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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-22 · 143 added, 76 removed, 130 unchanged (63% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the three months ended March 31, 2023 and 2022.

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Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby.

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It should be noted that the MD&A contains forward-looking statements that involve risks and uncertainties.

Genius Brands International, Inc.

Kartoon Studios, Inc.

(formerly known as Genius Brands International, Inc.;

“we,” “us,” “our,” or the “Company”) is a global content and brand management company that creates, produces, licenses, and broadcasts timeless and educational, multimedia animated content for children.

Led by experienced industry personnel, we distribute our content primarily on streaming platforms and television and license properties for a broad range of consumer products based on our characters.

Led by experienced industry personnel, we distribute our content primarily on streaming platforms and television and licenses properties for a broad range of consumer products based on our characters.

We are a “work for hire” producer for many of the streaming outlets and animated content intellectual property (“IP”) holders.

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With the exception of selected WOW Unlimited Media Inc.

titles, our programs, along with licensed programs, are being broadcast in the United States on our wholly-owned advertisement supported video on demand (“AVOD”) service, our free ad supported TV ("FAST") channels and subscription video on demand (“SVOD”) outlets, Kartoon Channel!

("Wow") titles, our programs, along with licensed programs, are being broadcast in the United States on our wholly-owned advertisement supported video on demand (“AVOD”) service, our free ad supported TV (“FAST”) channels and subscription video on demand (“SVOD”) outlets, Kartoon Channel!

These streaming services are available on Apple TV, Apple iOS, Android TV, Android mobile, Amazon Prime, Amazon Fire, Tubi, Roku, Comcast, Cox, Dish/Sling, Xumo, Pluto, Samsung Smart TVs, LG Smart TVs, as well as YouTube, among other platforms.

Our in-house owned and produced animated shows include Stan Lee’s Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama starring Jennifer Garner, Rainbow Rangers, KC Pop Quiz , and the upcoming Shaq’s Garage starring Shaquille O’Neal, scheduled to debut in the second quarter of 2023.

Our library titles include the award-winning Baby Genius , adventure comedy Thomas Edison’s Secret Lab®, and Warren Buffett’s Secret Millionaires Club , created with and starring iconic investor Warren Buffett, Team Zenko Go!, Reboot , Bee & PuppyCat:

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Through our investments in Germany’s Your Family Entertainment (“YFE”), a publicly traded company on the Frankfurt Exchange (RTV-Frankfurt), we have gained access to one of the largest animation catalogues in Europe with over 50 titles consisting of over 1,600 episodes, and a global distribution network which currently covers over 60 territories worldwide.

Through the ownership of WOW Unlimited Media Inc.

(“Wow”), we established an affiliate relationship with Mainframe Studios, which is one of the largest animation producers in the world.

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Through the ownership of WOW, we established an affiliate relationship with Mainframe Studios, which is one of the largest animation producers in the world.

In addition, Wow owns Frederator Networks Inc.

(“Frederator”) and its Channel Frederator Network , the largest animation focused multi-channel network on YouTube with over 2,500 channels.

We have rights to a select amount of valuable IP, included among them a controlling interest in Stan Lee Universe (“SLU”), through which we control the name, likeness, signature, and all consumer product and IP rights to Stan Lee (the “Stan Lee Assets”).

We have rights to a select amount of valuable IP, including among them a controlling interest in Stan Lee Universe, LLC (“SLU”), through which we control the name, likeness, signature, and all consumer product and IP rights to Stan Lee (the “Stan Lee Assets”).

We also own Beacon Media Group (“Beacon”), the largest media buying service for children in North America.

Beacon represents over 30 major toy companies, including Playmobile, Bandai Toys, Bazooka, Moose Toys, and JAKKS Pacific.

Beacon represents over 30 major toy companies, including Playmobile, Bandai Toys, Bazooka and Moose Toys.

In addition, we own the Canadian company Ameba Inc.

(“Ameba”), which distributes SVOD service for kids, and has become the focal point of revenue growth for Genius Networks’ subscription offering.

(“Ameba”), which distributes SVOD service for kids and has become the focal point of revenue growth for TOON Media Networks’ subscription offering.

We and our affiliates provide world class animation production studios a catalogue representing thousands of hours of premium global content for children, a broadcast system for delivering that content and an in-house consumer products licensing infrastructure to fully exploit the content.

On June 23, 2023, we were renamed Kartoon Studios, Inc.

On June 26, 2023, we transferred our listing to NYSE American LLC (“NYSE American”).

In connection with listing on NYSE American, we voluntarily delisted from the Nasdaq Capital Market (“Nasdaq”).

Our common stock began trading on NYSE American under the new symbol “TOON” on June 26, 2023.

Environmental, Social and Governance Strategy

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Human Capital Management

As of March 31, 2023, we employed 715 full-time employees and 46 independent contractors.

As of June 30, 2023, we employed 512 full-time employees and 44 independent contractors.

We aim to build a culture that attracts and retains the best employees and a workplace where everyone feels welcome, safe and inspired.

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• We make training on preventing sexual harassment, discrimination and retaliation available to our employees.

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• We expect employees to report any violations of Company policies, including sexual harassment, they witness.

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Eastern time.

At the effective time, every 10 issued and outstanding shares of the Company's common stock were converted into one share of common stock.

At the effective time, every 10 issued and outstanding shares of our common stock were converted into one share of common stock.

Any fractional shares of common stock resulting from the reverse stock split were rounded up to the nearest whole post-split share and no shareholders received cash in lieu of fractional shares.

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The reverse stock split proportionately reduced the number of shares of authorized common stock from 400,000,000 to 40,000,000 shares.

The reverse stock split also applied to common stock issuable upon the exercise of our outstanding warrants and stock options.

The reverse stock split also applied to common stock issuable upon the exercise of the Company's outstanding warrants and stock options.

The reverse stock split did not affect the authorized preferred stock of 10,000,000 shares.

Unless noted, all references to shares of common stock and per share amounts contained in this Quarterly Report on Form 10-Q have been retroactively adjusted to reflect a 1-for-10 reverse stock split.

Exercise of 2021 Warrants and Issuance of New Warrants

On June 26, 2023, we entered into warrant exercise inducement offer letters (the “Letter Agreements”) with certain existing institutional and accredited investors pursuant to which such investors agreed to exercise for cash certain warrants issued by us in January 2021 (the “2021 Warrants”) to purchase 2,311,550 shares of common stock (the “Exercise”).

To induce the Exercise by holders of the 2021 Warrants, we also amended the exercise price of the 2021 Warrants from $23.70 per share (as adjusted pursuant to a 1-for-10 reverse stock split of our outstanding shares of common stock effected on February 10, 2023) to $2.50 per share pursuant to the terms of the 2021 Warrants.

In consideration for the Exercise, the exercising holders received warrants to purchase up to 4,623,100 shares of common stock, and The Special Equities Group, LLC, a division of Dawson James Securities, which acted as warrant solicitation agent for the Exercise, received a warrant to purchase up to 161,809 shares of common stock (collectively, the “Warrants”).

The Warrants will be exercisable at any time at a price per share of $2.50 upon approval by our shareholders of (a) a proposal to approve an amendment to our articles of incorporation to increase our authorized shares of common stock from 40,000,000 shares to 190,000,000 shares with a corresponding increase in the total number of authorized shares of capital stock from 50,000,000 shares to 200,000,000 shares (the “Share Increase Proposal”) and (b) approve, in accordance with 713(A) of the NYSE American Company Guide, the issuance of more than 19.99% of our outstanding common stock upon the exercise of the Warrants (the “Warrant Exercise Proposal” and together with the Share Increase Proposal, the “Proposals”).

We are holding our annual shareholder meeting on August 25, 2023, at which we will seek the shareholders approval of the Proposals.

The Warrants have a term of exercise of five years from the from the date of Shareholder Approvals.

Pursuant to the Letter Agreements, we filed a registration statement on Form S-3 covering the resale of the shares of common stock issued or issuable upon the exercise of the Warrants on July 26, 2023, which registration statement is currently pending with the SEC.

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Results of Operations

Our summary results for the three months ended March 31, 2023 and 2022 are below:

Our summary results for the three months ended June 30, 2023 and 2022 are below:

Three Months Ended

March 31, 2023 March 31, 2022 Change % Change

June 30, 2023 June 30, 2022 Change % Change

(in thousands, except percentages)

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Total Revenue $ 11,038 $ 22,124 $ (11,086) (50) %

Production Services revenue is generated specifically by Wow providing animation production services for the three months ended March 31, 2023.

Production Services revenue is generated specifically by Wow providing animation production services.

Revenue for production services are recognized over time on a percentage of completion basis, therefore, as the projects are still in progress, we recognize revenue based upon the proportion of costs incurred cumulatively to total expected costs.

Consequently, less revenue is recognized during the periods in which the projects are near completion or completed.

Revenue for the three months ended June 30, 2023 decreased by 30% as compared to the three months ended June 30, 2022 primarily due to completion of various productions during the three months ended June 30, 2023 as compared to the majority of productions in process during the three months ended June 30, 2022.

Content Distribution revenue is generated from the distribution of our properties for broadcast on television, video-on-demand (“VOD”) or subscription video-on-demand (“SVOD”) in domestic and international markets and the sale of DVDs for home entertainment through our partners.

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Fluctuations in Content Distribution revenue are based on the achievement of revenue recognition criteria such as the start of a license period and the delivery of the content or advertisement to the customer.

Revenue related to our AVOD and SVOD, including advertising sales for the three months ended March 31, 2023, increased 697% as compared to the three months ended March 31, 2022 primarily due to the acquisition of Ameba, Wow and Frederator, increasing Content Distribution revenue by $3.0 million.

Revenue related to our AVOD and SVOD, including advertising sales for the three months ended June 30, 2023, decreased by 65% as compared to the three months ended June 30, 2022 primarily due to Wow’s continuous delivery of milestone episodes of an IP project during the three months ended June 30, 2022 generating $3.4 million in content revenue as compared to only a few deliveries of content generating revenue of $0.1 million during the three months ended June 30, 2023.

In addition, Frederator content revenue decreased during the three months ended June 30, 2023 by $2.3 million as compared to the same prior year period primarily due to an overall decrease in viewership and revenue per mille.

Licensing & Royalties revenues are generated by the items in which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as a licensing agent.

Revenue related to our licensing and royalties for the three months ended March 31, 2023 increased 12% as compared to the three months ended March 31, 2022 primarily due to entering an agreement for the licensing of certain Stan Lee Assets.

Revenue related to our licensing and royalties for the three months ended June 30, 2023 decreased by 96% as compared to the three months ended June 30, 2022 primarily due to our license deals related to our Stan Lee Assets generating increased revenue of $2.5 million during the prior year period.

Media Advisory & Advertising Services revenue is a combination of client retainer fee-based services and media commissions generated by our wholly-owned subsidiary, Beacon Media Group (“Beacon”).

Revenue for the three months ended June 30, 2023 decreased by 18% as compared to the three months ended June 30, 2022 primarily due to a loss of commissions during the three months ended June 30, 2023, resulting in a decrease of $0.3 million.

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Three Months Ended

March 31, 2023 March 31, 2022 Change % Change

June 30, 2023 June 30, 2022 Change % Change

(in thousands, except percentages)

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General and Administrative 8,370 15,105 (6,735) (45) %

Total Expenses $ 19,601 $ 30,725 $ (11,124) (36) %

Marketing and Sales expenses consist primarily of advertising expenses and certain payments made to our marketing partners.

Advertising expenses include promotional activities such as digital and television advertising.

Marketing expenses also include payroll and related expenses for personnel that support marketing activities.

The increase in marketing and sales expenses for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 was primarily due to recognition of an expense for a prepaid marketing campaign related to Shaq's Garage of $1.2 million, offset by a decrease in marketing and sales expenditures incurred by all entities.

Direct Operating Costs during the three months ended June 30, 2023 consisted primarily of salaries and related expenses for the animation production services employees of Wow and Frederator.

Channel expenses, licensing and production of content costs, such as participation expenses related to profit sharing obligations with various animation studios, post-production studios, writers, directors, musicians or other creative talent that had rendered services and amortization, including any write-downs of film and television costs, made up the remainder of Direct Operating Costs.

The decrease was primarily due to a decrease in Wow expenses of $3.0 million primarily due to a decrease in amortization of film and TV costs of $1.8 million as less IP episodes were delivered during the three months ended June 30, 2023 as compared to the prior year period and a decrease of $0.9 million due to the decrease in tax credits earned and a general decrease in production activity.

In addition, Frederator direct operating costs decreased by $2.1 million primarily due to a decrease in multi-channel network payouts as compared to the prior year period due to the decrease in viewership.

General and Administrative expenses primarily consist of payroll and related expenses, share-based compensation related to our equity compensation plan, rent, depreciation of our property and equipment and amortization of our intangible assets, as well as professional fees and other general corporate expenses.

