Innventure, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF INNVENTURE Unless the context otherwise requires, references in this section to "Innventure", "we", "us", "our" and "the Company" refer to the business and operations of Innventure LLC and its consolidated subsidiaries for all periods prior to the Closing, and to the business and operations of Innventure, Inc. and its consolidated subsidiaries for all periods after the Closing. Unless otherwise indicated, all dollar amounts ("$") are expressed in thousands. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes as of September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023 included in Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q") and our audited consolidated financial statements and related notes as of and for the year ended December 31, 2023 included in our definitive proxy statement/consent solicitation statement/prospectus, dated September 10, 2024 (the "Proxy Statement/Prospectus"). This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below in this section and those discussed in the sections titled "Risk Factors" and "Cautionary Statement Regarding Forward–Looking Statements" included elsewhere in this Form 10-Q. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview Innventure founds, funds, and operates companies with a focus on transformative, sustainable technology solutions acquired or licensed from MNCs. We are owner-operators who take what we believe to be breakthrough technologies from early evaluation to scaled commercialization utilizing an approach designed to help mitigate risk as we build disruptive companies that we believe have the potential to achieve a target enterprise value of at least $1 billion. When we say “disruptive,” we mean innovations that, in our opinion, have the ability to significantly change the way businesses, industries, markets, and/or consumers operate. We have launched three such companies since inception: PureCycle Technologies, Inc. (“PureCycle” or “PCT”) in late 2015 (technology sourced from P&G), AeroFlexx, LLC (“AeroFlexx” or “AFX”) in 2018 (technology sourced from P&G), and Accelsius Holdings LLC (“Accelsius” or “ACC”) in 2022 (technology sourced from Nokia). PureCycle became a publicly traded company in 2021 and Innventure no longer has an economic interest in PureCycle. Innventure’s approach to identifying and commercializing disruptive technology opportunities has a multidecade history and is designed to help mitigate the risks associated with building start-up businesses by sourcing technology from MNCs. One important part of our approach is our existing and ongoing collaboration with MNCs. These relationships give us access to disruptive opportunities, a combination of thoroughly researched and well-protected technology solutions that potentially satisfy unmet market needs, along with market data and customer insights unavailable to most new ventures. We use our systematic, repeatable DownSelect process to analyze each opportunity across a range of key success factors, including: (1) the disruptive potential, (2) the likelihood for accelerated early adoption driven by economic value creation, (3) the potential to materially address sustainability issues and drive economic value for business-to-business customers, (4) the ability to create sustainable competitive advantages, (5) the projected ability to generate rapid, sizable financial returns and (6) the potential to create target enterprise value of at least $1 billion. DownSelect uses the proprietary MNC market and customer data along with our own rigorous analytics to assess each opportunity and seeks opportunities for the MNC to help accelerate early market adoption by becoming early customers or offering channel access. When an opportunity satisfies our DownSelect criteria, we seek to acquire or license the MNC technology solution and use the initial business plans developed during our DownSelect process as the basis to launch a new “Innventure Company” with funding from our balance sheet. From an investor perspective, this model is intended to bring founder shares of a company with a target enterprise value of at least $1 billion onto the Innventure balance 35 sheet, which we believe can provide excellent potential returns to Innventure shareholders as described in more detail in this section. Historically, and prior to the business combination, the Innventure model has targeted exits for our new companies at 5-7 years after inception through a sale, initial public offering or merger, including a merger with a special purpose acquisition company. We now believe this approach can