Kartoon Studios, Inc. 10-Q

ITEM 2. 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 six months ended June 30, 2023 and 41 Table of Conten t s 2022. 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. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed on April 13, 2023 and elsewhere in this report, as well as other factors that may affect our business, results of operations, or financial condition. Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire. Overview Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide readers of our consolidated financial statements with the perspectives of management. This should allow the readers of this report to obtain a comprehensive understanding of our businesses, strategies, current trends, and future prospects. It should be noted that the MD&A contains forward-looking statements that involve risks and uncertainties. Our Business 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 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. In the children’s media sector, our portfolio features “content with a purpose” for toddlers to tweens, providing enrichment as well as entertainment. With the exception of selected WOW Unlimited Media Inc. ("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! and Ameba . 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 Shaq’s Garage starring Shaquille O’Neal. 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: Lazy in Space and Castlevania . We also license our programs to other services worldwide, in addition to the operation of our own channels, including but not limited to Netflix, HBO Max, Paramount+, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world. 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. 42 Table of Conten t s 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, 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 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 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 We are attempting to shape culture, social attitudes and societal outcomes with our animated content and consumer products that touch the lives of young people and their families. As a global content company that reaches millions of people, we aim to be a positive force in the world. We are committed to advancing and strengthening our approach to environmental, social and governance (“ESG”) topics to help serve our partners, audiences, employees and shareholders — and to enhance our success as a business. We are committed to responsible, ethical and inclusionary business practices as outlined below: Human Capital Management 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. Our human capital management strategy is intended to address the following areas: A Culture of Diversity, Equity and Inclusion We seek to foster a culture of diversity, equity and inclusion through a range of partnerships, collaborations, programs and initiatives, some of which are described below. We strive to be an inclusionary workplace because we believe that it strengthens our business. • In 2021, we created the role of Chief Diversity Officer. That role is responsible for both helping meet our hiring goals and reviewing the content we create. • Our board of directors is diverse with representation from people of color and the LGBTQ community. Preventing Harassment and Discrimination We have enacted policies addressing harassment, discrimination and other behaviors that could create a hostile workplace, some of which are described below. • We make training on preventing sexual harassment, discrimination and retaliation available to our employees. 43 Table of Conten t s • We expect employees to report any violations of Company policies, including sexual harassment, they witness. Among other ways, employees can report incidents of harassment using our anonymous complaint and reporting hotline. Social Impact and Corporate Social Responsibility We believe that the content we produce, primarily directed at young people and their families, both reflects and influences how our young viewers perceive and understand important issues. We endeavor to earn our viewers’ trust through a variety of practices, and we are focused on using our platforms to create positive social impacts. By way of just a few examples: in our show Rainbow Rangers , a diverse cast of girls works to save animals and protect the environment, while demonstrating the power of teamwork; in our Llama Llama series, we teach kindness and inclusion, and feature a differently abled character, which we have been told is appreciated by moms and kids who deal with physical challenges. In the earliest days of the COVID-19 pandemic, we spread public service messages to keep our audiences safe and informed with animated shorts featuring the iconic voices from our series including Warren Buffett from The Secret Millionaires Club and Jennifer Garner, the voice of Mama Llama from the Llama Llama series. Our mission statement says it all: “Content with a Purpose.” Social justice, caring about the environment and modeling appropriate and inclusionary behavior for kids has been part of our company for many years and we are constantly seeking ways to improve on what we have already been doing. Recent Developments On February 6, 2023, our board of directors approved a 1-for-10 reverse stock split of our outstanding shares of common stock. The reverse stock split was effected on February 10, 2023 at 5:00 p.m. Eastern time. 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. The par value of each share of common stock remained unchanged. 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 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. 44 Table of Conten t s Results of Operations Our summary results for the three months ended June 30, 2023 and 2022 are below: Revenue Three Months Ended June 30, 2023 June 30, 2022 Change % Change (in thousands, except percentages) Production Services $ 7,033 $ 10,018 $ (2,985) (30) % Content Distribution 3,012 8,529 (5,517) (65) % Licensing & Royalties 103 2,495 (2,392) (96) % Media Advisory & Advertising Services 890 1,082 (192) (18) % Total Revenue $ 11,038 $ 22,124 $ (11,086) (50) % 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. 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. 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 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 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. 45 Table of Conten t s Expenses Three Months Ended June 30, 2023 June 30, 2022 Change % Change (in thousands, except percentages) Marketing and Sales $ 1,690 $ 972 $ 718 74 % Direct Operating Costs 9,541 14,648 (5,107) (35) % 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: Revenue 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. 46 Table of Conten t s 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. 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. 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 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. Expenses 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 % Impairment of Intangible Assets 4,023 – 4,023 100 % Impairment of Goodwill 11,287 – 11,287 100 % Total Expenses $ 55,786 $ 42,086 $ 13,700 33 % 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 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. 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 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. 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 $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 47 Table of Conten t s 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. Other Income (Expense), Net Components of Other Income (Expense), net are summarized as follows: Three Months Ended Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Interest Expense (a) $ (1,020) $ (388) $ (2,105) $ (443) 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 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. 48 Table of Conten t s Liquidity and Capital Resources 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 $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 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 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 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. We believe that our current cash and cash equivalents balances and our investments in available for sale marketable securities are sufficient to support our operations for at least the next twelve months. 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 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. 49 Table of Conten t s Six Months Ended June 30, 2023 June 30, 2022 Increase (Decrease) in Net Cash (in thousands) Net Cash Used in Operating Activities $ (10,587) $ (17,544) $ 6,957 Net Cash Provided by (Used in) Investing Activities 35,948 (41,339) 77,287 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) 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 $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 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 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 We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods. 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 $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. 50 Table of Conten t s We plan to utilize our liquidity (as described above) to fund our material cash requirements. As of June 30, 2023, we have $2.9 million in commitments for capital expenditures, related to equipment leases. Critical Accounting Policies and Estimates The preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material. Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2022 Annual Report on Form 10-K, and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2022 Annual Report on Form 10-K describe the significant accounting policies and methods used in the preparation of our condensed consolidated financial statements. Off Balance Sheet Arrangements We have no off-balance sheet arrangements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.