Kartoon Studios, Inc.: Form 10-Q for the period ended Jun 30, 2025

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 six months ended June 30, 2025 and 2024. Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2024, which was filed with the SEC on March 31, 2025 (“The 2024 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.

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

Production Services

Our production services business is centered on delivering original and third-party commissioned animated content with a focus on production efficiency and scalability. Mainframe Studios, our primary production entity, is undertaking operational enhancements through the adoption of flexible production workflows, strategic outsourcing, and the integration of new technologies. These initiatives aim to optimize cost structures and streamline the production pipeline. To date, Mainframe has produced over 1,200 television episodes, 70 movies, and three feature films, including titles such as Barbie Dreamhouse Adventures, Octonauts: Above & Beyond, Cocomelon, SuperKitties, and Unicorn Academy, in partnership with leading global media companies.

Content Distribution

Our content distribution strategy is focused on scaling audience reach and monetization across our proprietary networks, including Kartoon Channel!, Frederator, Ameba, and Kartoon Channel! Worldwide. We hope to grow our revenue through expanded licensing activity and increased utilization of existing IP assets such as Stan Lee brands, Shaq’s Garage, Rainbow Rangers, and many more. To support margin expansion, we are actively implementing AI-driven tools designed to reduce operating costs in areas such as language dubbing, video resolution enhancement, and 2D-to-3D conversion.

Licensing and Royalties

We believe the licensing and royalties business presents the most significant long-term growth opportunity. Strategic emphasis is being placed on the commercialization of the Stan Lee intellectual property portfolio, with a focus on both digital and physical consumer products. We intend to expand the use of our broader IP catalog in licensing programs beginning throughout 2025 and beyond.

Media Advisory and Advertising Services

Our media advisory and advertising segment is focused on developing recurring revenue through a mix of retainer and project-based engagements. The group continues to build upon its established presence in the toy industry while expanding into adjacent sectors, including family entertainment and travel. Over the past two years, the team has broadened its client engagement capabilities by integrating influencer-driven marketing strategies and custom campaign development.

Results of Operations

Our summary results for the three months ended June 30, 2025 and 2024 are below:

Revenue

(in thousands, except percentages)

Production Services revenue was generated specifically by Mainframe Studios 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 three months ended June 30, 2025 was higher than the Mainframe Studios’ production services revenue recognized during three months ended June 30, 2024 primarily due to the number of active projects in the current quarter.

Revenue related to Content Distribution on AVOD and SVOD, including advertising sales for the three months ended June 30, 2025, decreased by 17% as compared to the three months ended June 30, 2024. The decrease of $0.4 million was due to a decrease in Frederator’s creator network revenue from YouTube driven by overall less viewership as compared to the prior year period.

Revenue related to Licensing and Royalties for the three months ended June 30, 2025 increased by 219% as compared to the three months ended June 30, 2024 primarily due to higher amounts earned from our existing license deals related to our consumer products agreements and music licensing agreements. Additionally, we executed new licensing agreements related to Stan Lee Universe, LLC assets.

Revenue generated by Media Advisory and Advertising services for the three months ended June 30, 2025 decreased by 3% as compared to the three months ended June 30, 2024 primarily due to lower net renewal activity and media purchases from clients.

Expenses

(in thousands, except percentages)

The decrease in Marketing and Sales expenses for the three months ended June 30, 2025 as compared to the three months ended June 30, 2024 was primarily due to a decrease in advertising efforts aimed at promoting the Kartoon Studios branding.

Direct Operating Costs during the three months ended June 30, 2025 consisted of salaries and related expenses for animation production services employees of Mainframe Studios and Frederator. The remainder of Direct Operating Costs consisted of creator network channel expenses, content licensing, and production costs, including participation expenses related to profit-sharing obligations with various animation studios, post-production studios, writers, directors, musicians, and other creative talent, as well as amortization and any write-downs of film and television costs. The increase during the three months ended June 30, 2025 was primarily due to an increase in salary costs and headcount included in Production Services related to new projects that advanced in the current quarter compared to the same period of the prior year.

The decrease in General and Administrative expenses for the three months ended June 30, 2025 as compared to the three months ended June 30, 2024 was primarily due to a decrease of $0.5 million in professional fees reflecting lower legal expenses and reduced use of external consulting services, a decrease of $0.1 million in depreciation expense related to the property and equipment impairment recorded in prior year and a net reduction of $0.1 million in overhead costs primarily due to cost-saving initiatives.

