Kartoon Studios, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the three and nine months ended September 30, 2024 and September 30, 2023 . Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission (the “SEC”), in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “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. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire. References to “we”, “us”,”our”, and the “Company” refer to Kartoon Studios, Inc. Overview Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide readers of our condensed consolidated financial statements with the perspectives of management. This should allow the readers of this report to obtain a comprehensive understanding of our businesses, strategies, current trends, and future prospects. It should be noted that the MD&A contains forward-looking statements that involve risks and uncertainties. Our Business Our Content Distribution business is focused on achieving scale across our networks, including Kartoon Channel! , Frederator, Ameba, and Kartoon Channel! Worldwide. Revenue growth will be driven by the continued focus on licensed content and exploitation of our current content such as Stan Lee, Shaq's Garage , Rainbow Rangers and many more. Continued profit growth will be realized the more we can scale the business across our platforms. In addition, we are looking at artificial intelligence (“AI”) tools to reduce the cost of operating distribution expenses such as dubbing expenses, video resolution upscaling and converting between 2D and 3D. Our Production Services business is focused on creating high-quality original and for hire content in the most efficient way possible. To achieve this, our Mainframe Studios division, the main driver of this business, is exploring more ways to improve operations by adopting a more flexible and efficient approach. This includes collaborating with outsource partners and utilizing AI technology to streamline processes and drive efficiencies within the organization. 30 Our Licensing & Royalties business has the most upside and potential for the Company. We are looking to take advantage of our incredible set of Stan Lee assets to drive consumer products - both digitally and physically. We will be focused on utilizing all of our IP assets further in 2024 and beyond. Our Media Advisory & Advertising Services business is focused on driving deal flow opportunities and winning annuity business through retainers and projects. The team continues to focus on the toy business, but also expansion into tangential industries such as family and travel. The team has expanded their reach recently by leveraging their relationships with influencers to promote products and provide bespoke marketing initiatives for the clients. Results of Operations Our summary results for the three months ended September 30, 2024 and 2023 are below: Revenue Three Months Ended September 30, 2024 2023 Change % Change (in thousands, except percentages) Production Services $ 4,898 $ 6,360 $ (1,462 ) (23)% Content Distribution 2,348 2,562 (214 ) (8)% Licensing & Royalties 37 153 (116 ) (76)% Media Advisory & Advertising Services 1,425 997 428 43% Total Revenue $ 8,708 $ 10,072 $ (1,364 ) (14)% 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 Wow production services for the three months ended September 30, 2024 was 23% lower than the Wow production services revenue recognized during three months ended September 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 advertisement supported video on demand (“AVOD”) and subscription video on demand (“SVOD”), including advertising sales for the three months ended September 30, 2024, decreased by 8% as compared to the three months ended September 30, 2023. This was primarily due to a decrease in Frederator’s creator network revenue of $0.2 million from YouTube due to reduced advertising spending and a decline in revenue per mille (“RPM”) advertising rates. Revenue related to Licensing & Royalties for the three months ended September 30, 2024 decreased by 76% as compared to the three months ended September 30, 2023 primarily due to higher royalties earned in the prior year for owned IP and music royalties. Revenue generated by Media Advisory & Advertising services for the three months ended September 30, 2024 increased by 43% as compared to the three months ended September 30, 2023 primarily due to higher net renewal activity and media purchases from clients. 31 Expenses Three Months Ended September 30, 2024 2023 Change % Change (in thousands, except percentages) Marketing and Sales $ 290 $ 522 $ (232 ) (44)% Direct Operating Costs 5,766 13,475 (7,709 ) (57)% General and Administrative 5,199 8,679 (3,480 ) (40)% Total Expenses $ 11,255 $ 22,676 $ (11,421 ) (50)% The decrease in Marketing and Sales expenses for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was primarily due to a decrease of $0.3 million in marketing expenses associated with company brand development. Direct Operating Costs during the three months ended September 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 $6.3 million of film cost impairments and write-down of development projects for the three months ended September 30, 2023, a $1.1 million reduction in salary costs, net of tax credits, from a decline in headcount as a result of lower volumes of service production projects for the three months ended September 30, 2024, compared to the same period of the prior year, and a reduction of $0.2 million in participation estimates related to Wow owned IP. The decrease in General and Administrative expenses for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was primarily due to a decrease in expenses of $1.9 million related to cost saving initiatives, a decrease of $0.6 million in litigation expenses mainly due to a litigation insurance provision recognized in the three months ended September 30, 2024, a decrease of $0.4 million in annual shareholder meeting expenses of holding the annual shareholder meeting during the quarter ended September 30, 2024 as opposed to earlier in the prior year, and lower depreciation expense of $0.3 million for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. During the three months ended September 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 September 30, 2024. Our summary results for the nine months ended September 30, 2024 and 2023 are below: Revenue Nine Months Ended September 30, 2024 2023 Change % Change (in thousands, except percentages) Production Services $ 12,756 $ 23,279 $ (10,523 ) (45)% Content Distribution 7,002 8,815 (1,813 ) (21)% Licensing & Royalties 235 362 (127 ) (35)% Media Advisory & Advertising Services 3,177 2,820 357 13% Total Revenue $ 23,170 $ 35,276 $ (12,106 ) (34)% 32 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 Wow production services for the nine months ended September 30, 2024 was 45% lower than the Wow production services revenue recognized during nine months ended September 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 nine months ended September 30, 2024, decreased by 21% as compared to the nine months ended September 30, 2023. This was primarily due to a decrease in Frederator’s creator network revenue of $1.7 million from YouTube due to reduced advertising spending and a decline in RPM advertising rates. Revenue related to Licensing & Royalties for the nine months ended September 30, 2024 decreased by 35% as compared to the nine months ended September 30, 2023 primarily due to higher royalties earned in the prior year for music royalties. Revenue generated by Media Advisory & Advertising services for the nine months ended September 30, 2024 increased by 13% as compared to the nine months ended September 30, 2023 primarily due to higher net renewal activity, client fees, and media purchases from clients. Expenses Nine Months Ended September 30, 2024 2023 Change % Change (in thousands, except percentages) Marketing and Sales $ 1,026 $ 2,457 $ (1,431 ) (58)% Direct Operating Costs 15,936 34,301 (18,365 ) (54)% General and Administrative 19,710 26,274 (6,564 ) (25)% Impairment of Property and Equipment – 120 (120 ) —% Impairment of Intangible Assets – 4,023 (4,023 ) —% Impairment of Goodwill – 11,287 (11,287 ) —% Total Expenses $ 36,672 $ 78,462 $ (41,790 ) (53)% The decrease in Marketing and Sales expenses for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was primarily due to expenses incurred for stock issued for services of $1.3 million related to our Shaq’s Garage series that was not incurred during the current nine months ended September 30, 2024, and a decrease of $0.3 million in marketing expenses associated with company brand development Direct Operating Costs during the nine months ended September 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 of 54% as compared to the nine months ended September 30, 2023 was primarily due to a $11.5 million reduction in salary costs, net of tax credits, as a result in a reduction in headcount due to a lower volume of service production projects for the nine months ended September 30, 2024, compared to the same period of the prior year, and $6.5 million of film cost impairments and write-down of development projects for the nine months ended September 30, 2024. 33 The decrease in General and Administrative expenses for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was primarily due to a decrease of $2.0 million as a result of decreased use in equipment rentals and software licenses, a decrease of $1.5 million in share-based compensation expense, a decrease of $1.5 million in payroll related expenses, a decrease of $0.9 million in depreciation related to equipment leases that had ended prior to the current period, and a decrease of $0.6 million in general administrative expenses related to additional cost saving initiatives. During the nine months ended September 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 nine months ended September 30, 2024. Other Expense, net Components of Other Expense, net are summarized as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Interest Expense (a) $ (176 ) $ (672 ) $ (625 ) $ (2,777 ) Warrant Incentive Expense (b) – – – (12,664 ) Gain on Revaluation of Warrants (c) 3 2,797 63 8,999 Gain (Loss) on Revaluation of Equity Investment in YFE (d) (461 ) (2,325 ) (1,342 ) 1,102 Realized Loss on Marketable Securities Investments (e) (148 ) (1,897 ) (505 ) (4,154 ) Gain (Loss) on Foreign Exchange (f) 999 (637 ) 19 (282 ) Interest Income (g) 40 95 135 563 Loss on Early Lease Termination (h) – (232 ) – (232 ) Finance Lease Interest Expense (i) (20 ) (48 ) (74 ) (152 ) Other (j) 189 11 723 37 Other Income (Expense), net $ 602 $ (2,236 ) $ (981 ) $ (6,783 ) Three Months and Nine Months Ended September 30, 2024 (a) Interest Expense during the three and nine months ended September 30, 2024 primarily consisted of $0.2 million and $0.6 million, respectively, primarily due to interest incurred on production facilities and bank indebtedness. (b) There was no warrant incentive expense in 2024. (c) The Gain on Revaluation of Warrants during the three and nine months ended September 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 nine months ended September 30, 2024, excluding the impact of foreign currency recorded separately, is a result of a decrease in YFE’s stock price as of September 30, 2024. (e) The Realized Loss on Marketable Securities Investments during the three and nine months ended September 30, 2024 reflects the loss that will not be recovered from the investments due to selling securities prior to maturity. 