The $6.7 million decrease in general and administrative expenses for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 was primarily due to the absence of $4.5 million in acquisition fees incurred in the prior year period for the acquisition of Wow and a decrease of $3.5 million in stock-based compensation expense as incurred during the prior year period for the modification of awards granted to the CEO.

Our summary results for the six months ended June 30, 2023 and 2022 are below:

Six Months Ended

June 30, 2023 June 30, 2022 Change % Change

(in thousands, except percentages)

Production Services $ 16,919 $ 10,018 $ 6,901 69 %

Content Distribution 6,313 8,942 (2,629) (29) %

Licensing & Royalties 149 2,536 (2,387) (94) %

Media Advisory & Advertising Services 1,846 2,067 (221) (11) %

Total Revenue $ 25,227 $ 23,563 $ 1,664 7 %

Production Services revenue was generated specifically by Wow providing animation production services.

Revenue for the six months ended June 30, 2023 increased primarily due to the recognition of six full months of revenue during the period as compared to three months of recognition during the six months ended June 30, 2022, when Wow was acquired during the second quarter of 2022.

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Content Distribution also includes our advertising sales generated on our digital network, the Kartoon Channel!

in the form of either flat rate promotions or advertising impressions served, SVOD revenues generated by Ameba and revenue generated by Frederator on its multi-channel network.

Revenue related to our AVOD and SVOD, including advertising sales for the six months ended June 30, 2023, decreased by 29% as compared to the six months ended June 30, 2022 primarily due to Wow's continuous delivery of milestone episodes of an IP project during the three months ended June 30, 2022 generating $3.4 million in content revenue as compared to only a few deliveries of content generating revenue of $0.3 million during the six months ended June 30, 2023.

Licensing & Royalties revenues are generated by the items in which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as a licensing agent.

Revenue related to our licensing and royalties for the six months ended June 30, 2023 decreased by 94% as compared to the six months ended June 30, 2022 primarily due to our license deals related to our Stan Lee Assets generating increased revenue of $2.5 million during the prior year period.

Media Advisory & Advertising Services revenue is a combination of client retainer fee-based services and media commissions generated by our wholly-owned subsidiary, Beacon Media Group (“Beacon”).

Revenue for the six months ended June 30, 2023 decreased by 11% as compared to the six months ended June 30, 2022 primarily due to a loss of commissions during the six months ended June 30, 2023, resulting in a decrease of $0.5 million.

Six Months Ended

June 30, 2023 June 30, 2022 Change % Change

(in thousands, except percentages)

Marketing and Sales $ 1,935 $ 1,132 $ 803 71 %

Direct Operating Costs 20,826 14,992 5,834 39 %

General and Administrative 17,595 25,962 (8,367) (32) %

Impairment of Property and Equipment 120 – 120 100 %

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Marketing expenses also include payroll and related expenses for personnel that support marketing activities.

The increase in marketing and sales expenses for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily

due to a decrease in marketing and advertising expenses incurred to promote the Kartoon Channel!

as well as the launch of Superhero Kindergarten.

Direct Operating Costs during the three months ended March 31, 2023 consist primarily of salaries and related expenses for the animation production services employees of Mainframe and Frederator.

Channel expenses, licensing and production of content costs, such as participation expenses related to profit sharing obligations with various animation studios, post-production studios, writers, directors, musicians or other creative talent that have rendered services and amortization, including any write-downs of film and television costs, make up the remainder of Direct Operating Costs.

The increase is primarily due to the acquisition of Ameba, Wow and Frederator, which increased Direct Operating Costs for the three months ended March 31, 2023 by $11.1 million as compared to the three months ended March 31, 2022.

The increase in marketing and sales expenses for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 was primarily due to recognition of an expense for a prepaid marketing campaign related to Shaq’s Garage of $1.2 million, offset by a decrease in marketing and sales expenditures incurred by all entities.

Direct Operating Costs during the six months ended June 30, 2023 consisted primarily of salaries and related expenses for the animation production services employees of Wow and Frederator.

The increase was primarily due to recognition of six full months of costs incurred by Wow and Fred versus three months of costs incurred during the six months ended June 30, 2022 after the acquisition in the second quarter of 2022.

