What changed in this filing

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Item 1A. Risk Factors

2024-11-14 compared with 2024-08-14 · 160 added, 58 removed, 5 unchanged (98% of the section changed)

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.

Six Months Ended June 30, 2024, we generated total revenues of $14.5 million and incurred a net loss of $12.9 million, while for the previous year, we generated total revenue of $25.2 million and incurred a net loss of $36.3 million, respectively.

For the year ended December 31, 2023, we generated total revenues of $44.1 million and incurred a net loss of $77.1 million, while for the previous year, we generated net revenue of $62.3 million and incurred a net loss of $45.6 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.

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

As of June 30, 2024, we and our subsidiaries have production loan facility obligations of approximately $9.8 million and advances outstanding of $0.4 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.

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;

We have a history of operating

losses and incurred net losses in each fiscal quarter since our inception.

During the nine months ended September 30, 2024, we generated

total revenues of $23.2 million and incurred a net loss of $15.0 million, while for the same period the previous year, we generated total

revenue of $35.3 million and incurred a net loss of $51.7 million, respectively.

For the year ended December 31, 2023, we generated total

revenues of $44.1 million and incurred a net loss of $77.1 million, while for the previous year, we generated net revenue of $62.3 million

and incurred a net loss of $45.6 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

T here is uncertainty

regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt about our ability

to continue as a going concern.

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, 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 do not 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.

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.

We have incurred indebtedness that could

adversely affect our operations and financial condition.

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.

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.

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;

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.

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

We were not in compliance with financial covenants under its revolving demand facility as of June 30, 2024.

As a result of the covenant violations, our remaining equipment lease agreements with the lender of CAD million are subject to repayment.

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

The amendment and covenant 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.

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, 2024, approximately 38,373,500 shares of common stock of the 39,463,517 shares of common stock issued are outstanding and freely trading.

As of June 30, 2024, there were 6,926,952 warrants outstanding.

Lastly, as of June 30, 2024, there are 958,806 shares of common stock underlying outstanding options granted, 2,293,603 shares, including vested and unvested, of common stock underlying outstanding restricted stock units (“RSUs”) and 216,767 shares reserved for issuance under our Kartoon Studios, Inc.

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.

We are currently in default under financial

covenants under our revolving demand facility.

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 the three 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

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.

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 September 30, 2024,

approximately 37,303,946 shares of common stock are outstanding and unrestricted, out of the 39,555,161 shares of common stock issued,

meaning they exclude shares held by insiders and can be freely traded on the open market.

As of September 30, 2024, there were 6,926,952

warrants outstanding.

Lastly, as of September 30, 2024, there are 953,640 shares of common stock underlying outstanding options granted,

2,385,247 shares, including vested and unvested, of common stock underlying outstanding restricted stock units (“RSUs”) and

1,832,734 shares reserved for issuance under our Kartoon Studios, Inc.

2020 Incentive Plan.

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

During the three and six months ended June 30, 2024, we had four customers, whose total revenue exceeded 10% of the total condensed consolidated revenue.

These customers accounted for 80.9% of the total revenue.

During the six months ended June 30, 2024, we had three customers, whose total revenue exceeded 10% of the total condensed consolidated revenue.

These customers accounted for 66.7% of the total revenue.

As of June 30, 2024, the Company had three customers whose total accounts receivable exceeded 10% of the total accounts receivable.

These customers accounted for 66.0% of the total accounts receivable as of June 30, 2024.

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.

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.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, our management is required to report on the effectiveness of our internal control over financial reporting.

The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation.

Annually, we perform activities that include reviewing, documenting and testing our internal control over financial reporting.

In addition, if we fail to maintain the adequacy of our internal control over financial reporting, we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.

If we fail to achieve and maintain an effective internal control environment, we could suffer misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information.

This could result in significant expenses to remediate any internal control deficiencies and lead to a decline in our stock price.

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.

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.

Unregistered Sales of Equity Securities and Use of Proceeds

Defaults Upon Senior Securities

Mine Safety Disclosures

Not applicable.

To date, our revenues have come from a limited

number of customers, making us dependent on those few customers.

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.

During the nine months ended

September 30, 2024, we had three customers, whose total revenue exceeded 10% of the total condensed consolidated revenue.

customers accounted for 60.2% of the total revenue.

As of September 30, 2024, the Company had three customers whose total accounts

receivable exceeded 10% of the total accounts receivable.

These customers accounted for 59.4% of the total accounts receivable as of

September 30, 2024.

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.

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.

Pursuant to Section 404 of

the Sarbanes-Oxley Act of 2002, as amended, our management is required to report on the effectiveness of our internal control over financial

The rules governing the standards that must be met for management to assess our internal control over financial reporting

are complex and require significant documentation, testing and possible remediation.

Annually, we perform activities that include reviewing,

documenting and testing our internal control over financial reporting.

In addition, if we fail to maintain the adequacy of our internal

control over financial reporting, we will not be able to conclude on an ongoing basis that we have effective internal control over financial

reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.

If we fail to achieve and maintain an effective internal

control environment, we could suffer misstatements in our financial statements and fail to meet our reporting obligations, which would

likely cause investors to lose confidence in our reported financial information.

This could result in significant expenses to remediate

any internal control deficiencies and lead to a decline in our stock price.

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.

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

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors