Kartoon Studios, Inc.

Current report

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

Current report

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.

Current report

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.

Current report

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.

Current report

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

Previous report

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.

Previous report

Historically, we have financed its 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. We have 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, we donot have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. Our ability sell securities registered on our registration statement on Form S-3 is limited until such time 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 the NYSE American rules and regulations. There can be no assurance that we will be able to continue to raise funds through the sale of shares of common stock or issuance of debt. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of its existing stockholders 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 us, we will seek to reduce overhead costs and reduce its weekly cash obligations in the short term as needed. In addition, we can look to divest or bring in equity partners for our various divisions and bring in near term capital. No adjustments have been made to the presented condensed consolidated financial statements as a result of this uncertainty.

Previous report

We have incurred indebtedness that could adversely affect our operations and financial condition.

Previous report

As of September 30, 2024, we and our subsidiaries have production loan facility obligations of approximately $8.7 million and advances outstanding of $0.6 million under our senior secured revolving credit facility. As of December 31, 2023, we and our subsidiaries have production loan facility obligations of approximately $15.3 million and advances outstanding of $2.9 million under our senior secured revolving credit facility. We also had an outstanding margin loan of $0.8 million secured by our marketable investment securities as of December 31, 2023. The facilities are guaranteed by us and the security reflects substantially all of our tangible and intangible assets including a combination of federal and provincial tax credits, other government incentives, production service agreements and license agreements. The facilities and the margin loan are generally repayable on demand and are subject to customary default provisions, representations and warranties and other terms and conditions.

Previous report

Our level of debt could have adverse consequences on our business, such as making it more difficult for us to satisfy our obligations with respect to our other debt; limiting our ability to refinance such indebtedness or to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements; requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes; increasing our vulnerability to economic downturns and adverse developments in our business; exposing us to the risk of increased interest rates as certain of our borrowings are at fixed long term rates and or variable rates of interest; limiting our flexibility in planning for, and reducing our flexibility in reacting to, changes in the conditions of the financial markets and our industry; placing us at a competitive disadvantage compared to other, less leveraged competitors; increasing our cost of borrowing; and restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our existing and future indebtedness and exposing us to potential events of default (if not cured or waived) under covenants contained in our debt instruments.

Previous report

We are currently in default under financial covenants under our revolving demand facility.

Previous report

We were not in compliance with a financial covenant under the revolving demand facility as of September 30, 2024. Due to financial covenant violations in the second quarter of 2024, the Company’s remaining equipment lease agreements with the lender of$0.6 million (CAD 0.8 million)as of September 30, 2024, are subject to early repayment. During thethree months ended September 30, 2024, the lender and the Company 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, the Company paid $0.1 million (CAD 0.1 million) to the lender as part of its early repayment plan for the existing equipment lease line agreements. Subsequent to September 30, 2024, the Company paid$0.3 million(CAD 0.4 million) to the lender as part of its repayment plan for the equipment lease line. The amendment and covenant violations 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.

Previous report

To date, our revenues have come from a limited number of customers, making us dependent on those few customers.

Previous report

The loss of, or a significant reduction of business from, any of our primary customers will have a material adverse effect on our business, financial condition, and results of operation unless we are able to replace such customers with other primary customers.

Previous report

We have identified material weaknesses in our internal control over financial reporting. Failure to remediate the material weaknesses or any other material weaknesses that we identify in the future could result in material misstatements in our financial statements.

Previous report

We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Previous report

We cannot provide assurance that we have identified all, or that we will not in the future have additional, material weaknesses in our internal control over financial reporting. As a result, we may be required to implement further remedial measures and to design enhanced processes and controls to address deficiencies. If we do not effectively remediate the material weaknesses identified by management and maintain adequate internal controls over financial reporting in the future, we may not be able to prepare reliable financial reports and comply with our reporting obligations under the Exchange Act on a timely basis. Any such delays in the preparation of financial reports and the filing of our periodic reports may result in a loss of public confidence in the reliability of our financial statements, which, in turn, could materially adversely affect our business, the market value of our common stock and our access to capital markets.

Previous report — wording carried elsewhere

During the three months ended September 30, 2024, we had four customers, whose total revenue exceeded 10% of the total condensed consolidated revenue. These customers accounted for 77.2% of the total revenue.