Kartoon Studios, Inc. 10-Q

Item 4. Controls and Procedures 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 Securities Exchange Act of 1934, as amended (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) Exchange Act.Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that that as of the end of the period covered by this report, our disclosure controls and procedures, as defined in Rule 13a-15(e), were not effective at the reasonable assurance level due to material weaknesses in our internal control over financial reporting which were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. Our management, including our Chief Executive Officer and Chief Financial Officer, has also concluded that as of December 31, 20243 and March 31, 2024 our disclosure controls and procedures, as defined in Rule 13a-15(e), were not effective at the reasonable assurance level due to material weaknesses in our internal control over financial reporting which were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. Material Weakness in Internal Control over Financial Reporting As disclosed in Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2023, our management identified the following material weaknesses in our internal control over financial reporting: • Inadequate design of user access provisioning/deprovisioning controls and inadequate segregation of duties on certain controls or processes; • Lack of specialized experts related to income tax areas; and • Inappropriate application of accounting standards related to warrant modifications Notwithstanding the identified material weaknesses, our management believes the unaudited condensed financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with GAAP. Management’s Plan to Remediate the Material Weakness We continue to be committed to maintaining a strong internal control environment. In response to the identified material weaknesses, management has taken comprehensive actions to strengthen its internal controls and has been and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated. Our plans for remediation include, but are not limited to, the efforts summarized below, which have been or are in the process of being implemented: • Enhanced procedures for formal documented review and approval of journal entries; • Reorganized the accounting team members to ensure proper segregation of duties; • Implemented core financial reporting and financial close software systems; • Performed risk assessment procedures and improved the documentation of internal processes and controls; • Improved documentation over complex financial transactions; • Implemented additional procedures over assessment of cybersecurity and information technology general controls; 35 Table of Contents • Increase the extent of oversight and verification checks included in operation of user access controls and processes; and • Continue to enhance review over financial reporting, financial operations, internal controls including segregation of duties; as well as improve tax analysis and fair value estimates. We will not be able to conclude whether these efforts will fully remediate the material weakness until the updated process has operated for a sufficient period of time and management has concluded, through testing, that such controls are operating effectively. 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, 2024 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. PART II. OTHER INFORMATION