During the three months ended June 30, 2025, we reassessed our nonfinancial assets, including our definite-lived intangible assets, our indefinite-lived intangible assets for impairment. As a result, we concluded that impairment charges to those assets were not required. Furthermore, we concluded that no indicators of impairment or triggering events were identified during the period.

Our summary results for the six months ended June 30, 2025 and 2024 are below:

Revenue

(in thousands, except percentages)

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Production Services revenue was generated specifically by Mainframe Studios 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, 2025 was higher than the Mainframe Studios’ production services revenue recognized during six months ended June 30, 2024 primarily due to the number of active projects in the current quarter.

Revenue related to Content Distribution on AVOD and SVOD, including advertising sales for the six months ended June 30, 2025, decreased by 16% as compared to the six months ended June 30, 2024. The decrease of $0.8 million was due to a decrease of $0.6 million in Frederator’s creator network revenue from YouTube driven by overall less viewership as compared to the prior year period, and a decrease in Kartoon Studios’ content distribution revenue of $0.2 million related to lower volume of licensing agreements signed by the Kartoon Channel! Worldwide division for the broadcast of the channel.

Revenue related to Licensing and Royalties for the six months ended June 30, 2025 increased by 34% as compared to the six months ended June 30, 2024 primarily due to higher amounts earned from our existing license deals related to our consumer products agreements and music licensing agreements. Additionally, we executed new licensing agreements related to Stan Lee Universe, LLC assets.

Revenue generated by Media Advisory and Advertising services for the six months ended June 30, 2025 decreased by 2% as compared to the six months ended June 30, 2024 primarily due to lower net renewal activity and media purchases from clients.

Expenses

(in thousands, except percentages)

The decrease in Marketing and Sales expenses for the six months ended June 30, 2025 as compared to the six months ended June 30, 2024 was primarily due to a decrease in advertising efforts aimed at promoting the Kartoon Studios branding.

Direct Operating Costs during the six months ended June 30, 2025 consisted of salaries and related expenses for animation production services employees of Mainframe Studios and Frederator. The remainder of Direct Operating Costs consisted of creator network channel expenses, content licensing, and production costs, including participation expenses related to profit-sharing obligations with various animation studios, post-production studios, writers, directors, musicians, and other creative talent, as well as amortization and any write-downs of film and television costs. The increase during the six months ended June 30, 2025 was primarily due to an increase in salary costs and headcount included in Production Services related to new projects that began in the current year compared to the same period of the prior year.

The decrease in General and Administrative expenses for the six months ended June 30, 2025 as compared to the six months ended June 30, 2024 was primarily due to a decrease of $1.2 million in professional fees reflecting lower legal expenses and reduced use of external consulting services, decrease of $0.7 million in overhead costs primarily due to cost-saving initiatives, decrease of $0.4 million in depreciation expense related to the property and equipment impairment recorded in prior year, and a $0.3 million decrease in share-based compensation expense.

During the three months ended June 30, 2025, we reassessed our nonfinancial assets, including our definite-lived intangible assets, our indefinite-lived intangible assets for impairment. As a result, we concluded that impairment charges to those assets were not required. Furthermore, we concluded that no indicators of impairment or triggering events were identified during the period.

Other Expense, net

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

Three Months and Six Months Ended June 30, 2025

(a) Interest Expense during the three and six months ended June 30, 2025 consisted of $0.2 million and $0.3 million respectively, primarily due to interest incurred on production facilities.

(b) The Loss on Revaluation of Warrants during the three months ended June 30, 2025 is related to the remeasurement occurred immediately before reclassification of the outstanding 7,894,736 Series A warrants and 7,894,736 Series B warrants from liability to equity. The Loss on Revaluation of Warrants during the six months ended June 30, 2025 consists of $0.7 million Loss recorded at remeasurement offset by a $0.4 million fair value gain in the period ended March 31, 2025 of the outstanding 7,894,736 Series A warrants and 7,894,736 Series B warrants. These Warrants were classified as a liability in the period ended March 31, 2025 and change in their Fair Value resulted in a recorded gain due to a decrease of expiration period.

(c) As accounted for using the fair value option, the Loss on Revaluation of Equity Investment in YFE of $3.8 million and $7.4 million, respectively, recorded in the three and six months ended June 30, 2025, is a result of the 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.

(d) The Realized Loss on Marketable Securities Investments of $32,145 recorded during the three months ended June 30, 2025 is related to the Loss of $37,197 on sale of certain securities prior to the maturity date, offset by the Gain of $5,053 attributable to the sale of U.S. Treasury Securities. The Realized Loss on Marketable Securities Investments of $27,691 recorded during the six months ended June 30, 2025 is related to the Loss of $37,197 on sale of certain securities prior to the maturity date, offset by the Gain of $9,507 attributable to the sale of U.S. Treasury Securities.

(e) The Gain on Foreign Exchange during the three and six months ended June 30, 2025 primarily related to the revaluation of the YFE investment, resulting in a gain of $1.7 million and $2.4 million, respectively, due to the depreciation of the U.S. dollar against the Euro relative to prior periods..

(f) In April 2025, we entered into a settlement agreement with YFE related to the Shareholder Loan Agreement. As the settlement was considered probable and the loss reasonably estimable as of March 31, 2025, we recorded a loss of approximately $0.9 million during the three months ended March 31, 2025.

(g) Interest Income during the three and six months ended June 30, 2025 and 2024 primarily consisted of income from investments in marketable securities, net of premium amortization expense, as well as other transactions, including interest income related to Employee Retention Tax Credit (“ERTC”) receivable and interest income related to the Shareholder Loan. Each of these sources was individually immaterial.

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

(i) In April 1, 2025, a subsidiary, Beacon Communications, executed a rent reassignment agreement relinquishing one floor of its office space in Toronto to a new tenant who assumed the lease obligation for that floor. This transaction resulted in a gain of $4,253 on lease modification recorded during the period ended June 30, 2025.

(j) During the three months ended June 30, 2025, a net loss of $0.1 million was recognized in connection with the reversal of previously accrued other income related to Employee Retention Tax Credit (ERTC) claims. Other income had initially been recorded based on anticipated recoveries from submitted claims. Recent legislative developments reduced the expected recoverable amounts, resulting in a partial reversal of the accrued other income. The amount also included $11,991 of other income, primarily consisting of late fees from select clients on payment plans. For the six months ended June 30, 2025, other income primarily related to such late fees totaled $50,197.

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Three Months and Six Months Ended June 30, 2024

(a) Interest Expense during the three and six months ended June 30, 2024 consisted of $0.2 million and $0.4 million, respectively, primarily due to interest incurred on production facilities and bank indebtedness.

(b) The Gain on Revaluation of Warrants recorded during the three and six months ended June 30, 2024 was related to the remeasurement of 89,286 outstanding liability warrants which expired in March 2025.

(c) As accounted for using the fair value option, the Loss on Revaluation of Equity Investment in YFE of $0.9 million recorded in the three and six months ended June 30, 2024, was a result of the decreases in YFE’s stock price as of the current reporting period when compared to the prior reporting period. This excluded the impact of foreign currency recorded separately.

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

(e) The Gain (Loss) on Foreign Exchange during the three and six months ended June 30, 2024 was 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 was related to remeasurements of transactions made in foreign currencies that are outstanding as of the condensed consolidated balance sheet date.

(f) No loss on settlement of debt was recorded during the three and six months ended June 30, 2024.

(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 represented the interest portion of the finance lease obligations for equipment purchased under an equipment lease line.

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

Liquidity, Going Concern, and Capital Resources

As of June 30, 2025, the Company had cash and restricted cash of $2.6 million, which decreased by $5.8 million as compared to December 31, 2024. The decrease was primarily due to cash used in operating activities of $6.3 million, cash used in financing activities of $0.3 million, reduction of $0.5 million in the value of our cash due to changes in foreign exchange rates, offset by cash provided by investing activities of $1.3 million. The cash used in operating activities was primarily due to net loss of $12.9 million and net change in operating asset and liabilities of $2.9 million, partially offset by net change in non-cash adjustments of $9.5 million. The cash used in financing activities was primarily due to payments of lease obligations of $0.2 million and repayments of the production facilities and margin loan, net of proceeds from each, resulting in net cash used of $0.1 million. The cash provided by investing activities of $1.3 million was primarily due to proceeds from the sale and maturities of marketable securities of $3.2 million, offset by the investment in marketable securities of $1.8 million.

