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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 123 added, 72 removed, 91 unchanged (68% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the three months ended March 31, 2024 and 2023.

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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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 for the year ended December 31, 2023, which was filed with the SEC on April 9, 2024, and elsewhere in this report, as well as other factors that may affect our business, results of operations, or financial condition.

These differences can arise as a result of the risks described in the section entitled “Risk Factors” below in this Quarterly Report on Form 10-Q (the “Form 10-Q”) and in the section entitled “Item 1A.

Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on April 9, 2024 (the “2023 Annual Report”), 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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Results of Operations

Our summary results for the three months ended March 31, 2024 and 2023 are below:

Three Months Ended March 31,

Our summary results for the three months ended June 30, 2024 and 2023 are below:

Three Months Ended June 30,

2024 2023 Change % Change

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

Revenue for the three months ended March 31, 2024 was lower than the Wow production services revenue recognized during three months ended March 31, 2023 primarily due to a lower volume of active service production projects in the current period versus the prior year period.

Revenue related to Content Distribution on AVOD and SVOD, including advertising sales for the three months ended March 31, 2024, decreased by 29% as compared to the three months ended March 31, 2023.

This was primarily due to a decrease in Frederator’s multi-channel network revenue of $0.8 million from YouTube due to less viewership and a decline in RPM advertising rates.

Revenue related to Licensing & Royalties for the three months ended March 31, 2024 increased by 117% as compared to the three months ended March 31, 2023 primarily due to the acquisition of new customers during the current period.

Revenue generated by Media Advisory & Advertising services for the three months ended March 31, 2024 decreased by 7% as compared to the three months ended March 31, 2023 primarily due to lower net renewal activity and media purchases from clients.

Three Months Ended March 31,

Revenue for the three months ended June 30, 2024 was 28% lower than the Wow production services revenue recognized during three months ended June 30, 2023 primarily due to a lower volume of active service production projects in the current period versus the prior year period.

Revenue related to Content Distribution on AVOD and SVOD, including advertising sales for the three months ended June 30, 2024, decreased by 20% as compared to the three months ended June 30, 2023.

This was primarily due to a decrease in Frederator’s multi-channel network revenue of $0.6 million from YouTube due to reduced ad spending and a decline in RPM advertising rates.

Revenue related to Licensing & Royalties for the three months ended June 30, 2024 decreased by 74% as compared to the three months ended June 30, 2023 primarily due to higher royalties earned for owned IP for the period ended June 30, 2023.

Revenue generated by Media Advisory & Advertising services for the three months ended June 30, 2024 decreased by 3% as compared to the three months ended June 30, 2023 primarily due to lower net renewal activity and media purchases from clients.

Three Months Ended June 30,

2024 2023 Change % Change

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General and Administrative 6,908 8,370 (1,462) (17) %

Total Expenses $ 13,045 $ 19,601 $ (6,556) (33) %

The decrease in Marketing and Sales expenses for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 was primarily due to expenses incurred for stock issued for services of $1.2 million related to the Company’s Shaq’s Garage series that was not incurred during the current three months ended June 30, 2024 and decrease of $0.2 million in media expenses.

Direct Operating Costs during the three months ended June 30, 2024 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, make up the remainder of Direct Operating Costs.

The decrease was primarily due to a $6.1 million reduction in salary costs from a decline in headcount as a result of lower

volumes of service production projects for the three months ended June 30, 2024, compared to the same period of the prior year, offset by a $2.1 million reduction in tax credits earned as correlated to the decrease in labor costs, and an increase of $0.5 million of production costs as new project contracts were signed during the current period.

The decrease in General and Administrative expenses for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 was primarily due to a decrease of $1.0 million as a result of decreased use in equipment rentals and software licenses, a decrease of $0.6 million in share-based compensation expense, a decrease of $0.4 million in depreciation related to equipment leases that had ended prior to the current period, and a decrease in general administrative expenses related to our cost saving initiatives, offset by an increase of $0.7 million in litigation fees and an increase of $0.3 million in annual shareholder meeting expenses of holding the annual shareholder meeting during the quarter ended June 30, 2024 as opposed to later in the prior year.

During the three months ended June 30, 2023, we reassessed our nonfinancial assets, including our definite-lived intangible assets, our indefinite-lived intangible assets and our remaining goodwill for impairment.

As a result, we concluded that impairment charges to those assets were required.

We concluded that there were no indications or triggering events that would further impair the assets during the three months ended June 30, 2024.

Our summary results for the six months ended June 30, 2024 and 2023 are below:

Six Months Ended June 30,

2024 2023 Change % Change

(in thousands, except percentages)

Production Services $ 7,858 $ 16,919 $ (9,061) (54) %

Content Distribution 4,725 6,313 (1,588) (25) %

Licensing & Royalties 127 149 (22) (15) %

Media Advisory & Advertising Services 1,752 1,846 (94) (5) %

Total Revenue $ 14,462 $ 25,227 $ (10,765) (43) %

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

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 six months ended June 30, 2024 was 54% lower than the Wow production services revenue recognized during six months ended June 30, 2023 primarily due to a lower volume of active service production projects in the current period versus the prior year period.

Revenue related to Content Distribution on AVOD and SVOD, including advertising sales for the six months ended June 30, 2024, decreased by 25% as compared to the six months ended June 30, 2023.

This was primarily due to a decrease in Frederator’s multi-channel network revenue of $1.5 million from YouTube due to reduced ad spending and a decline in RPM advertising rates.

Revenue related to Licensing & Royalties for the six months ended June 30, 2024 decreased by 15% as compared to the six months ended June 30, 2023 primarily due to higher royalties earned for owned IP for the period ended June 30, 2023.

Revenue generated by Media Advisory & Advertising services for the six months ended June 30, 2024 decreased by 5% as compared to the six months ended June 30, 2023 primarily due to lower net renewal activity and media purchases from clients.

Six Months Ended June 30,

2024 2023 Change % Change

(in thousands, except percentages)

Marketing and Sales $ 736 $ 1,935 $ (1,199) (62) %

Direct Operating Costs 10,170 20,826 (10,656) (51) %

General and Administrative 14,511 17,595 (3,084) (18) %

Impairment of Property and Equipment – 120 (120) — %

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Total Expenses $ 25,417 $ 55,786 $ (30,369) (54) %

The increase in Marketing and Sales expenses for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was primarily due to an increase in advertising efforts aimed at promoting the Kartoon Studios branding.

Direct Operating Costs during the three months ended March 31, 2024 consisted primarily of salaries and related expenses for the animation production services employees of Wow and Frederator.

amortization, including any write-downs of film and television costs, make up the remainder of Direct Operating Costs.

The decrease was primarily due to a reduction in salary costs and headcount due to a lower volume of service production projects for the three months ended March 31, 2024, compared to the same period of the prior year.

The decrease in General and Administrative expenses for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was primarily due to a decrease of $0.7 million in share-based compensation expense, a decrease in depreciation related to equipment leases that had ended prior to the current period, and a decrease in general expenses as part of the Company’s cost saving initiatives.

During the three months ended March 31, 2023, we reassessed our nonfinancial assets, including our definite-lived intangible assets, our indefinite-lived intangible assets and our remaining goodwill for impairment.

The decrease in Marketing and Sales expenses for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 was primarily due to expenses incurred for stock issued for services of $1.3 million related to the Company’s Shaq’s Garage series that was not incurred during the current three months ended June 30, 2024.

Direct Operating Costs during the six months ended June 30, 2024 consisted primarily of salaries and related expenses for the animation production services employees of Wow and Frederator.

The decrease was primarily due to a $14.2 million reduction in salary costs as a result in a reduction in headcount due to a lower volume of service production projects for the six months ended June 30, 2024, compared to the same period of the prior year, partially offset by a $4.3 million reduction in tax credits earned as correlated to the decrease in labor costs.

The decrease in General and Administrative expenses for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 was primarily due to a decrease of $1.5 million as a result of decreased use in equipment rentals and software licenses, a decrease of $1.2 million in share-based compensation expense, a decrease of $0.7 million in payroll related expenses, a decrease of $0.6 million in depreciation related to equipment leases that had ended prior to the current period, and a decrease in general administrative expenses related to our cost saving initiatives, partially offset by an increase of $1.0 million in litigation and legal fees and an increase of $0.3 million in annual shareholder meeting expenses due to holding the annual shareholder meeting earlier in the year versus the prior year.

During the six months ended June 30, 2023, we reassessed our nonfinancial assets, including our definite-lived intangible assets, our indefinite-lived intangible assets and our remaining goodwill for impairment.

As a result, we concluded that impairment charges to those assets were required.

The Company concluded that there were no indications or triggering events that would further impair the assets during the three months ended March 31, 2024.

The Company concluded that there were no indications or triggering events that would further impair the assets during the six months ended June 30, 2024.

Other Expense, net

Components of Other Expense, net are summarized as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 2024 2023

Interest Expense (a) $ (246) $ (1,020) $ (449) $ (2,105)

Gain on Revaluation of Warrants (b) 37 139

Loss on Revaluation of Equity Investment in YFE (c) – (895)

Realized Loss on Marketable Securities Investments (d) (141) (1,537)

Gain (Loss) on Foreign Exchange (e) (650) 320

Interest Income (f) 53 310

Finance Lease Interest Expense (g) (30) (50)

Other (h) 164 1

Warrant Incentive Expense (b) – (12,664) – (12,664)

Gain on Revaluation of Warrants (c) 23 6,063 60 6,202

Loss on Revaluation of Equity Investment in YFE (d) (881) 4,322 (881) 3,427

Realized Loss on Marketable Securities Investments (e) (216) (720) (357) (2,257)

Gain (Loss) on Foreign Exchange (f) (330) 35 (980) 355

Interest Income (g) 42 158 95 468

Finance Lease Interest Expense (h) (24) (54) (54) (104)

Other (i) 370 2 534 3

Other Expense, net

$ (1,016) $ (2,858) $ (1,583) $ (4,570)

(a) Interest Expense during the three months ended March 31, 2024 primarily consisted of $0.1 million of interest incurred on the production facilities and $0.1 million of interest incurred on bank indebtedness.

(b) The Gain on Revaluation of Warrants during the three months ended March 31, 2024 is primarily related to the changes in fair value of the remaining outstanding warrant classified as a liability due to decreases in market price.

(c) As accounted for using the fair value option, the Loss on Revaluation of Equity Investment in YFE 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.

This excludes the impact of foreign currency recorded separately.

The stock price of YFE as of March 31, 2024 did not change from the prior period.

(d) The Realized Loss on Marketable Securities Investments reflects the loss that will not be recovered from the investments due to selling securities prior to maturity.

(e) The Gain (Loss) on Foreign Exchange during the three months ended March 31, 2024 primarily related to the revaluation of the YFE investment, resulting in a loss of $0.4 million due to the EURO fluctuation to USD as compared to the prior reporting period.

The remaining balance is related to remeasurements of transactions made in foreign currencies that are outstanding as of the balance sheet date.

(f) Interest Income during the three months ended March 31, 2024 primarily consisted of interest income, net of premium amortization expense, recorded for the investments in marketable securities.

(g) The Finance Lease Interest Expense represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line.

Other Income is primarily related to late fees from select clients on a payment plan.

Three Months and Six Months Ended June 30, 2024

(a) Interest Expense during the three and six months ended June 30, 2024 primarily consisted of $0.2 million and $0.1 million, respectively, primarily due to interest incurred on bank indebtedness.

(b) There was no warrant incentive expense in 2024.

(c) The Gain on Revaluation of Warrants during the three and six months ended June 30, 2024 is primarily related to the changes in fair value of the remaining outstanding warrant classified as a liability due to decreases in market price.

(d) As accounted for using the fair value option, the loss on the YFE investment revaluation during the three and six months ended June 30, 2024, excluding the impact of foreign currency recorded separately, is a result of a decrease in YFE’s stock price as of June 30, 2024.

(e) The Realized Loss on Marketable Securities Investments during the three and six months ended June 30, 2024 reflects the loss that will not be recovered from the investments due to selling securities prior to maturity.

(f) The Gain (Loss) on Foreign Exchange during the three and six months ended June 30, 2024 primarily related to the revaluation of the YFE investment, resulting in a loss of $0.2 million and $0.6 million, respectively due to the EURO fluctuation to USD as compared to the prior reporting period.

The remaining balance is related to remeasurements of transactions made in foreign currencies that are outstanding as of the condensed consolidated balance sheet date.

(g) Interest Income during the three and six months ended June 30, 2024 primarily consisted of interest income, net of premium amortization expense, recorded for the investments in marketable securities.

(h) The Finance Lease Interest Expense during the three and six months ended June 30, 2024 represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line.

(i) Other during the three and six months ended June 30, 2024 is primarily related to late fees from select clients on a payment plan.

Three Months and Six Months Ended June 30, 2023

(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.

(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.

(i) Other during the three and six months ended June 30, 2023 is primarily related to late fees from select clients on a payment plan.

Liquidity and Capital Resources

As of March 31, 2024, we had cash of $2.8 million, which decreased by $1.3 million as compared to December 31, 2023.

The decrease was primarily due to cash used in financing activities of $7.9 million, offset by cash provided by operating activities of $3.8 million and investing activities of $2.6 million.

The cash used in financing activities was primarily due to the net repayment of the production facilities and bank indebtedness, partially offset by the net proceeds from the margin loan, resulting in cash used of $7.5 million, and payments on finance leases of $0.4 million.

As of June 30, 2024, the Company had cash of $2.7 million, which decreased by $1.4 million as compared to December 31, 2023.

The decrease was primarily due to cash used in financing activities of $4.8 million and cash used for operating activities of $2.7 million, offset by cash provided by investing activities of $5.5 million.

The cash used in financing activities was primarily due to repayments of the production facilities, margin loan and bank indebtedness, net of proceeds from each, resulting in net cash used of $7.7 million, offset by proceeds from the Offering of $3.3 million.

The cash provided by investing activities was due to sales of marketable securities of $5.5 million.

As of March 31, 2024, we held available-for-sale marketable securities with a fair value of $9.4 million, a decrease of $2.6 million as compared to December 31, 2023 due to sales and maturities during the three months ended March 31, 2024.

As of June 30, 2024, the Company held available-for-sale marketable securities with a fair value of $6.5 million, a decrease of $5.5 million as compared to December 31, 2023 due to sales and maturities during the six months ended June 30, 2024.

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

As of March 31, 2024 and December 31, 2023, our margin loan balance was $2.9 million and $0.8 million, respectively.

During the three months ended March 31, 2024, we borrowed an additional $3.1 million from our investment margin account and repaid $0.9 million primarily with cash received from sales and maturities of marketable securities.

As of June 30, 2024 and December 31, 2023, the Company’s margin loan balance was $1.1 million and $0.8 million, respectively.

During the six months ended June 30, 2024, the Company borrowed an additional $6.3 million from its investment margin account and repaid $6.0 million primarily with cash received from sales and maturities of marketable securities.

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 0.95% and 0.98% on average margin loan balances of $14.2 million and $27.4 million as of March 31, 2024 and December 31, 2023, respectively.

We incurred interest expense on the loan of $18,632 and $0.7 million during the three months ended March 31, 2024 and 2023, 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.

We are subject to financial and customary affirmative and negative non-financial covenants on the revolving demand facility and equipment lease line that have an aggregate total outstanding balance of USD 1.0 million (CAD 1.4 million).