34 (f) The Gain on Foreign Exchange during the three and nine months ended September 30, 2024 primarily related to the revaluation of the YFE investment, resulting in a gain of $0.8 million and $0.2 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 nine months ended September 30, 2024 primarily consisted of interest income, net of premium amortization expense, recorded for the investments in marketable securities. (h) There was no gain or loss on lease termination in 2024. (i) The Finance Lease Interest Expense during the three and nine months ended September 30, 2024 represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line. (j) Other during the three and nine months ended September 30, 2024 is primarily related to late fees from select clients on a payment plan. Three Months and Nine Months Ended September 30, 2023 (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. (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. (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 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. (h) 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. (i) The finance lease interest expense represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line. (j) Other during the three and nine months ended September 30, 2023 is primarily related to late fees from select clients on a payment plan. Liquidity, Going Concern, and Capital Resources As of September 30, 2024, we had cash of $4.6 million, which increased by $0.5 million as compared to December 31, 2023. The increase was primarily due to cash provided by investing activities of $7.9 million, offset by cash used in financing activities of $6.4 million and cash used for operating activities of $1.1 million. The cash used in financing activities was primarily due to repayments of the production facilities, finance lease obligations, and bank indebtedness, net of proceeds from each, resulting in net cash used of $10.0 million, offset by net proceeds from the Offering of $3.3 million and margin loan of $0.3 million. The cash provided by investing activities was primarily due to sales of marketable securities of $8.0 million. 35 As of September 30, 2024, we held available-for-sale marketable securities with a fair value of $4.1 million, a decrease of $7.9 million as compared to December 31, 2023 due to sales and maturities during the nine months ended September 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 September 30, 2024 and December 31, 2023, our margin loan balance was $1.1 million and $0.8 million, respectively. During the nine months ended September 30, 2024, we borrowed an additional $9.1 million from our investment margin account and repaid $8.8 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 0.71% and 0.98%, respectively, on average margin loan balances of $7.5 million and $27.4 million as of September 30, 2024 and December 31, 2023, respectively. For three months ended September 30, 2024 and September 30, 2023, we incurred interest expense on the loan of $11,070 and $0.2 million, respectively. We incurred interest expense on the margin loan of $42,131 and $1.5 million during the nine months ended September 30, 2024 and September 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 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 agreements that have an aggregate total outstanding balance of $1.2 million ( CAD 1.6 million). During March 2024, we amended the revolving demand facility, equipment lease line, and treasury risk management facility. As a result of the amendment, the revolving demand facility allows for draws of up to $0.7 million ( CAD 1.0 million) to be made by way of CAD prime rate loans, CAD overdrafts, USD base rate loans or letters of credit up to a maximum of $200,000 in either CAD or USD and having a term of up to 1 year. The CAD prime borrowings and overdrafts bear interest at a rate equal to bank prime plus 2.00% per annum. The USD base rate borrowings bear interest at a rate equal to bank base rate plus 2.00% per annum. In addition, the equipment lease line was terminated, however, we have and will continue to make the regular principal and interest payments under the specific financing terms of the existing equipment lease agreements. The amendment removed the treasury risk management facility that allowed for advances of up to $0.4 million (CAD 0.5 million). As of the date of amendment and December 31, 2023, 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. As of September 30, 2024 , we are not in compliance with a financial covenant to maintain a minimum liquidity threshold. Due to financial covenant violations in the second quarter of 2024, our remaining equipment lease agreements with the lender of $0.6 million (CAD 0.8 million) are subject to early repayment. During the three months ended September 30, 2024, the lender agreed to a repayment plan for the equipment leases under the equipment lease line to be completed prior to the end of the fourth quarter of 2024. On August 30, 2024, we paid $0.1 million (CAD 0.1 million) to the lender as part of our repayment plan for the existing equipment lease line agreements. Subsequent to September 30, 2024, we paid $0.3 million (CAD 0.4 million) to the lender as part of our repayment plan for the equipment lease line. The amendment and covenant violation did not have any impact on our production facilities that are separate from the revolving demand facility and are used for financing specific productions. 36 Working Capital As of September 30, 2024, we had total current assets of $37.2 million, including cash of $4.6 million and marketable securities of $4.1 million, and our total current liabilities were $33.7 million. We had working capital of $3.5 million as of September 30, 2024 as compared to working capital of $11.5 million as of December 31, 2023. The decrease of $8.0 million was primarily due to sales of marketable securities of $8.0 million, a decrease in accounts receivable and tax credits receivable of $14.0 million, partially offset by a decrease in accounts payable of $4.8 million and a decrease in production facilities and bank indebtedness of $8.9 million. During the nine months ended September 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. Based on our current expected level of operating expenditures and the cash and cash equivalents on hand at September 30, 2024, management concludes that there is