What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-17 compared with 2023-08-14 · 120 added, 115 removed, 158 unchanged (60% 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 six months ended June 30, 2023 and

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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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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.

Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC 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.

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("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 Shaq’s Garage starring Shaquille O’Neal.

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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.

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Through our investments in Germany’s Your Family Entertainment AG (“YFE”), a publicly traded company on the Frankfurt Stock 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, we established an affiliate relationship with Mainframe Studios, which is one of the largest animation producers in the world.

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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.

We also own Beacon Media Group, LLC (“Beacon Media”) and Beacon Communications, Ltd.

(“Beacon Communications”) (collectively, “Beacon”), a leading North American marketing and media agency and its first-class media research, planning and buying division.

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

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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 advancing and strengthening our approach to environmental, social and governance (“ESG”) topics to help serve our partners, audiences, employees and stockholders — 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.

As of September 30, 2023, we employed 368 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 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.

• We maintain a Chief Diversity Officer who is responsible for helping us 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.

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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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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.

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

The par value of each share of common stock remained unchanged.

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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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(“SEG”) which acted as the warrant solicitation agent for the Exercise, received a warrant to purchase up to 161,809 shares of common stock (collectively, the “Warrants”).

The Warrants are exercisable at any time beginning on November 1, 2023 (i.e., the date stockholder approval was received as described therein) (the “Initial Exercise Date”) and ends on the fifth anniversary of the Initial Exercise Date at a price per share of $2.50.

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

The fair value for the newly issued liability-classified Exchange Warrants of $12.7 million and the increase in fair value of $3.5 million for the repriced 2021 Warrants prior to exercise of the equity instruments was recorded as a loss to Warrant Incentive Expense within Other Income (Expense), Net on the condensed consolidated statement of operations.

Declaration of Series C Preferred Stock Dividend;

Redemption of Series C Preferred Stock

On September 21, 2023, our board of directors declared a dividend of one one-thousandth of a share of Series C Preferred Stock, par value $0.001 per share (“Series C Preferred Stock”), for each outstanding share of our common stock, par value $0.001 per share to stockholders of record on October 2, 2023 (the “Record Date”).

Each share of Series C Preferred Stock would entitle the holder thereof to 1,000,000 votes per share (and, for the avoidance of doubt, each fraction of a share of Series C Preferred Stock would have a ratable number of votes).

Thus, each one-thousandth of a share of Series C Preferred Stock would entitle the holder thereof to 1,000 votes.

The outstanding shares of Series C Preferred Stock would vote together with the outstanding shares of common stock as a single class exclusively with respect to the approval of the proposal (the “Share Increase Proposal”) to amend our Articles of Incorporation to increase the 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 Amendment”) and any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Share Increase Amendment (the “Adjournment Proposal” and together with the Share Increase Proposal, the “Proposals”).

The Series C Preferred Stock would not be entitled to vote on any other matter, except to the extent required under Chapter 78 of the Nevada Revised Statues.

We held a special meeting of stockholders on November 1, 2023 (the “Special Meeting”), at which both Proposals were approved by the stockholders.

All shares of Series C Preferred Stock that had not been duly voted by proxy prior to the opening of the Special Meeting were automatically redeemed in whole, but not in part, by us as of immediately prior to the opening of such meeting.

Any outstanding shares of Series C Preferred Stock that had not been redeemed prior to the opening of the Special Meeting were redeemed in whole, but not in part, automatically upon the approval of the Share Increase Proposal by the stockholders.

Each share of Series C Preferred Stock was redeemed in consideration for the right to receive an amount equal to $0.01 in cash for each ten whole shares of Series C Preferred Stock that had been held as of immediately prior to the applicable redemption.

However, the redemption consideration in respect of the shares of Series C Preferred Stock (or fractions thereof) would only be payable to such owners on the number of shares owned and redeemed pursuant to the redemptions rounded down to the nearest whole number that is a multiple of ten (such, that for example, an owner of 25 shares of Series C Preferred Stock redeemed pursuant to any redemption would be entitled to receive cash payment only on redemption of 20 shares of Series C Preferred Stock).

Results of Operations

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

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

Three Months Ended

June 30, 2023 June 30, 2022 Change % Change

September 30, 2023 September 30, 2022 Change % Change

(in thousands, except percentages)

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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.