The weighted average interest rates were 0.82% and 0.98%, respectively, on average margin loan balances of $9.8 million and $27.4 million as of June 30, 2024 and December 31, 2023, respectively.

For three months ended June 30, 2024 and June 30, 2023, the Company incurred interest expense on the loan of $12,429 and $0.6 million, respectively.

The Company incurred interest expense on the loan of $31,061 and $1.3 million during the six months ended June 30, 2024 and June 30, 2023, 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 the Company’s condensed consolidated balance sheets.

The Company is subject to financial and customary affirmative and negative non-financial covenants on the revolving demand facility and equipment lease agreements that have an aggregate total outstanding balance of $1.3 million $1.7 million.

During March 2024, the Company amended the revolving demand facility, equipment lease line, and treasury risk management facility.

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The amendment removed the treasury risk management facility that allowed for advances of up to CAD 0.5 million.

As of March 31, 2024 and the date of the amendment, there were no outstanding amounts drawn under the treasury risk management facility.

As of June 30, 2024 and the date of the amendment, there were no outstanding amounts drawn under the treasury risk management facility.

The amendment also introduced revised financial covenants that are effective as of March 15, 2024.

The amendment did not have any impact on the Company’s existing production facilities that are separate from the revolving demand facility and are used for financing specific productions.

As of June 30, 2024 , the Company was not in compliance with two financial covenants.

The financial covenants required the Company to maintain a minimum liquidity threshold and to complete a minimum equity raise by June 30, 2024.

As a result of the covenant violations, the Company’s remaining equipment lease agreements with the lender of CAD 1.2 million (USD $0.9 million) are subject to repayment in the fourth quarter of 2024.

As of August 14, 2024, the lender and the Company have agreed to a repayment plan for the equipment leases to be completed within the fourth quarter of 2024.

The amendment and covenant violation did not have any impact on the Company’s production facilities that are separate from the revolving demand facility and are used for financing specific productions.

Working Capital

As of March 31, 2024, we had total current assets of $41.0 million, including cash of $2.8 million and marketable securities of $9.4 million, and our total current liabilities were $34.9 million.

We had working capital of $6.1 million as of March 31, 2024 as compared to working capital of $11.5 million as of December 31, 2023.

The decrease of $5.4 million was primarily due to a decrease in our cash and marketable security position.

During the three months ended March 31, 2024, we met our immediate cash requirements through existing cash balances.

As of June 30, 2024, we had total current assets of $38.8 million, including cash of $2.7 million and marketable securities of $6.5 million, and our total current liabilities were $33.6 million.

We had working capital of $5.2 million as of June 30, 2024 as compared to working capital of $11.5 million as of December 31, 2023.

The decrease of $6.3 million was primarily due to a decrease in our cash and marketable securities position.

During the six months ended June 30, 2024, we met our immediate cash requirements through existing cash balances and through the sale of marketable securities.

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

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

Comparison of Cash Flows for the Three Months Ended March 31, 2024 and March 31, 2023

Our total cash as of March 31, 2024 and March 31, 2023 was $2.8 million and $4.1 million, respectively.

Three Months Ended March 31,

Comparison of Cash Flows for the Six Months Ended June 30, 2024 and June 30, 2023

Our total cash as of June 30, 2024 and June 30, 2023 was $2.7 million and $4.8 million, respectively.

Six Months Ended June 30,

2024 2023 Change

(in thousands)

Net Cash Provided by (Used in) Operating Activities $ 3,845 $ (5,165) $ 9,010

Net Cash Used in Operating Activities $ (2,654) $ (10,587) $ 7,933

Net Cash Provided by Investing Activities 5,518 35,948 (30,430)

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Net Non-cash Expenses

Items necessary to reconcile from net loss to cash provided by operating activities included net non-cash expenses of $2.1 million for the three months ended March 31, 2024 as compared to net non-cash expenses of $19.4 million for the three months ended March 31, 2023.

The majority of the decrease of $17.3 million was primarily due to the absence of the recognition of $15.4 million in impairment expenses of long-lived assets, intangible assets and goodwill and a loss of $0.9 million on the revaluation of our equity investment in YFE securities that was recorded during the three months ended March 31, 2023.

In addition, the realized loss on marketable securities decreased by $1.4 million due to the decreased sales of our marketable securities prior to their maturity date and stock based compensation expense decreased by $0.7 million.

The decrease is offset by the absence of recording deferred income taxes of $0.9 million.

Items necessary to reconcile from net loss to cash used in operating activities included net non-cash expenses of $4.8 million for the six months ended June 30, 2024 as compared to net non-cash expenses of $27.2 million for the six months ended June 30, 2023.

The majority of the decrease of $22.4 million in non-cash expenses was primarily due to the

absence of the recognition of $15.4 million in impairment expenses of long-lived assets, intangible assets and goodwill and warrant incentive expense of $12.7 million, a decrease of realized losses from marketable securities of $1.9 million and a decrease in share-based compensation of $1.2 million.

The decreases were partially offset by the six months ended June 30, 2023 reconciling non-cash items of $10.5 million related to gains from revaluations of our investment in YFE and warrants.

Change in Operating Activities

The net change in operating asset and liability activities from cash used of $0.7 million as of March 31, 2023 to the net change in operating asset and liability activities provided by cash of $8.8 million as of March 31, 2024 was primarily due to an increase in net receipts of tax credits during the current year of $5.6 million as credits were received for production completed in the prior year, a decrease in deferred revenue of $3.4 million and a $2.0 million decrease in accounts payable and accrued expenses due to timing.

The net change in operating asset and liability activities provided by operating activities of $5.5 million as of June 30, 2024 compared to the net change in operating asset and liability activities used by operating activities of $1.4 million as of June 30, 2023 was primarily due to an increase in net receipts of tax credits during the current year of $4.6 million as credits were received for production completed in the prior year, a decrease in deferred revenue of $5.9 million, a decrease in accounts receivable, net of $1.9 million and a $1.4 million increase in accounts payable due to timing.

Change in Investing Activities

The decrease in cash provided by investing activities of $12.1 million was primarily due to a decrease in proceeds from the sales and maturities of marketable securities of $12.2 million during the three months ended March 31, 2024 due to less sales of our marketable securities during the current period.

The decrease in cash provided by investing activities of $30.4 million was primarily due to a decrease in proceeds from the sales and maturities of marketable securities of $29.1 million during the six months ended June 30, 2024 as a result of selling less marketable securities during the current period.

Change in Financing Activities

The decrease in cash used in financing activities of $4.3 million was primarily due to a decrease in borrowings from our margin loan and production facilities, offset by an increase in pay down of the production facilities resulting in a net decrease of cash used in financing of $3.8 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.

The decrease in cash used in financing activities of $23.1 million was primarily due to a decrease in repayments of our margin loan of $35.8 million, offset by repayments during the current period, compared to proceeds from bank indebtedness during the prior year period, resulting in a net increase of cash used in financing of $5.6 million.

In addition, we did not receive proceeds from a warrant exchange in the current period compared to the prior year period of $5.3 million.

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 $24.6 million as of March 31, 2024, of which about $8.5 million could be owed within one year if the margin loan is called.

The aggregate amount of future minimum purchase obligations under these agreements over the period of next five years is approximately $27.2 million as of June 30, 2024, of which about $6.3 million could be owed within one year if the margin loan is called.

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

As of March 31, 2024, we had $1.7 million in commitments for capital expenditures, related to equipment leases.

Critical Accounting Policies and Estimates

As of June 30, 2024, we had $1.4 million in commitments for capital expenditures, related to equipment leases.

Critical Accounting 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.

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 our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on April 9, 2024 (the “2023 Annual Report”), and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2023 Annual Report 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 Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2023 Annual Report, and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2023 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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What changed 10-Q

Item 2. Management’s Discussion and Analysis