

 Q1

 (in thousands)

Net Revenue by Line of Business

Consumer Media (A)

$

3,884

$

5,483

$

5,752

$

4,197

$

6,951

$

5,669

Mobile Services (B)

6,719

8,704

7,155

7,678

7,720

8,199

Games (C)

5,121

5,463

5,958

6,682

6,934

5,823

     Total net revenue

$

15,724

$

19,650

$

18,865

$

18,557

$

21,605

$

19,691

Net Revenue by Product

Consumer Media

- Software License (D)

$

1,808

$

3,337

$

3,595

$

2,012

$

4,741

$

3,295

- Subscription Services (E)

1,225

1,285

1,362

1,434

1,531

1,564

- Product Sales (F)

299

340

350

322

261

377

- Advertising & Other (G)

552

521

445

429

418

433

Mobile Services

- Software License (H)

469

1,335

388

688

642

619

- Subscription Services (I)

6,250

7,369

6,767

6,990

7,078

7,580

Games

- Subscription Services (J)

2,689

2,693

2,707

2,708

2,781

2,828

- Product Sales (K)

1,953

2,402

3,086

3,851

4,007

2,862

- Advertising & Other (L)

479

368

165

123

146

133

     Total net revenue

$

15,724

$

19,650

$

18,865

$

18,557

$

21,605

$

19,691

Net Revenue by Geography

United States

$

7,646

$

11,434

$

10,120

$

10,084

$

10,889

$

9,740

Rest of world

8,078

8,216

8,745

8,473

10,716

9,951

     Total net revenue

$

15,724

$

19,650

$

18,865

$

18,557

$

21,605

$

19,691

Net Revenue by Line of Business

(A) The Consumer Media division primarily includes revenue from the licensing of our portfolio of video codec technologies. Also included is RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, sales of RealPlayer Plus software to consumers, and consumer subscriptions such as RealPlayer Plus and SuperPass.

(B) The Mobile Services division primarily includes revenue from SaaS services and sales of professional services provided to mobile carriers.

(C) The Games division primarily includes revenue from sales of mobile and PC games, online games subscription services, and advertising on games sites and social network sites.

Net Revenue by Product

(D) Software licensing revenue within Consumer Media includes revenues from licenses of our video codec technologies.

(E) Subscriptions revenue within Consumer Media includes revenue from subscriptions such as our RealPlayer Plus and SuperPass offerings.

(F) Product sales within Consumer Media includes sales of RealPlayer Plus software to consumers.

(G) Advertising & other revenue within Consumer Media includes distribution of third-party software products and advertising on RealPlayer websites.

(H) Software license revenue within Mobile Services includes revenue from our integrated RealTimes platform.

(I) Subscription services revenue within Mobile Services includes revenue from ringback tones and our intercarrier messaging services, as well as from related professional services provided to mobile carriers.

(J) Subscription services revenue within Games includes revenue from online games subscriptions.

(K) Product sales revenue within Games includes revenue from retail and wholesale games-related revenue and sales of mobile games.

(L) Advertising & other revenue within Games includes advertising on games sites and social network sites.

RealNetworks, Inc. and Subsidiaries

Segment Results of Operations and Reconciliation to non-GAAP Contribution Margin

(Unaudited)

2018

2017

2018

2017

Q2

Q1

Q2

YTD

YTD

 (in thousands)

Consumer Media

Net revenue

$

3,884

$

5,483

$

6,951

$

9,367

$

12,620

Cost of revenue

1,028

993

1,159

2,021

2,564

   Gross profit

2,856

4,490

5,792

7,346

10,056

   Gross margin

74

%

82

%

83

%

78

%

80

%

Operating expenses

3,439

3,918

3,730

7,357

7,740

Operating income (loss), a GAAP measure

$

(583)

$

572

$

2,062

$

(11)

$

2,316

Depreciation and amortization

51

46

159

97

326

  Contribution margin, a non-GAAP measure

$

(532)

$

618

$

2,221

$

86

$

2,642

Mobile Services

Net revenue

$

6,719

$

8,704

$

7,720

$

15,423

$

15,919

Cost of revenue

2,134

2,316

2,426

4,450

5,616

   Gross profit

4,585

6,388

5,294

10,973

10,303

   Gross margin

68

%

73

%

69

%

71

%

65

%

Operating expenses

6,969

7,366

6,705

14,335

14,824

Operating income (loss), a GAAP measure

$

(2,384)

$

(978)

$

(1,411)

$

(3,362)

$

(4,521)

Acquisitions related intangible asset amortization

91

92

201

183

397

Depreciation and amortization

155

180

175

335

378

Contribution margin, a non-GAAP measure

$

(2,138)

$

(706)

$

(1,035)

$

(2,844)

$

(3,746)

Games

Net revenue

$

5,121

$

5,463

$

6,934

$

10,584

$

12,757

Cost of revenue

1,456

1,817

2,679

3,273

4,616

   Gross profit

3,665

3,646

4,255

7,311

8,141

   Gross margin

72

%

67

%

61

%

69

%

64

%

Operating expenses

5,095

4,917

5,090

10,012

10,037

Operating income (loss), a GAAP measure

$

(1,430)

$

(1,271)

$

(835)

$

(2,701)

$

(1,896)

Acquisitions related intangible asset amortization

20

—

25

20

52

Depreciation and amortization

146

165

157

311

298

   Contribution margin, a non-GAAP measure

$

(1,264)

$

(1,106)

$

(653)

$

(2,370)

$

(1,546)

Corporate

Cost of revenue

$

7

$

10

$

23

$

17

$

60

   Gross profit

(7)

(10)

(23)

(17)

(60)

   Gross margin

N/A

N/A

N/A

N/A

N/A

Operating expenses

2,429

3,267

2,959

5,696

7,254

Operating income (loss), a GAAP measure

$

(2,436)

$

(3,277)

$

(2,982)

$

(5,713)

$

(7,314)

Other income (expense), net

(42)

(41)

(13)

(83)

(239)

Depreciation and amortization

148

137

119

285

306

Restructuring and other charges

187

501

150

688

1,714

Stock-based compensation

457

1,157

863

1,614

2,297

Lease exit and related benefit

(129)

(325)

—

(454)

—

   Contribution margin, a non-GAAP measure

$

(1,815)

$

(1,848)

$

(1,863)

$

(3,663)

$

(3,236)

RealNetworks, Inc. and Subsidiaries

Reconciliation of Net income (loss) from continuing operations to adjusted EBITDA, a non-GAAP measure

(Unaudited)

2018

2017

2018

2017

 Q2

 Q1

 Q2

 YTD

 YTD

(in thousands)

Reconciliation of GAAP Net income (loss) from continuing operations to adjusted EBITDA:

Net income (loss) from continuing operations

$

(6,930)

$

(5,178)

$

(3,779)

$

(12,108)

$

(13,329)

Income tax expense (benefit)

166

270

360

436

815

Interest income, net

(111)

(87)

(109)

(198)

(237)

Equity in net loss of Napster

—

—

349

—

1,097

Acquisitions related intangible asset amortization

111

92

226

203

449

Depreciation and amortization

500

528

610

1,028

1,308

Restructuring and other charges

187

501

150

688

1,714

Stock-based compensation

457

1,157

863

1,614

2,297

Lease exit and related benefit

(129)

(325)

—

(454)

—

   Adjusted EBITDA, a non-GAAP measure

$

(5,749)

$

(3,042)

$

(1,330)

$

(8,791)

$

(5,886)