Revenue for production services is 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.

Revenue for the three months ended September 30, 2023 decreased by 30% as compared to the three months ended September 30, 2022 primarily due to a decrease in the percentage of projects completed during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Four out of nine productions were fully delivered in the prior year period, with two new projects commencing during the three months ended September 30, 2023.

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

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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 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.

Revenue related to our AVOD and SVOD, including advertising sales for the three months ended September 30, 2023, decreased by 72% as compared to the three months ended September 30, 2022 primarily due to Wow’s delivery of an IP project during the three months ended September 30, 2022 generating $3.4 million in content revenue as compared to $0.1 million in revenue related to distribution during the three months ended September 30, 2023.

In addition, Frederator content revenue decreased during the three months ended September 30, 2023 by $2.6 million as compared to the same prior year period primarily due to lower revenue generated from its multi-channel network on YouTube revenue as a result of less viewership and a decline in revenue per 1,000 (mille) impressions (“RPM”) advertising rates.

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.

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Revenue related to our licensing and royalties for the three months ended September 30, 2023 decreased by 56% as compared to the three months ended September 30, 2022 primarily due to our license deals related to our Stan Lee Assets generating increased revenue during the prior year period.

Media Advisory & Advertising Services revenue is a combination of client retainer fee-based services and media commissions generated by Beacon.

Revenue for the three months ended September 30, 2023 decreased by 17% as compared to the three months ended September 30, 2022 primarily due to an increase of commissions during the three months ended September 30, 2023.

Three Months Ended

June 30, 2023 June 30, 2022 Change % Change

September 30, 2023 September 30, 2022 Change % Change

(in thousands, except percentages)

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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 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.

The decrease in marketing and sales expenses for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily due to reduced marketing and advertising expenses incurred to promote Kartoon Channel!

Direct Operating Costs consist primarily of salaries and related expenses for the animation production services employees of Wow and Frederator.

The decrease was primarily due to a reduction in Wow’s headcount, resulting in a $4.8 million decrease in costs and a decrease of $2.6 million reduction in Frederator’s costs as in line with the decrease in revenue.

The decrease is offset by offset by write-downs of $6.2 million in film and television costs recorded during the three months ended September 30, 2023.

The write-downs were as a result of inactive projects, projects not advancing to the production stage due to a lack of interest from potential partners and an overall economic downturn affecting customers in the entertainment industry.

There were no write-downs recorded during the nine months ended September 30, 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 $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

The $1.7 million decrease in general and administrative expenses for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily due to a $0.7 million decrease in stock based compensation expense as less shares vested during the current period, a $0.6 million reduction in professional services costs, primarily legal fees and a $0.2 million decrease in amortization expense of intangibles due to previously amortizable assets written off during the current period.

Our summary results for the nine months ended September 30, 2023 and 2022 are below:

Nine Months Ended

September 30, 2023 September 30, 2022 Change % Change

(in thousands, except percentages)

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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

Revenue for the nine months ended September 30, 2023 increased primarily due to recognition of nine full months of revenue during the current period as compared to six months of recognition during the nine months ended September 30, 2022 after the acquisition of Wow in the second quarter of 2022.

Adding in Wow’s first quarter revenue of 2022 to the nine months ended

September 30, 2022 results for comparison purposes, revenue generated by production services decreased by $5.7 million during the nine months ended September 30, 2023.

The decrease was primarily due to a decrease in the percentage of projects completed during the current period as compared to the same prior year period.

Revenue related to content distribution on AVOD and SVOD, including advertising sales for the nine months ended September 30, 2023, decreased by 51% as compared to the nine months ended September 30, 2022 primarily due to a decrease in Wow’s IP production revenue of $6.2 million as there were no IP projects delivered during the current period as compared to the prior year period and a $2.2 million decrease in Frederator’s multi-channel network on YouTube revenue as a result of less viewership and a decline in RPM advertising rates.

Revenue related to our licensing and royalties for the nine months ended September 30, 2023 decreased by 90% as compared to the nine months ended September 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.

Revenue for the nine months ended September 30, 2023 decreased by 14% as compared to the nine months ended September 30, 2022 primarily due to lower commissions during the nine months ended September 30, 2023, resulting in a decrease of $0.5 million.