result in exiting companies prior to their maximum shareholder value. As we continue to advance the Innventure model, we are moving to an approach designed to allow us to build and hold companies, generating positive cash flows of one or more majority-owned Operating Companies and potentially maximizing value for investors and other stakeholders. As part of the new “Disruptive Conglomerate Model,” Innventure intends to retain majority (or sole) ownership. We believe that holding companies allows those companies to mature further and gives us the opportunity to derive greater value from those companies over the long term. While a sale or other disposition of one or more of our companies could occur in the future, exit transactions are not expected to be a factor in the business plans for AeroFlexx, Accelsius and Innventure’s future subsidiary companies that Innventure founds, funds, and operates going forward (the “Operating Companies”). We are currently deploying this advanced approach with Accelsius, and we will continue to deploy it following the business combination. The Business Combination On October 24, 2023, Learn CW Investment Corporation, ("Learn CW") and Innventure LLC entered into a Business Combination Agreement with Learn SPAC HoldCo, Inc., ("Holdco"), LCW Merger Sub, Inc., a direct, wholly-owned subsidiary of Holdco ("LCW Merger Sub") and Innventure Merger Sub, LLC, a direct, wholly-owned subsidiary of Holdco ("Innventure Merger Sub" and, together with LCW Merger Sub, the "Merger Subs"). On September 30, 2024, the stockholders of Learn CW approved the business combination, and the business combination closed on October 2, 2024 (the "Closing Date"). The business combination was preliminarily accounted for as a reverse recapitalization and Innventure LLC has been determined to be the accounting acquirer and the Predecessor under the preliminary analysis. The information provided in this Form 10-Q only reflects the financial condition and results of operations of the Predecessor. Pursuant to the Business Combination Agreement, among other things, (i) LCW Merger Sub merged with and into Learn CW (the "LCW Merger"), with Learn CW as the surviving company of the LCW Merger and (ii) Innventure Merger Sub merged with and into Innventure (the “Innventure Merger” and together with the LCW Merger, the "Mergers"), with Innventure LLC as the surviving entity of the Innventure Merger. Following the Mergers, each of Learn CW and Innventure LLC became a subsidiary of Holdco, and Holdco became a publicly traded company. Holdco changed its name to Innventure, Inc. in connection with the business combination. Summary Segments Based on the allocation of resources and assessment of financial performance by our Chief Executive Officer (who has been determined to be our Chief Operating Decision Maker), we have two reportable segments: (i) Corporate ("Corporate") and (ii) Technology ("Technology"). Highlights The three and nine months ended September 30, 2024 includes the following highlights: • Innventure's Technology segment began generating revenue related to its cooling systems for data centers. • Total operational expenses of approximately $3,637 and $10,483, respectively, relate to public readiness activities connected with the business combination for the three and nine months ended September 30, 36 2024. Increased headcount within both the Corporate and Technology segments accounted for approximately $1,793 and $7,000 for the three and nine months ended September 30, 2024, respectively. • Cash inflows from equity raises were approximately $26,981 compared to net cash outflows related to operating, investing and remaining financing activity of $13,259 for the nine months ended September 30, 2024. • Innventure filed several amendments to its registration statement on Form S-4 with the U.S. Securities and Exchange Commission (the “SEC”) during the three months ended September 30, 2024 as it progressed toward completion of the business combination and shareholders of Learn CW voted to approve the business combination on September 30, 2024, after receiving effectiveness notice from the SEC. As noted above, the business combination was subsequently completed on October 2, 2024. Results of Operations for the Nine Months Ended September 30, 2024 and 2023 (in thousands, except as otherwise noted) (Unaudited) The following table provides our consolidated operating results for the periods indicated and percentage of revenue for each line item. Nine Months Ended September 30, 2024 2023 Change ($ in thousands) ($) (%) ($) (%) ($) (%) Total Revenue 764 100.0 % 893 100.0 % (129) (14.4) % Operating Expenses Cost of sales 777 101.7 % — — % 777 100.0 % General and administrative 25,323 3,314.5 % 9,878 1,106.2 % 15,445 156.4 % Sales and marketing 4,178 546.9 % 1,901 212.9 % 2,277 119.8 % Research and development 5,978 782.5 % 2,822 316.0 % 3,156 111.8 % Total Operating Expenses 36,256 4,745.5 % 14,601 1,635.1 % 21,655 148.3 % Loss from Operations (35,492) (4,645.5) % (13,708) (1,535.1) % (21,784) 158.9 % Total Non-operating (Expense) Income 9,011 1,179.5 % (4,243) (475.1) % 13,254 (312.4) % Income tax expense — — % — — % — nm* Net Loss (26,481) (3,466.1) % (17,951) (2,010.2) % (8,530) 47.5 % Less: Loss attributable to non-controlling interest (11,762) (1,539.5) % (101) (11.3) % (11,661) 11,545.5 % Net Loss Attributable to Innventure LLC Unitholders $ (14,719) (1,926.6) % $ (17,850) (1,998.9) % $ 3,131 (17.5) % Other comprehensive income (loss), net of taxes: Unrealized loss on AFS debt securities - related party (2,373) (310.6) % — — % (2,373) 100.0 % Total comprehensive loss, net of taxes (28,854) (3,776.7) % (17,951) (2,010.2) % (10,903) 60.7 % Less: Comprehensive loss attributable to non-controlling interest (11,762) (1,539.5) % (101) (11.3) % (11,661) 11,545.5 % Net Comprehensive Loss Attributable to Innventure LLC Unitholders (17,092) (2,237.2) % (17,850) (1,998.9) % 758 (4.2) % 37 * not meaningful Revenue Revenue was $764 for the nine months ended September 30, 2024, as compared to $893 for the nine months ended September 30, 2023, a decrease of $129, or 14.4%. The decrease was primarily due to $225 of non-recurring consulting revenue generated to certain third parties for the nine months ended September 30, 2023. The decrease was partially offset by new product sales within the Technology segment during the nine months ended September 30, 2024. Cost of Sales Cost of sales was $777 for the nine months ended September 30, 2024 as compared to $— for the nine months ended September 30, 2023, an increase of $777, or 100.0%. This increase is due to the fact that the Technology segment was pre-revenue in 2023 and started generating revenue from product sales during the nine months ended September 30, 2024. Cost of sales relate to those costs incurred to generate the new product sale revenue. General and Administrative General and administrative expense was $25,323 for the nine months ended September 30, 2024 as compared to $9,878 for the nine months ended September 30, 2023, an increase of $15,445, or 156.4%. This increase in expenditure was primarily attributed to an increase in professional services, legal fees, and consulting fees related to the business combination. The remaining increase in expenditure was due to increased employee costs as a result of increased headcount. Sales and Marketing Sales and marketing expense was $4,178 for the nine months ended September 30, 2024 as compared to $1,901 for the nine months ended September 30, 2023, an increase of $2,277, or 119.8%. This was primarily due to increased compensation costs for both the Technology and Corporate segments (as a result of increased headcount), increases in public relations expenses, website expenses and marketing efforts and events. The Technology segment's commission expenses related to product revenue also contributed to the increase, as the segment’s first sales occurred in 2024. Research and Development Research and Development ("R&D") expense was $5,978 for the nine months ended September 30, 2024 as compared to $2,822 for the nine months ended September 30, 2023, an increase of $3,156 or 111.8%. This was primarily due to an increase in employee-related costs in the Technology segment and an increase in new product development costs also in the Technology segment. Total Non-operating (Expense) Income Total non-operating income was $9,011 for the nine months ended September 30, 2024 as compared to total non-operating expense of $4,243 for the nine months ended September 30, 2023, a net change of $13,254, or 312.4%. This was primarily due to an increase in the value of exchange traded investments in the current period as opposed to a decrease in the prior period. Additionally, equity method investment income was recognized due to Innventure's allocation of larger unrealized gains on the Innventus ESG Fund I, L.P. (the “ESG Fund”), offset by Innventure's portion of allocated loss on the AeroFlexx investment. These increases in income were partially offset by higher interest expense in the current period due to the debt financing as well as the loss on the conversion of promissory notes that was recognized in the first quarter of 2024. Loss Attributable to Non-controlling Interest 38 Loss attributable