substantial doubt about our ability to continue as a going concern for a period of at least 12 months subsequent to the issuance of the accompanying condensed consolidated financial statements. Historically, the Company has financed its operations primarily through revenue generated from operations, loans and sales of its securities, and the Company expects to continue to seek and obtain additional capital in a similar manner. The Company has filed a registration statement on Form S-3 on December 22, 2023, as amended, registering the sale of up to $75 million of the Company’s securities pursuant to a shelf registration statement, and a registration statement on Form S-1 on September 27, 2024, as amended, in connection with a best efforts public offering of up to $8 million of the Company’s securities. However, the Company does not have any committed sources of financing at this time, and it is uncertain whether any additional funding will be available when it needs it on terms that will be acceptable to it, or at all. The Company’s ability to sell securities registered on its registration statement on From S-3 is limited until such time that the market value of its voting securities held by non-affiliates is $75 million or more. In addition, the number of shares of common stock and securities convertible or exercisable for common stock that the Company can sell, under certain circumstances, will be limited by NYSE American rules and regulations. There can be no assurance that the Company will be able to raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of its existing shareholders will be diluted. The issuance of debt can result in restrictive covenants that limit operations. If funding is not available or not available at terms acceptable to the Company, the Company will seek to reduce overhead costs and reduce its weekly cash obligations in the short term as needed. In addition, the Company can look to divest or bring in equity partners for our various divisions and bring in near term capital. Comparison of Cash Flows for the Nine Months Ended September 30, 2024 and September 30, 2023 Our total cash as of September 30, 2024 and September 30, 2023 was $4.6 million and $3.9 million, respectively. Nine Months Ended September 30, 2024 2023 Change (in thousands) Net Cash Used in Operating Activities $ (1,127 ) $ (20,168 ) $ 19,041 Net Cash Provided by Investing Activities 7,902 69,418 (61,516 ) Net Cash Used in Financing Activities (6,444 ) (52,829 ) 46,385 Effect of Exchange Rate Changes on Cash 155 34 121 Net Increase (Decrease) in Cash $ 486 $ (3,545 ) $ 4,031 37 Net Non-cash Expenses Items necessary to reconcile from net loss to cash used in operating activities included net non-cash expenses of $5.9 million for the nine months ended September 30, 2024 as compared to net non-cash expenses of $37.6 million for the nine months ended September 30, 2023. The net decrease of $31.7 million in non-cash expenses was primarily due to the absence of the recognition of $21.6 million in impairment expenses of film and television costs, long-lived assets, intangible assets and goodwill, a decrease in warrant incentive expense of $12.7 million, a decrease of realized losses from marketable securities of $3.6 million, and a decrease in share-based compensation of $1.5 million. The decreases were partially offset by the nine months ended September 30, 2023 reconciling non-cash items of $8.9 million related to gains from revaluations of warrants. Change in Operating Activities The net change in operating asset and liability activities provided by operating activities of $8.1 million as of September 30, 2024 compared to the net change in operating asset and liability activities used by operating activities of $6.0 million as of September 30, 2023 was primarily due to an increase in net receipts of tax credits during the current year of $7.4 million as credits were received for production completed in the prior year, a decrease in deferred revenue of $8.0 million, an increase in accounts receivable, net of $2.6 million and a $2.9 million increase in accounts payable due to timing. Change in Investing Activities The decrease in cash provided by investing activities of $61.5 million was primarily due to a decrease in proceeds from the sales and maturities of marketable securities of $60.1 million during the nine months ended September 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 $46.4 million was primarily due to a decrease in repayments of our margin loan of $67.4 million, partially offset by less proceeds drawn from the margin loan and production facilities of $13.2 million, higher 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 $2.8 million, and higher repayments of production facilities in the current year of $3.7 million. Material Cash Requirements We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods. Our material cash requirements from known contractual and other obligations primarily relate to our debt and lease obligations and our employment and consulting contracts. The aggregate amount of future minimum purchase obligations under these agreements over the period of next five years is approximately $25.3 million as of September 30, 2024, of which $5.0 million could be owed within one year. Included in the amount that could be due within one year is the margin loan current balance of $1.1 million and revolving demand facility current balance of $0.6 million. We plan to utilize our liquidity (as described above) to fund our material cash requirements. As of September 30, 2024, we had $1.1 million in commitments for capital expenditures, related to equipment leases. 38 Critical Accounting Estimates The preparation of the financial statements and related disclosures in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material. Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of 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 We have no off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.