Nine Months Ended

September 30, 2023 September 30, 2022 Change % Change

(in thousands, except percentages)

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Total Expenses $ 78,462 $ 67,204 $ 11,258 17 %

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.

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 $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.

The increase in marketing and sales expenses for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily due to recognition of marketing expenses related to Shaq’s Garage of $1.2 million, offset by a decrease in marketing and sales expenses during the nine months ended September 30, 2023.

Direct Operating Costs during the nine months ended September 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 the recognition of nine full months of costs incurred by Wow and Fred versus six months of costs incurred during the nine months ended September 30, 2022 after the acquisition in the second quarter of 2022.

In addition, we recorded write-downs of $6.2 million in film and television costs during the nine months ended September 30, 2023 due to an overall economic downturn affecting customers in the entertainment industry.

There were no write-downs recorded during the nine months ended September 30, 2022.

The $10.1 million decrease in general and administrative expenses for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily due to a decrease of $7.8 million in stock-based compensation expense and acquisition related costs of $4.5 million incurred during the nine months ended September 30, 2022.

The decrease is offset by the recognition of nine full months of costs incurred by Wow and Fred versus six months of costs incurred during the nine months ended September 30, 2022 after the acquisition in the second quarter of 2022.

During the nine months ended September 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

Six Months Ended

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

Nine Months Ended

September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

Interest Expense (a) $ (672) $ (740) $ (2,777) $ (1,184)

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Realized Loss on Marketable Securities Investments (e) (1,897) (36) (4,154) (160)

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

Loss on Foreign Exchange (f) (637) (1,336) (282) (2,596)

Interest Income (g) 95 257 563 759

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

Loss on Early Lease Termination (h) (232) – (152) –

Finance Lease Interest Expense (i) (48) (42) (232) (72)

Other 11 – 37 –

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.

Other Expense, net

$ (2,236) $ (5,062) $ (10,293) $ (2,805)

(a) Interest expense during the three and nine months ended September 30, 2023 primarily consisted of $0.2 million and $1.5 million of interest incurred on the margin loan, respectively, and $0.5 million and $1.3 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.

(c) The gain on warrant revaluation during the three months ended September 30, 2023 is primarily related to the $2.7 million change in fair value as of the end of the current reporting period of the Exchange Warrants and SEG Warrants compared to the fair value as of the end of the prior reporting period due to a decrease in market price.

The gain on warrant revaluation during the nine months ended September 30, 2023 is primarily related to the $8.8 million change in fair value as of the end of the current reporting period of the Exchange Warrants and SEG Warrants compared to the fair value as of the issuance date due to a decrease in market price.

(d) As accounted for using the fair value option, the gain or loss on the YFE investment revaluation, excluding the impact of foreign currency recorded separately, is a result of the increases or decreases in YFE’s stock price as of the current reporting period when compared to the prior reporting 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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(f) The loss on foreign currency exchange during the three and nine months ended September 30, 2023 primarily related to the EURO weakening against the USD when compared to the prior reporting period.

(g) Interest Income during the three and nine months ended September 30, 2023 primarily consisted of interest income of $0.1 million and $0.4 million, net of premium amortization expense, recorded for the investments in marketable securities, respectively.

The loss on early termination of lease is due to early termination of the Lyndhurst, NJ office lease, effective August 1, 2023.

The loss includes fees of $0.1 million and the write-down of assets and liabilities resulting in net, $0.1 million of loss.

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.

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.

As of September 30, 2023, we had cash of $3.9 million, which decreased by $3.5 million as compared to December 31, 2022.

The decrease was primarily due to cash used in financing activities of $52.8 million, primarily due to repayment of the margin loan, net proceeds, offset by the cash received from the warrant exchange and $20.2 million used in operating activities.

The cash used was offset by cash provided by sales and maturities of marketable securities of $67.6 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.

As of September 30, 2023, we held available-for-sale marketable securities with a fair value of $16.2 million, which decreased by $67.6 million as compared to December 31, 2022 due to sales and maturities during the nine months ended September 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.

We borrowed an additional $17.6 million from our investment margin account during the nine months ended September 30, 2023 and repaid $76.2 million primarily with cash received from sales and maturities of marketable securities.

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

The interest rates for the borrowings fluctuate based on the Fed Funds Upper Target plus 0.60%.

The weighted average interest rates were 1.13% and 1.66% on average margin loan balances of $34.0 million and $27.1 million as of September 30, 2023 and December 31, 2022, respectively.

We incurred interest expense on the loan of $0.2 million and $0.4 million during the three months ended September 30, 2023 and September 30, 2022, respectively and $1.5 million and $0.6 million during the nine months ended September 30, 2023 and September 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.

As of September 30, 2023 and December 31, 2022, our margin loan balance was $2.2 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 $3.8 million USD ($5.2 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 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 September 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.

The revolving demand facility and the treasury risk management facility can be called at any time 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.

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.

As of September 30, 2023, we had current assets of $61.4 million, including cash of $3.9 million and marketable securities of $16.2 million, and our current liabilities were $49.6 million.

We had working capital of $11.8 million as of September 30, 2023 as compared to working capital of $28.6 million as of December 31, 2022.

The decrease of $16.8 million was primarily due to a decrease in our cash 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 nine months ended September 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.

We believe that our current cash 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.

Table of Conten t s

Six Months Ended

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

Comparison of Cash Flows for the Nine Months Ended September 30, 2023 and September 30, 2022

Our total cash as of September 30, 2023 and September 30, 2022 was $3.9 million and $7.1 million, respectively.

Nine Months Ended

September 30, 2023 September 30, 2022 Change

(in thousands)

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Net Cash Provided by (Used in) Investing Activities 69,418 (37,362) 106,780

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 Cash Provided by (Used in) Financing Activities (52,829) 58,609 (111,438)

Effect of Exchange Rate Changes on Cash 34 (187) 221

Decrease in Cash

$ (3,545) $ (2,967) $ (578)

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.

Items necessary to reconcile from net loss to cash used in operating activities included net noncash expenses of $41.3 million for the nine months ended September 30, 2023 as compared to net noncash expenses of $22.9 million for the nine months ended September 30, 2022.

The majority of the increase of $18.4 million was primarily due to the recognition of $16.2 million as the fair value of Exchange Warrants classified as liabilities issued in June 2023 and the incremental expense of the modified 2021 Warrants exchanged and impairment expenses of our long-lived assets, intangible assets and goodwill of $15.4 million recorded during the nine months ended September 30, 2023.

In addition, the realized loss on marketable securities increased by $4.0 million due to the increased sales of our marketable securities prior to their maturity date.

The increase is offset by a gain of $8.6 million from the revaluation of liability classified warrants, primarily the new Exchange Warrants and a decrease in our stock-based compensation of $7.8 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.

Change in Operating Activities

The change in cash provided by operating asset activity of $9.1 million as of September 30, 2023 compared to September 30, 2022 was primarily due to the decrease in the change in tax credit receivables, net by the Wow entity of $4.2 million as productions decreased and a decrease in the change in film and television costs of $6.6 million due to write-downs of $6.2 million recognized during the three months ended September 30, 2023.

The decrease in cash used in operating liability activities of $3.9 million as of September 30, 2023 compared to September 30, 2022 was primarily due to the change in accrued production costs of $2.5 million, due to less production in the current period and accounts payable of $2.0 million due to timing of payments.

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.

Cash investing activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 increased from cash used in investing of $37.4 million to cash provided by investing of $69.4 million, primarily due to an increase in proceeds from the sales and maturities of marketable securities of $52.8 million during the nine months ended September 30, 2023 and the decrease in cash used of $50.7 million for investments and acquisitions in the prior year that did not occur in the current period.

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.

Cash financing activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 decreased from cash provided by financing of $58.6 million to cash used in financing of $52.8 million, primarily due to paying down the margin loan during the nine months ended September 30, 2023 compared to additional borrowings during the nine months ended September 30, 2022, resulting in a net $115.1 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 $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

The aggregate amount of future minimum purchase obligations under these agreements over the period of next five years is approximately $38.7 million as of September 30, 2023, of which about $10.4 million could be owed within one year if the margin loan and interim production facilities are called.

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.

As of September 30, 2023, we had $2.5 million in commitments for capital expenditures, related to equipment leases.

Critical Accounting Policies and Estimates

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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.

Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on April 13, 2023 (the “2022 Annual Report”), and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2022 Annual Report describe the significant accounting policies and methods used in the preparation of our condensed consolidated financial statements.

Off Balance Sheet Arrangements

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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