to non-controlling interest was $11,762 for the nine months ended September 30, 2024, as compared to $101 for the nine months ended September 30, 2023, an increase of $11,661, or 11,545.5%. This was due to the increase in Technology segment loss subject to allocable percentage during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, as well as an increase in total number of non-controlling interest unitholders. Other Comprehensive Income/Loss Other comprehensive loss was $2,373 for the nine months ended September 30, 2024, as compared to $— for the nine months ended September 30, 2023, an increase of $2,373, or 100.0%. This was due to the change in fair value of the new investment in debt securities of a related party which are classified as available-for-sale. Results of Operations for the Three Months Ended September 30, 2024 and 2023 (in thousands, except as otherwise noted) (Unaudited) The following table provides our consolidated operating results for the periods indicated and percentage of revenue for each line item. 39 Three Months Ended September 30, 2024 2023 Change ($ in thousands) ($) (%) ($) (%) ($) (%) Total Revenue 317 100.0 % 274 100.0 % 43 15.7 % Operating Expenses Cost of sales 777 245.1 % — — % 777 100.0 % General and administrative 9,052 2,855.5 % 4,054 1,479.6 % 4,998 123.3 % Sales and marketing 1,629 513.9 % 696 254.0 % 933 134.1 % Research and development 2,533 799.1 % 1,240 452.6 % 1,293 104.3 % Total Operating Expenses 13,991 4,413.6 % 5,990 2,186.1 % 8,001 133.6 % Loss from Operations (13,674) (4,313.6) % (5,716) (2,086.1) % (7,958) 139.2 % Total Non-operating (Expense) Income 6,033 1,903.2 % (13,200) (4,817.5) % 19,233 (145.7) % Income tax expense — — % — — % — nm* Net Loss (7,641) (2,410.4) % (18,916) (6,903.6) % 11,275 (59.6) % Less: Loss attributable to non-controlling interest (5,430) (1,712.9) % (45) (16.4) % (5,385) 11,966.7 % Net Loss Attributable to Innventure LLC Unitholders (2,211) (697.5) % (18,871) (6,887.2) % 16,660 (88.3) % Other comprehensive income (loss), net of taxes: Unrealized loss on AFS debt securities - related party (2,373) (748.6) % — — % (2,373) 100.0 % Total comprehensive loss, net of taxes (10,014) (3,159.0) % (18,916) (6,903.6) % 8,902 (47.1) % Less: Comprehensive loss attributable to non-controlling interest (5,430) (1,712.9) % (45) (16.4) % (5,385) 11,966.7 % Net Comprehensive Loss Attributable to Innventure LLC Unitholders (4,584) (1,446.1) % (18,871) (6,887.2) % 14,287 (75.7) % * not meaningful Revenue Revenue was $317 for the three months ended September 30, 2024, as compared to $274 for the three months ended September 30, 2023, an increase of $43 or 15.7%. The increase was primarily due to new product sales within the Technology segment. This was partially offset by non-recurring consulting revenue generated to certain third parties for the three months ended September 30, 2023. Cost of Sales Cost of sales expense was $777 for the three months ended September 30, 2024 as compared to $— for the three months ended September 30, 2023, an increase of $777, or 100.0%. This increase is due to the fact that Accelsius was pre-revenue in 2023 and started generating revenue during the three months ended September 30, 2024. Cost of sales relate to those costs incurred to generate the new product sale revenue. 40 General and Administrative General and administrative expense was $9,052 for the three months ended September 30, 2024 as compared to $4,054 for the three months ended September 30, 2023, a increase of $4,998, or 123.3%. This increase in expenditures was primarily attributed to an increase in professional services, legal fees, and consulting fees related to the business combination. The remaining increase in expenditures was due to increased employee costs as a result of increased headcount. Sales and Marketing Sales and marketing expense was $1,629 for the three months ended September 30, 2024 as compared to $696 for the three months ended September 30, 2023, an increase of $933, or 134.1%. This was primarily due to increased compensation costs for both the Technology and Corporate segments as a result of increased headcount and increases in public relations expenses, website expenses and marketing efforts and events. The Technology segment's commissions expenses related to product revenue also contributed to the increase, as the segment's first sales occurred in 2024. Research and Development R&D expense was $2,533 for the three months ended September 30, 2024 as compared to $1,240 for the three months ended September 30, 2023, an increase of $1,293 or 104.3%. This was primarily due to increased employee costs in the Technology segment and an increase in new product development costs in the Corporate segment. Total Non-operating (Expense) Income Total non-operating income was $6,033 for the three months ended September 30, 2024 as compared to the total non-operating expense of $13,200 for the three months ended September 30, 2023, a change of $19,233, or 145.7%. This was primarily due to an increase in the value of exchange traded investments in the current period as opposed to a decrease in the prior period. Additionally, equity method investment income was recognized due to Innventure's allocation of larger unrealized gains on the ESG Fund, offset by Innventure's portion of allocated loss on the AeroFlexx investment. Further, there was no loss realized in association with embedded derivative liabilities in the current period in comparison to a loss recognized in the prior period. These increases in income were partially offset by higher interest expenses in the current period due to additional debt financing. Loss Attributable to Non-controlling Interest Loss attributable to non-controlling interest was $5,430 for the three months ended September 30, 2024, as compared to $45 for the three months ended September 30, 2023, an increase of $5,385, or 11,966.7%. This was due to the increase in Technology segment loss subject to allocable percentage during the nine months ending September 30, 2024 as compared to the nine months ending September 30, 2023 , as well as an increase in total non-controlling interest unitholders. Other Comprehensive Income/Loss Other comprehensive loss was $2,373 for the three months ended September 30, 2024, as compared to $— for the three months ended September 30, 2023, a increase of $2,373, or 100.0%. This was due to the change in fair value of the new investment in debt securities of a related party which are classified as available-for-sale. Liquidity and Capital Resources (in thousands, except as otherwise noted) Sources of Liquidity In assessing liquidity, we monitor and analyze cash on hand and operating expenditure commitments. Our liquidity needs are to meet working capital requirements and operating expense obligations. To date, and prior to the 41 business combination, we have financed our operations primarily through cash flows from investing and various financing activities. The following is a summary of the components of our current liquidity: September 30, 2024 December 31, 2023 Cash and cash equivalents $ 16,297 $ 2,475 Restricted cash — 100 Working capital (20,386) (2,504) Accumulated deficit $ (90,952) $ (64,284) Our future liquidity requirements will depend on many factors, including funding required by our Operating Companies, funding needed to support other business opportunities and expenditures, and funding for working capital and general corporate purposes. Based on current projections, we believe we will require approximately $25 million to meet our liquidity requirements for the 12 months after the completion of the business combination. We expect to satisfy our liquidity requirements through cash on hand available after the share redemptions pursuant to the business combination, cash generated from our Operating Companies, the Standby Equity Purchase Agreement (the “SEPA”), dated October 24, 2023, entered into with Yorkville (maximum amount of $75,000, subject to various conditions), the WTI Facility (as defined below) (maximum amount of $50,000, subject to the satisfaction of certain conditions and achievement of certain commercial milestones by certain dates) as well as proceeds from additional financings completed by us or our Operating Companies. During the nine months ended September 30, 2024, the Corporate and Technology segments each raised approximately $13,932 and $14,468 of additional financing, in comparison to each respective segment raising approximately $8,771 and $100 during the nine months ended September 30, 2023. During the three months ended September 30, 2024, the Corporate and Technology segments each raised approximately $3,384 and $3,175 of additional financing, in comparison to each respective segment raising approximately $5,382 and $100 during the three months ended September 30, 2023. Bridge Financing On August 20, 2024, pursuant to an unsecured promissory note (the “Glockner Bridge Note”), Innventure borrowed $10,000 from Glockner Family Venture Fund (the “Glockner Lender”), a Florida limited partnership affiliated with Glockner Enterprises, as bridge financing until the Closing of the transactions related to the business combination. The outstanding principal amount and loan fee are due upon the later of