The $1.6 million decrease in general and administrative expenses for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily due to a decrease in stock-based compensation of $3.6 million due to the absence of modification expenses that were incurred in the prior year period and a decrease in professional fees of $0.9 million offset by the increase during the three months ended March 31, 2023 of $8.2 million, due to the consolidation of Ameba, Wow and Frederator's general and administration expenses.

During the three months ended March 31, 2023, we reassessed our long-lived assets, including our definite-lived intangible assets, our indefinite-lived intangible assets and our remaining goodwill allocated to the Content Production and Distribution reportable segment for impairment.

The $8.4 million decrease in general and administrative expenses for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 was

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primarily due to the absence of $4.5 million in acquisition fees incurred in the prior year period for the acquisition of Wow and a decrease of $3.5 million in stock-based compensation expense as incurred during the prior year period for the modification of awards granted to the CEO.

During the six months ended June 30, 2023, we reassessed our long-lived assets, including our definite-lived intangible assets, our indefinite-lived intangible assets and our remaining goodwill allocated to the Content Production and Distribution reportable segment for impairment.

As a result, we recorded an impairment charge to our property and equipment of $0.1 million, our definite-lived intangible assets of $2.8 million, our indefinite-lived intangible assets of $1.3 million and our goodwill recorded within the Content Production and Distribution reporting unit of $11.3 million in our condensed consolidated statement of operations.

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Three Months Ended

March 31, 2023 March 31, 2022 Change % Change

(in thousands, except percentages)

Six Months Ended

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

Interest Expense (a) $ (1,020) $ (388) $ (2,105) $ (443)

Gain on Warrant Revaluation (b) 139 41 98 239 %

Gain (Loss) on Foreign Exchange (c) 320 (192) 512 (267) %

Loss on Marketable Securities Investments (d) (1,537) (79) (1,458) 1,846 %

Gain (Loss) on Revaluation of Equity Investment in YFE (e) (895) 5,395 (6,290) (117) %

Interest Income (f) 311 248 63 25 %

Finance Lease Interest Expense (g) (50) – (50) 100 %

Warrant Incentive Expense (b) (16,174) – (16,174) –

Gain on Revaluation of Warrants (c) 6,063 227 6,202 269

Gain (Loss) on Revaluation of Equity Investment in YFE (d) 4,322 (2,494) 3,427 2,901

Realized Loss on Marketable Securities Investments (e) (720) (44) (2,257) (123)

Gain (Loss) on Foreign Exchange (f) 35 (1,073) 355 (1,262)

Interest Income (g) 158 253 468 501

Finance Lease Interest Expense (h) (54) (30) (104) (30)

Other 2 – 3 –

Other Income (Expense) $ (6,368) $ (3,161) $ (8,080) $ 2,256

(a) Interest expense during the three months ended March 31, 2023 primarily consisted of $0.7 million of interest incurred on the margin loan collateralized by the marketable security investments and $0.4 million of interest incurred on production facilities loans and bank indebtedness assumed as part of the Wow Acquisition.

(b) The gain on warrant revaluation is related to the change in fair value of outstanding warrants that were determined to be derivative liabilities attached to previously issued and converted convertible notes.

(c) The gain on foreign currency exchange during the three months ended March 31, 2023 primarily related to the EURO weakening against the USD compared to the previous reporting period end date of December 31, 2022.

The remeasurement of the investment in YFE’s equity securities resulted in a foreign exchange gain of $0.3 million.

(d) The net realized loss on marketable securities reflects the loss that will not be recovered from the investments due to selling securities and issuers' prepayments of principals on certain mortgage-backed securities.

(e) The fair value revaluation of the investment in YFE accounted for using the fair value option as of March 31, 2023, resulted in a $0.9 million loss, excluding the impact of foreign currency recorded separately as a Gain on Foreign Exchange.

The loss is a result of the decrease in YFE’s stock price as of March 31, 2023, as compared to December 31, 2022.

(f) Interest Income during the three months ended March 31, 2023 primarily consisted of cash interest received of $0.4 million from the investments in marketable securities, net of premium amortization expense of $0.2 million.

The remaining increase is due to interest accrued on the Notes Receivable from Related Parties.

(g) The finance lease interest expense represents the interest portion of the finance lease obligations assumed as part of the Wow Acquisition for equipment purchased under an equipment lease line.

Prior to the acquisition of Wow, we did not have any finance leases.

(a) Interest expense during the three and six months ended June 30, 2023 primarily consisted of $0.6 million and $1.3 million of interest incurred on the margin loan, respectively, and $0.4 million and $0.8 million, respectively, of interest incurred on production facilities loans and bank indebtedness assumed as part of the Wow Acquisition.