As of June 30, 2025, we held available-for-sale marketable securities with a fair value of $0.7 million, a decrease of $1.3 million as compared to December 31, 2024, due to a sale of securities during the six months ended June 30, 2025. The available-for-sale securities consist of government debt securities and are also available as a source of liquidity.

Working Capital

As of June 30, 2025, we had total current assets of $25.5 million, including cash of $2.1 million, restricted cash of $0.5 million and marketable securities of $0.7 million, and our total current liabilities were $30.4 million. We had negative working capital of $4.9 million as of June 30, 2025 as compared to working capital of $1.2 million as of December 31, 2024. The decrease of $6.1 million was due to a decrease of $9.2 million in current assets and a decrease of $3.1 million in current liabilities compared to the prior period. A decrease in current assets is primarily driven by a decrease of $5.8 million in cash, a decrease of $4.9 million in accounts receivable and a decrease of $1.3 million in marketable securities investments, offset by an increase of $2.0 million in production tax credit receivable position, an increase $0.7 million in prepaid balance and an increase of $0.1 million in other receivables. The decrease in current liabilities is primarily driven by a decrease of $5.2 million in accounts payable, a decrease of $0.8 million in margin loan balance, a decrease of $0.3 million in accrued participation cost balance and a decrease of $0.3 million in other current liabilities, offset by an increase by $1.4 million in production facilities, an increase of $0.9 million in accrued expenses, an increase of $0.7 million in accrued salaries, and an increase of $0.5 million in deferred revenue balance.

During the six months ended June 30, 2025, we met our immediate cash requirements through existing cash balances. Additionally, we used equity and equity-linked instruments to pay for services and compensation.

Going Concern

Based on our current expected level of operating expenditures and the cash and cash equivalents on hand at June 30, 2025, management concludes that there is substantial doubt about our ability to continue as a going concern for a period of at least twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements. Historically, we have financed our operations primarily through revenue generated from operations, loans and sales of our securities, and we expect to continue to seek and obtain additional capital in a similar manner. In order to address our capital needs, we intend to consider multiple alternatives, including, but not limited to, the sale of equity or debt securities, financing arrangements or entering into collaborative, strategic, and/or licensing transactions. We do not have any committed sources of financing at this time, and it is uncertain whether any additional funding will be available when we need it on terms that will be acceptable to us, or at all. Our ability to sell securities registered on our registration statement on Form S-3 is limited until such time that the market value of our 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 we can sell, under certain circumstances, will be limited by NYSE American rules and regulations. If we are able to raise funds by selling additional shares of Common Stock or other securities convertible into Common Stock, the ownership interest of our existing shareholders will be diluted. The issuance of debt can result in restrictive covenants that limit operations. There can be no assurance that we will be able to complete any such financing, collaborative or strategic transaction in a timely manner or on acceptable terms. As a result, we may have to significantly limit our operations and its business, financial condition and results of operations would be materially harmed.

In parallel, management also plans to preserve liquidity, as needed, by implementing cost saving measures. For example, subsequent to the period ending June 30, 2025, in order to improve liquidity, we sold certain assets, including CARES Act Employee Retention Tax Credit receivables and 1,500,000 YFE shares. While management is taking these steps to improve liquidity, due to the uncertainty surrounding the successful execution and timing of these plans, substantial doubt continues to exist regarding our ability to meet our obligations as they become due within one year after the date the accompanying condensed consolidated financial statements are issued.

Comparison of Cash Flows for the Six Months Ended June 30, 2025 and June 30, 2024

Our total cash as of June 30, 2025 and June 30, 2024 was $2.1 million and $7.9 million, respectively.

(in thousands)

Net Non-cash Expenses

Items necessary to reconcile from net loss to cash used in operating activities included net non-cash expenses of $9.5 million for the six months ended June 30, 2025 as compared to net non-cash expenses of $4.8 million for the six months ended June 30, 2024. The majority of the increase of $4.7 million was primarily due to loss of $6.5 million on the revaluation of our equity investment in YFE securities and a loss of $1.3 million relating to Related Party Notes Receivable settlement agreement, and a net loss of $0.3 million related to revaluation of the warrants. The increase is offset by an increase of $2.4 million of FX impact on the value of the equity investment in YFE, a decrease of $0.4 million in amortization of Right-of-Use assets, a decrease of $0.3 million in stock-based compensation expense and a decrease of $0.3 million in realized loss on marketable securities due to the lower sales of our marketable securities prior to their maturity date.

Change in Operating Activities

The decrease in net change in operating asset and liability activities used by operating activities of $2.9 million as of June 30, 2025, compared to the net change in operating asset and liability activities provided by operating activities of $5.5 million as of June 30, 2024, was due to a decrease of $8.8 million in operating assets activity and a increase of $0.4 million in operating liabilities activity. A decrease of in operating assets activity was primarily due to a decrease of $6.9 million in net receipts tax credits during the current year related to completed projects and an increase of $1.5 million in net Film and Television Cost expenditures, a decrease of $0.3 million in accounts receivable net receipts and a decrease of $0.2 million in prepaid expenses, offset by a increase of $0.1 million in outstanding balance of other receivable. An increase in operating liability activity was primarily due to a decrease in accounts payable of $1.4 million due to certain legal expenditures being subject to extended payment terms related to potential insurance recovery, an decrease of $0.6 million in accrued salaries and wages, a decrease of $0.5 million in accrued expenses, offset by a increase of $1.5 million in deferred revenue, representing more cash received in advance for projects not yet recognized, and an increase of $0.6 million in accrued production costs.

Change in Investing Activities

The decrease in cash provided by investing activities of $4.2 million was primarily due to a decrease in proceeds from the sales and maturities of marketable securities of $2.4 million during the six months ended June 30, 2025 reflecting fewer sales during the current period. In addition, we made a purchase of additional securities of $1.8 million during the six months ended June 30, 2025.

Change in Financing Activities

The decrease in cash used in financing activities of $4.5 million was primarily due to a decrease in repayments of our production facilities of $5.2 million, an increase of $0.9 million in proceeds drawn from the production facilities, a decrease of bank indebtedness repayment of $2.6 million and a decrease in lease payments of $0.2 million, offset by a decrease in proceeds from financing of $3.3 million, and a decrease in borrowings from our margin loan of $1.1 million during the six months ended June 30, 2025 as compared to the six months ended June 30, 2024.

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 $27.1 million as of June 30, 2025, of which $16.2 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 $0.1 million and production facilities of $10.7 million.

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

As of June 30, 2025, we had $0.5 million in commitments for capital expenditures, related to equipment leases.

Critical Accounting Policies and Estimates

The preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.

Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2024 Annual Report and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2024 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.

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.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2025 our disclosure controls and procedures ensuring that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, were effective.

Remediation of a Material Weakness in Internal Control over Financial Reporting

As disclosed in Item 9A, Controls and Procedures of our 2024 Annual Report, our management identified the following material weaknesses in our internal control over financial reporting, which is observed in many small companies with a small number of accounting and financial reporting staff:

• Inadequate design of user access provisioning/deprovisioning controls and inadequate segregation of duties on certain controls or processes, related to our information technology general controls (ITGC).

Management has discussed this matter and developed a remediation plan that included transitioning certain administrative privileges to independent user groups outside of the finance function in order to enhance segregation of duties. In addition, the team has implemented a quarterly user access review process to ensure that system permissions remain appropriate and aligned with current roles and responsibilities. The final phase of our remediation plan was completed in the second quarter of 2025.

Changes in Internal Control over Financial Reporting

Other than the remediation efforts described above, there was no change in our internal controls over financial reporting that occurred during the quarter ended June 30, 2025 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations over Internal Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Except as set forth below, there have been no material changes to the Risk Factors set forth in our 2024 Annual Report.

We must raise additional capital to fund our operations in order to continue as a going concern.

As of June 30, 2025, we had an accumulated deficit of $752.0 million. As of June 30, 2025, the Company had total current assets of $25.5 million, including cash of $2.1 million, restricted cash of $0.5 million, and marketable securities of $0.7 million, and total current liabilities of $30.4 million. The Company had negative working capital of $4.9 million as of June 30, 2025, compared to working capital of $1.2 million as of December 31, 2024. Management has evaluated the significance of these conditions in relation to the Company’s ability to meet its obligations and concluded, that there is substantial doubt about our ability to continue as a going concern for a period of at least one year subsequent to the issuance of the accompanying condensed consolidated financial statements. In order to address our capital needs, we will need to raise further capital through the sale of equity or debt securities, financing arrangements or by entering into collaborative, strategic, and/or licensing transactions. There can be no assurance that the Company will be able to complete any such financing, collaborative or strategic transactions in a timely manner or on acceptable terms. If we are unable to improve our liquidity position, we may not be able to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate revenue and raise additional capital. There can be no assurance that we will be successful in accomplishing these objectives. Without such additional capital, we may be required to curtail or cease operations and be required to realize our assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial portion of their investment.