October 15, 2024 and the first business day following Closing. The Glockner Bridge Note carries a loan fee of $1,000 and does not bear interest except during an event of default. Pursuant to the Glockner Bridge Note, advances under the note shall be made in multiple installments as follows: (i) $3,000 on August 20, 2024 (and was received on August 20, 2024), (ii) $3,000 on August 27, 2024 (and was received on August 27, 2024) and (iii) $4,000 on September 3, 2024 (and was received on September 3, 2024). Amounts that are borrowed and repaid may not be re-borrowed. On August 22, 2024, pursuant to an unsecured promissory note (the “Scott Bridge Note”), Innventure borrowed $2,000 from Dr. John Scott, Innventure's Chief Strategy Officer. Interest will accrue on the Scott Bridge Note at a rate of eleven and half percent (11.5%) per annum plus, in the case of an event of default, an additional two percent (2%) per annum, amounts will be advanced under the Scott Bridge Note upon written request and, otherwise, the Scott Bridge Note has terms identical to the Glockner Bridge Note. Any amounts due under the Glockner Bridge Note and the Scott Bridge Note may each be repaid in lieu of cash, at the option of the Glockner Lender and Dr. Scott, respectively, in shares of preferred stock. On October 1, 2024, the Company and the Glockner Family Venture Fund amended and restated the Glockner Bridge Note (as amended, the “A&R Glockner Bridge Note”). The A&R Glockner Bridge Note was issued in the principal amount of $10.0 million and such borrowings are due upon the earlier of January 31, 2025 and the first business day following the date on which the Company has sufficient capital to be able to repay all amounts outstanding under such note and otherwise meet its expected working capital needs, as determined by the Company in its reasonable discretion. From and after the issuance date of the A&R Glockner Bridge Note, such note will bear 42 interest at 15.99% per annum, payable in arrears on the first business day of each calendar month, beginning on November 1, 2024. In the event of a failure to pay any amount due under the A&R Glockner Bridge Note, such failure will not constitute an event of default unless certain other conditions are met. The Company also agreed to pay the Glockner Family Venture Fund $1.0 million as a loan fee, which has not yet been repaid. As of the date hereof, no amounts have been repaid under the A&R Glockner Bridge Note. As described above, Mr. Donnally serves as the managing member of the Glockner Family Venture Fund’s general partner, Bellringer Consulting Group LLC. On October 1, 2024, the Company and Dr. John Scott agreed to amend and restate the Scott Bridge Note (as amended, the “A&R Scott Bridge Note”). The A&R Scott Bridge Note was reissued in the principal amount of $1.0 million and such borrowings are due at maturity on January 31, 2025. From August 22, 2024 to but excluding October 1, 2024, interest on the A&R Scott Bridge Note accrued at a rate of 11.5% per annum, and from and after October 1, 2024, interest on the A&R Scott Bridge Note accrued at a rate of 13.5% per annum. In the event of a failure to pay any amount due under the A&R Scott Bridge Note, such failure will not constitute an event of default unless certain other conditions are met. The Company also agreed to pay Dr. John Scott, the Company’s Chief Strategy Officer, $1.0 million under the Scott Bridge Note, which has not yet been repaid. As of the date hereof, no amounts have been repaid under the A&R Scott Bridge Note. WTI Loan and Security Agreement On October 22, 2024 (the “WTI Closing Date”), Innventure LLC entered into a Loan and Security Agreement with WTI Fund X, Inc. and WTI Fund XI, Inc. (collectively, the “WTI Lenders”), as supplemented by the Supplement (the “Supplement”) to the Loan and Security Agreement, dated October 22, 2024, by and among Innventure LLC and the WTI Lenders (the “Loan and Security Agreement”). Further, Innventure LLC, the Company and the WTI Lenders entered into a joinder agreement, pursuant to which the Company became a co-borrower under the Loan and Security Agreement and related loan documents (collectively, the “Loan Documents”). The Loan and Security Agreement provides for a term loan facility in an aggregate principal amount of up to $50 million (the “WTI Facility”), of which (i) up to $20 million will be made available after the WTI Closing Date and through November 15, 2024 (the “First Tranche”); (ii) up to $15 million will be made available after November 1, 2024 and through November 30, 2024 (the “Second Tranche”); and (iii) up to $15 million will be made available after December 31, 2024 and through January 31, 2025 (the “Third Tranche”) (provided that up to $7.5 million of the Third Tranche will be made available until March 31, 2025), in each case, subject to the satisfaction of certain conditions, including, without limitation, (x) with respect to the First Tranche, available cash (after giving effect to the loans to be made under the First Tranche) of $35 million and (y) with respect to each of the Second Tranche and the Third Tranche, satisfaction of certain financial conditions and the WTI Lenders’ satisfaction with the Company’s forward-looking plan at such time. In the event that no loans are made prior to March 31, 2025, the obligations in the Loan and Security Agreement and the Supplement that would otherwise remain in effect until payment in full shall terminate. Borrowings under the First Tranche, the Second Tranche and the Third Tranche will accrue interest at a rate per annum equal to the greater of (i) the “prime rate” of interest, as published by The Wall Street Journal on the date that the WTI Lenders prepare the promissory notes for the borrowings under such tranche, plus 5.00% and (ii) 13.50% and will amortize, after an interest only period of 12 months in the case of the First Tranche and 6 months in the case of each of the Second Tranche and the Third Tranche, in equal monthly installments over a period of thirty months. Obligations under the Loan Documents are secured by a lien on substantially all of the assets of Innventure LLC and the Company. The Loan Documents contain various representations, warranties, covenants and events of default, including, without limitation, certain restrictions on the ability of Innventure LLC, the Company and their subsidiaries to incur indebtedness, grant liens, transfer assets, make investments, make dividends and other distributions and make certain payments of other indebtedness. 43 In connection with the Loan and Security Agreement, Innventure issued two warrants to purchase up to an aggregate total of 1,000,000 shares of the Company's common stock, par value $0.0001 (“Common Stock”) to WTI Fund X, LLC and WTI Fund XI, LLC (each an affiliate of the WTI Lenders), respectively (the “WTI Warrants”). Each warrant is exercisable into one share of Common Stock at price of $0.01 per share (subject to certain limitations, adjustment and certain other rights to possible future financings in accordance with terms of the WTI Warrants) through March 31, 2025. The WTI Warrants include customary registration rights and change-of-control adjustments and may be exchanged, at each of WTI Fund X, LLC’s and WTI Fund XI, LLC’s option, for a cash amount equal to $15 million (in the aggregate), subject to adjustment to the extent a WTI Warrant is partially exercised, in lieu of exercise upon a change of control, at any time from and after the four-year anniversary of the Closing. Each of WTI Fund X, LLC and WTI Fund XI, LLC will also have the option to purchase up to $5 million (in the aggregate) or such amount as is necessary for each of WTI Fund X, LLC and WTI Fund XI, LLC to maintain its pro rata ownership in certain future financings conducted by the Company, subject to customary exclusions. Cash Flows Cash flows associated with operating, investing, and financing activities for the nine months ended September 30, 2024 and September 30, 2023 are summarized as follows: Nine months ended September 30, Change ($ in thousands) 2024 2023 Amount % Net Cash Used in Operating Activities $ (18,647) $ (12,136) $ (6,511) 53.7 % Net Cash Used in Investing Activities (5,822) (1,595) (4,227) 265.0 % Net Cash Provided by Financing Activities 38,191 10,325 27,866 269.9 % Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash $ 13,722 $ (3,406) $ 17,128 (502.9) % Net Cash Used in Operating Activities Cash used in operating activities were $18,647 for the nine months ended September 30, 2024 as compared to $12,136 for the nine months ended September 30, 2023, an increase of $6,511, or 53.7%. The increase in cash used in operating activities is primarily related to change in net loss related to changes in the fair value of our investments and other financial instruments, additional costs incurred in connection with the Business Combination, increased employee compensation costs associated with increased headcount, and increased expenditures on inventory as the Technology segment began preparing for product sales. This increase was partially offset by advance receipt of funds for equity issuances expected to occur after the Business Combination. Net Cash (Used in) Provided by Investing Activities Cash used in investing activities were $5,822 for the nine months ended September 30, 2024 as compared to cash used in investing activities of $1,595 for the nine months ended September 30, 2023, an increase of $4,227 or 265.0%. The increase is primarily related to investment in available for sale debt securities and increased acquisitions of property, plant and equipment and partially offset by increased proceeds received related to PCT stock sale. Net Cash Provided by Financing Activities Cash provided by financing activities were $38,191 for the nine months ended September 30, 2024 as compared to $10,325 for the nine months ended September 30, 2023, an increase of $27,866 or 269.9%. The increase was primarily related to proceeds from the issuance of securities, issuance of units to non-controlling interest and related party notes payable. This increase was partially offset by increased repayment of debt. Indebtedness 44 Refer to Note 5 " Borrowings " to our condensed consolidated financial statements for the three and nine months ended September 30, 2024 included in Item 1 of this Form 10-Q for a discussion of our indebtedness. In combination with the capital raises and in order to finance continued operations and transaction costs, Innventure converted $396 of Series 1 promissory notes into Class B Preferred Units as detailed in the condensed consolidated financial statements for the nine months ended September 30, 2024. Furthermore, Innventure extended eligible Series 1 promissory notes with an aggregate outstanding principal of $543 for an additional 12-month period with an average increase to the related interest rate of 3%. The 8% convertible promissory notes were converted to equity of the Technology segment in the amount of $6,755, thereby reducing indebtedness accordingly. Contractual Obligations The following table presents a summary of our contractual obligations, including payments due by period, as of September 30, 2024: ($ in thousands) 2024 2025 2026 2027 2028 Thereafter Total Operating lease 83 299 351 94 — — 827 Debt obligations 12,364 2,543 — — — — 14,907 Total 12,447 2,842 351 94 — — 15,734 Going Concern We have experienced recurring losses from operations and negative cash flows from operating activities. In addition, we had, and may potentially continue to have, an ongoing need to raise additional cash from outside sources to fund our growth plans and related operations. We believe the successful transition to attaining profitable operations is dependent upon achieving a level of revenues from our Operating Companies adequate to support our cost structure. In connection with our assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Accounting Standards Update 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that these conditions raise substantial doubt about our ability to continue as a going concern within one year after the date of the consolidated financial statements included in Item 1 of this Form 10-Q. If we are unable to realize our assets, obtain adequate capital from the SEPA, the WTI Facility or otherwise generate sufficient revenues to support our cost structure within the normal operating cycle of a twelve (12) month period, we may have to consider supplementing our available sources of funds through: • other available sources of financing from banks and other financial institutions; • capital raising transactions; or • financial support from our related parties and shareholders. We can make no assurances that required financings will be available for the amounts needed, or on terms commercially acceptable to us, if at all. If one or all of these events does not occur or subsequent capital raises are insufficient to bridge financial and liquidity shortfalls (or both), there would likely be a material adverse effect on our business and financial condition that would materially adversely affect our ability to continue as a going concern. See "Item 1A. Risk Factors – Risk’s Related to Innventure’s Business – There is uncertainty regarding Innventure's ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt about its ability to continue as a going concern." in this Form 10-Q. The condensed consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. Critical Accounting Policies and Use of Estimates 45 Refer to Note 2. Accounting Policies to our consolidated financial statements for the year ended December 31, 2023 included in the Proxy Statement/Prospectus for a discussion of our critical accounting policies. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the "Exchange Act") and are not required to provide the information required under this Item.