(b) The Warrant Incentive Expense is related to the $12.7 million fair value of Exchange Warrants that were issued during the three months ended June 30, 2023 to certain existing warrant holders in exchange for previously issued outstanding warrants and $3.5 million recorded as the incremental expense of the 2021 Warrants immediately before and after the repricing.

(c) The gain on warrant revaluation during the three and six months ended June 30, 2023 is primarily related to the $6.0 million change in fair value as of the end of the reporting period of the Exchange and SEG Warrants compared to the fair value at issuance date.

(d) As accounted for using the fair value option, the gain on the YFE investment revaluation during the three and six months ended June 30, 2023, excluding the impact of foreign currency recorded separately, is a result of an increase in YFE’s stock price as of June 30, 2023 when compared to the three and six months ended prior period.

(e) The net realized loss on marketable securities reflects the loss that will not be recovered from the investments due to selling securities and issuers' prepayments of principals on certain mortgage-backed securities.

(f) The gain on foreign currency exchange during the three and six months ended June 30, 2023 primarily related to the EURO weakening against the USD compared to the three and six months ended prior period.

(g) Interest Income during the three and six months ended June 30, 2023 primarily consisted of cash interest received of $0.3 million and $0.7 million from the investments in marketable securities, respectively, net of premium amortization expense of $0.2 million and $0.3 million, respectively.

(h) The finance lease interest expense represents the interest portion of the finance lease obligations assumed as part of the Wow Acquisition for equipment purchased under an equipment lease line.

Prior to the acquisition of Wow, finance leases did not exist.

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Liquidity and Capital Resources

As of March 31, 2023, we had cash and cash equivalents of $4.8 million, which decreased by $2.7 million as compared to December 31, 2022.

The decrease was primarily due to cash used in financing activities of $12.6 million, primarily due to the repayment of the margin loan, and $4.8 million used in operational activities.

The cash used was offset by cash provided by the sales and maturities of marketable securities of $14.3 million.

As of March 31, 2023, we held available-for-sale marketable securities with a fair value of $69.7 million, which decreased by $14.1 million as compared to December 31, 2022.

The decrease was primarily due to selling $14.3 million of securities, $2.9 million of securities maturing and additional prepayment proceeds of $0.5 million on principals for certain mortgage-backed securities during the three months ended March 31, 2023.

The decrease was offset by the net decrease of $0.8 million in unrealized and realized loss activity.

As of June 30, 2023, we had cash and cash equivalents of $4.8 million, which decreased by $2.6 million as compared to December 31, 2022.

The decrease was primarily due to cash used in financing activities of $27.9 million, primarily due to repayment of the margin loan, net proceeds, offset by the cash received from the warrant exchange and $10.6 million used in operating activities.

The cash used was offset by cash provided by sales and maturities of marketable securities of $34.2 million.

As of June 30, 2023, we held available-for-sale marketable securities with a fair value of $49.5 million, which decreased by $34.2 million as compared to December 31, 2022 due to sales and maturities during the six months ended June 30, 2023.

The available-for-sale securities consist principally of corporate and government debt securities and are also available as a source of liquidity.

We borrowed an additional $3.7 million from our investment margin account during the three months ended March 31, 2023 and repaid $16.3 million with cash received from sales and maturities of marketable securities.

During the three months ended March 31, 2023, the borrowed amounts were primarily used for operational costs.

The interest rates for the borrowings fluctuate based on the Federal Funds Rate plus 0.65% with interest only payable monthly.

The weighted average interest rates were 0.89% and 1.66% on average margin loan balances of $46.2 million and $27.1 million as of March 31, 2023 and December 31, 2022, respectively.

We incurred interest expense on the loan of $0.7 million and $21,846 during the three months ended March 31, 2023 and March 31, 2022, respectively.

We borrowed an additional $8.6 million from our investment margin account during the six months ended June 30, 2023 and repaid $41.8 million primarily with cash received from sales and maturities of marketable securities.

During the six months ended June 30, 2023, the borrowed amounts were primarily used for operational costs.

The interest rates for the borrowings fluctuate based on the Federal Funds Rate plus 0.65%.

The weighted average interest rates were 0.67% and 1.66% on average margin loan balances of $44.2 million and $27.1 million as of June 30, 2023 and December 31, 2022, respectively.