We have incurred net losses since inception.

We have a history of operating losses and incurred net losses in each fiscal quarter since our inception. During the three months ended June 30, 2025, we generated total revenues of $10.3 million and incurred a net loss of $6.3 million, while for the same period the previous year, we generated total revenue of $8.4 million and incurred a net loss of $5.9 million, respectively. During the six months ended June 30, 2025, we generated total revenues of $19.8 million and incurred a net loss of $12.9 million, while for the same period the previous year, we generated total revenue of $14.5 million and incurred a net loss of $13.0 million, respectively. For the year ended December 31, 2024, we generated net revenues of $32.6 million and incurred a net loss attributable to Kartoon Studios Inc. of $20.7 million. These losses, among other things, have had an adverse effect on our results of operations, financial condition, stockholders’ equity, net current assets and working capital.

We will need to generate additional revenue and/or reduce costs to achieve profitability. We are generating revenues derived from our existing properties, properties in production, and new brands being introduced into the marketplace. However, the ability to sustain these revenues and generate significant additional revenues and reduce our expenses or achieve profitability will depend upon numerous factors some of which are outside of our control.

Changes in U.S. trade policy, including proposed tariffs on foreign-produced content, could adversely impact our business operations, particularly due to our reliance on animation production services based in Canada and Asia.

The U.S. government has indicated its intent to adopt a new approach to trade policy and in some cases to renegotiate, or potentially terminate, certain existing bilateral or multilateral trade agreements. It has initiated or is considering the imposition of tariffs on certain foreign goods. Changes in U.S. trade policy could result in one or more U.S. trading partners adopting responsive trade policies, making it more difficult or costly for us to conduct our international and domestic operations. As an example, on May 4, 2025, President Trump announced an intention to impose tariffs on films made outside of the United States. Although our parent company is based in the United States, our primary animation production operations are located in Canada. The scope of the proposed tariffs is not yet finalized and there is a risk that such measures could be extended to include animated content produced internationally. Our business operations, financial condition, and results of operations could be significantly affected by such a measure and the potential expansion of existing tariffs or implementation of new tariffs, trade restrictions, or retaliatory measures by other countries that could disrupt our established operations. This in turn could require us to increase prices to our customers, which may reduce demand, or, if we are unable to increase prices, result in lowering our profit margin on certain services.

We cannot predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our services, our costs, our customers, our suppliers, and the U.S. economy, which in turn could adversely impact our business, financial condition, and results of operations.

The loss of one or a few significant customers could have a material adverse effect on us.

A few customers have in the past, and may in the future, account for a significant portion of our revenues in any one year or over a period of several consecutive years. During the three months ended June 30, 2025, we had four customers from which our total revenue exceeded 10% of our total condensed consolidated revenue. These customers collectively accounted for 85.9% of the total revenue. As of June 30, 2025, we had two customers whose total accounts receivable exceeded 10% of the total accounts receivable. These customers accounted for 49.6% of the total accounts receivable as of June 30, 2025. The loss of business from a significant customer could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

If our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period under Rule 144, or shares issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and, in anticipation of which, the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. In general, under Rule 144, a non-affiliated person who has held restricted shares of our common stock for a period of six months may sell into the market all of their shares, subject to us being current in our periodic reports filed with the SEC.

As of June 30, 2025, approximately 45,527,508 shares of common stock of the 47,906,569 shares of common stock issued are outstanding and freely trading. As of June 30, 2025, there were 24,155,943 warrants outstanding. Lastly, as of June 30, 2025, there are 882,313 shares of common stock underlying outstanding options granted, 969,995 shares of common stock underlying outstanding restricted stock units (“RSUs”) and 11,413,442 shares reserved for issuance under our Kartoon Studios, Inc. 2020 Incentive Plan