We incurred interest expense on the loan of $0.6 million and $0.2 million during the three months ended June 30, 2023 and June 30, 2022, respectively.

We incurred interest expense on the loan of $1.3 million and $0.2 million during the six months ended June 30, 2023 and June 30, 2022, respectively.

The investment margin account borrowings do not mature but are collateralized by the marketable securities held by the same custodian and the custodian can issue a margin call at any time, effecting a payable on demand loan.

Due to the call option, the margin loan is recorded as a current liability on our condensed consolidated balance sheets.

As of March 31, 2023 and December 31, 2022, our margin loan balance was $48.9 million and $60.8 million, respectively.

As of June 30, 2023 and December 31, 2022, our margin loan balance was $27.6 million and $60.8 million, respectively.

We are subject to financial and customary affirmative and negative non-financial covenants on the revolving demand facility, revolving equipment lease line and treasury risk management facility that have an aggregate total outstanding balance of $6.7 million USD ($8.9 million CAD).

We were in technical violation of two financial covenants requiring a minimum fixed charge ratio and a maximum senior funded debt to EBITDA ratio as of as of June 30, 2023.

We have continued to make our regular principal and interest payments on a timely basis since the effective borrowing date.

The revolving demand facility and the treasury risk management facility can be called at anytime by the lender as per the original terms of the facilities.

The risk of the lender demanding repayment can be deemed greater due to the breach of covenants, however, at the time the financial statements were available for issuance, the lender has not provided us with a formal notification of a covenant breach.

Working Capital

As of March 31, 2023, we had current assets of $114.3 million, including cash and cash equivalents of $4.8 million and marketable securities of $69.7 million, and our current liabilities were $90.8 million.

We had working capital of $23.5 million as of March 31, 2023 as compared to working capital of $28.6 million as of December 31, 2022.

As of June 30, 2023, we had current assets of $91.6 million, including cash and cash equivalents of $4.8 million and marketable securities of $49.5 million, and our current liabilities were $77.2 million.

We had working capital of $14.4 million as of June 30, 2023 as compared to working capital of $28.6 million as of December 31, 2022.

The decrease of $14.2 million was primarily due to a decrease in our cash and cash equivalents and marketable security position, offset by the change in net current assets and liabilities as a result of the acquisition of Wow and Ameba and additional short-term borrowings from our margin loan account.

During the three months ended March 31, 2023, we met our immediate cash requirements through existing cash balances.

During the six months ended June 30, 2023, we met our immediate cash requirements through existing cash balances.

Additionally, we used equity and equity-linked instruments to pay for services and compensation.

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To meet our short and long-term liquidity needs, we expect to use existing cash and marketable securities balances.

Comparison of Cash Flows for the Three Months Ended March 31, 2023 and March 31, 2022

Our total cash, cash equivalents and restricted cash as of March 31, 2023 and March 31, 2022 was $4.8 million and $52.8 million, respectively.

Three Months Ended

March 31, 2023 March 31, 2022 Increase (Decrease) in Net Cash

Comparison of Cash Flows for the six months ended June 30, 2023 and June 30, 2022

Our total cash, cash equivalents and restricted cash as of June 30, 2023 and June 30, 2022 was $4.8 million and $7.8 million, respectively.

Table of Conten t s

Six Months Ended

June 30, 2023 June 30, 2022 Increase (Decrease) in Net Cash

(in thousands)

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Net Cash Provided by (Used in) Investing Activities 35,948 (41,339) 77,287

Net Cash Provided by (Used in) Financing Activities (12,565) 51,353 (63,918)

Net Cash (Used in) Provided by Financing Activities (27,941) 56,593 (84,534)

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash (13) 46 (59)

Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash $ (2,667) $ 42,751 $ (45,418)

Decrease in Cash, Cash Equivalents and Restricted Cash $ (2,593) $ (2,244) $ (349)

Net Noncash Expenses

Items necessary to reconcile from net loss to cash flow used in operating activities included net noncash expenses of $21.4 million for the three months ended March 31, 2023 as compared to net noncash expenses of $0.5 million for the three months ended March 31, 2022.

The majority of the increase of $20.9 million was due to the impairments of our long-lived assets, intangible assets and goodwill of $15.4 million incurred during the three months ended March 31, 2023, our equity investment in YFE going from a loss of $5.4 million to a gain of $0.9 million and a decrease in stock-based compensation of $3.6 million.

Change in Operating Assets and Liabilities

The increase in cash provided by operating asset activity of $5.6 million as of March 31, 2023 compared to March 31, 2022 was primarily due to the receipt of tax credits earned, net by the Wow entity of $2.6 million, a decrease in the cash used of $1.3 million in prepaid expenses and assets due to the absence of a prepayment incurred for an insurance policy, that was not incurred in the current period and a decrease in cash used for film and television costs of $0.9 million.

The increase in cash used in operating liability activities of $5.6 million as of March 31, 2023 compared to March 31, 2022 was primarily due to the increase in cash used for accounts payable of $3.8 million and deferred revenue of $2.7 million, offset by a decrease in accrued production costs of $1.5 million.

Items necessary to reconcile from net loss to cash flow used in operating activities included net noncash expenses of $30.9 million for the six months ended June 30, 2023 as compared to net noncash expenses of $11.9 million for the six months ended June 30, 2022.

The majority of the increase of $19.0 million was primarily due to the warrant incentive expense related to the $12.7 million fair value of Exchange Warrants that were issued during the three months ended June 30, 2023 and $3.5 million recorded as the incremental expense of the 2021 Warrants immediately before and after the repricing.

In addition, the increase was due to the impairment expenses of our long-lived assets, intangible assets and goodwill of $15.4 million recorded during the six months ended June 30, 2023.

The increase in our noncash expenses are offset by a decrease in our stock-based compensation of $7.1 million due to the absence of incurring a modification expense in the current year for the CEO’s restricted stock that occurred in the prior year and not the current year and the a gain of $5.9 million due to the revaluation of liability classified warrants, primarily the new warrants exchanged, as of the reporting date.

The change in cash provided by operating asset activity of $10.8 million as of June 30, 2023 compared to June 30, 2022 was primarily due to the receipt of tax credits earned, net by the Wow entity of $4.0 million and a decrease in film and television costs of $5.3 million due to a decrease of productions in progress during the current period as compared to the prior year period.

The decrease in cash used in operating liability activities of $0.6 million as of June 30, 2023 compared to June 30, 2022 was primarily due to the change in accrued expenses of $2.4 million and accrued production costs of $1.9 million due to the timing of when production projects are completed.

Change in Investing Activities

Cash investing activities for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, increased from cash used in investing of $3.2 million, to cash provided by investing of $14.6 million, primarily due to using cash of $10.5 million for investments and acquisitions in the prior year, that did not occur in the current period and an increase in proceeds from the sales and maturities of marketable securities of $7.3 million during the three months ended March 31, 2023.

Cash investing activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 increased from cash used in investing of $41.3 million to cash provided by investing of $35.9 million, primarily due to using cash of $50.7 million for investments and acquisitions in the prior year that did not occur in the current period and an increase in proceeds from the sales and maturities of marketable securities of $24.7 million during the six months ended June 30, 2023.

Change in Financing Activities

Cash financing activities for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, decreased from cash provided by investing of $51.4 million, to cash used in investing of $12.6 million, primarily due to paying down the margin loan during the current quarter compared to additional borrowings in the prior year quarter resulting in a net $63.3 million decrease in cash provided by financing activities.

Cash financing activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 decreased from cash provided by financing of $56.6 million to cash used in financing of $27.9 million, primarily due to paying down the margin loan during the six months ended June 30, 2023 compared to additional borrowings during the six months ended June 30, 2022, resulting in a net $87.7 million decrease in cash provided by financing activities.

Material Cash Requirements

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Our material cash requirements from known contractual and other obligations primarily relate to our debt and lease obligations and our employment and consulting contracts.

The aggregate amount of future minimum purchase obligations under these agreements over the period of next five years is approximately $89.1 million as of March 31, 2023, of which about $60.8 million could be owed within one year if the margin loan and interim production facilities are called.

The aggregate amount of future minimum purchase obligations under these agreements over the period of next five years is approximately $67.2 million as of June 30, 2023, of which about $38.4 million could be owed within one year if the margin loan and interim production facilities are called.

Table of Conten t s

We plan to utilize our liquidity (as described above) to fund our material cash requirements.

As of March 31, 2023, we have $3.4 million in commitments for capital expenditures, related to equipment leases.

As of June 30, 2023, we have $2.9 million in commitments for capital expenditures, related to equipment leases.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis