Kartoon Studios, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide readers of our consolidated financial statements with the perspectives of management. This should allow the readers of this report to obtain an understanding of our businesses, strategies, current trends, and future prospects. It should be noted that the following MD&A contains forward-looking statements that involve risks and uncertainties. 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 months ended March 31, 2026 and 2025. 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, 2025, which was filed with the SEC on March 31, 2026 (“The 2025 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 We are a global content and brand management company focused on the creation, production, licensing, and distribution of multimedia animated content for children. Our main sources of revenue are derived from animation production services provided to third parties, the sale of licenses for the distribution of films and television programs, advertising revenues, and merchandising and licensing sales. Production Services Animation 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. Mainframe Studios is currently engaged in the production of numerous owned IP and for-hire projects spanning a range of formats and target audiences, including Phoebe & Jay, It's Andrew, Unicorn Academy, and SuperKitties . This content is being produced for leading platforms and broadcasters such as Disney Junior, PBS Kids, Netflix, Canadian Broadcasting Corporation, and the Australian Broadcasting Corporation, among others. These projects are at various stages of production and delivery, with certain titles completed during the prior year and others expected to be delivered through 2026. 32 During 2025, we entered into active development and production on Hundred Acre Wood’s Winnie and Friends, an animated franchise series inspired by Winnie-the-Pooh by A.A. Milne. Structured as a serialized short-form series, the production is engineered for broad multi-platform distribution across AVOD, FAST, SVOD, in-store, and international platforms. Developed as a cornerstone franchise for Kartoon Studios, the series features an original yarn-based animation style combining digital tools with handcrafted textures to create a warm, storybook aesthetic enhanced by music and dance. The franchise includes a multi-phase rollout, consisting of major holiday specials, including Christmas, Halloween, Thanksgiving, and Easter, and is supported by an integrated global consumer products program spanning toys, apparel, home goods, publishing, collectibles, and retail partnerships. The series is scheduled to premiere with preliminary activities in Q4 2026, with a full launch across main distribution channels anticipated in Q1 2027. Content Distribution Film and Television Licensing: We recognize revenue by licensing rights to exploit functional IP (IP that has significant standalone functionality, such as the ability to be played or aired). Our content distribution strategy is focused on scaling audience reach and monetization across a network of branded destinations, including Kartoon Channel! , Kartoon Channel! Worldwide , Frederator, and Ameba. We plan to grow revenue through expanded licensing activity and increased utilization of owned IP assets such as Rainbow Rangers , Stan Lee brands, Shaq’s Garage , and many more. To support margin expansion, we are actively implementing AI-driven tools designed to reduce operating costs in areas such as localization and video resolution enhancement. Advertising Revenue: We receive advertising revenue through our wholly-owned VOD services, Kartoon Channel! and Ameba, and Frederator’s owned and operated YouTube channels as well as revenues generated from the operation of Federator’s creator network, Channel Frederator Network . Additionally, advertising revenue is derived from Kartoon Channel! branded channels on Free Ad Supported Streaming TV services. Licensing and Royalties Merchandising and Licensing : The Company enters into merchandising and licensing agreements that allow licensees to produce merchandise utilizing certain of the Company’s symbolic IP (IP that is not functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its association with the entity’s past or ongoing activities, such as a brand or logo). 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 and the launch of the Hundred Acre Wood’s: Winnie & Friends property, with a focus on both digital and physical consumer products, as well as location-based fan experiences. We intend to expand the use of our broader IP catalog in licensing programs in 2026 and beyond. Media Advisory and Advertising Services Beacon, our specialized media and marketing agency, provides media advisory and advertising consulting services to clients. Revenue is recognized when the services are performed or are paid through a monthly retainer. Our media advisory and advertising operations are structured to generate recurring and diversified revenue through a combination of retainer-based engagements and commission-driven media planning and buying. This blended revenue model affords client flexibility and supports margin optimization through efficient resource utilization. Beacon has continued to invest in higher-value service offerings, including influencer-driven marketing programs, data-informed media planning, and customized campaign development. These capabilities have increased the scope and duration of client engagements and strengthened customer retention. As these services scale, we expect to benefit from operating leverage, as incremental revenue can be generated with comparatively limited increases in fixed costs. The group continues to build upon its established presence in the toy industry while expanding into adjacent sectors, including family entertainment and travel. 33 Recent Events Section 3(a)(10) Accounts Payable Settlement On August 27, 2025, we entered into an agreement to engage in a transaction under Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”) with Continuation Capital, Inc. (“CCI”), to settle $1.8 million of outstanding accounts payable, in exchange for issuing 3,148,535 shares of common stock. Under the terms of the agreement, CCI makes payments to our vendors in cash and, in exchange, we issue shares of common stock to CCI. The settlement was valued at 1.75 shares of common stock per $1 of accounts payable, pursuant to the terms of the agreement. The transaction was approved by a court after a public hearing on the fairness of the terms and conditions. The transaction was carried out in stages and completed in the year ended December 31, 2025. On November 18, 2025, we entered into a new agreement to settle an additional $1.0 million of accounts payable under Section 3(a)(10) of the Securities Act with CCI, in exchange for issuing 1,695,072 shares of common stock. The terms were consistent with the original arrangement. As of March 31, 2026 we had completed the arrangement, settling a total of $1.0 million of accounts payable and issuing an aggregate of 1,695,072 shares of common stock. During the three months ended March 31, 2026, we settled an aggregate of $0.6 million of accounts payable, issued 977,360 shares of common stock to CCI, and recognized a loss of $0.1 million on the settlement, representing the difference between the carrying value of liabilities extinguished and the fair value of shares issued, included in Other Income (Expense), net, on the condensed consolidated statements of operations. On April 8, 2026, we entered into a new agreement to settle an additional $1.1 million of accounts payable under Section 3(a)(10) of the Securities Act with CCI, in exchange for issuing 2,001,797 shares of common stock, and to settle additional obligations up to $0.3 million in exchange for issuing 551,250 shares of common stock. The terms were consistent with the original arrangement. Results of Operations Our summary results for the three months ended March 31, 2026 and 2025 are below: Revenue Three Months Ended March 31, 2026 2025 Change % Change (in thousands, except percentages) Production Services $ 4,093 $ 6,572 $ (2,479 ) (38% ) Content Distribution 2,273 1,981 292 15% Licensing and Royalties 73 84 (11 ) (13% ) Media Advisory and Advertising Services 799 867 (68 ) (8% ) Total Revenue $ 7,238 $ 9,504 $ (2,266 ) (24% ) 34 Production Services 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. The production services revenue for the three months ended March 31, 2026 was 38% lower than the production services revenue recognized during the three months ended March 31, 2025. The decrease was primarily due to the timing of production deliveries at Mainframe Studios, with several projects shifting from the first quarter into later periods in 2026, reducing the proportion of costs incurred relative to total estimated project costs. In contrast, the comparable prior year period benefited from multiple projects simultaneously entering advance production phases, resulting in a higher concentration of production activity and correspondingly higher revenue recognized under the percentage of completion method. Content Distribution Revenue related to content distribution on advertising-supported video on demand (“AVOD”) and subscription video on demand (“SVOD”), including advertising sales for the three months ended March 31, 2026, increased by 15% as compared to the three months ended March 31, 2025. The increase was primarily driven by revenue recognized from the delivery of episodes of Wow’s It’s Andrew! IP Project of $0.2 million, distribution revenue from other Wow IP of $0.6 million and an increase in sales activity of Ameba and Kartoon Channel divisions by $0.1 million. The increase was partially offset by a decline in content revenue from Frederator’s creator network on YouTube of $0.6 million for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025. The decrease in Frederator’s creator network revenue from YouTube was due to overall less viewership as compared to the prior year period. Licensing and Royalties Revenue related to our licensing and royalties for the three months ended March 31, 2026 decreased by 13% as compared to the three months ended March 31, 2025, primarily attributable to timing differences in revenue recognition from our existing license deals. Media Advisory and Advertising Services Revenue generated by media advisory and advertising services for the three months ended March 31, 2026 decreased by 8% as compared to the three months ended March 31, 2025, primarily due to lower net renewal activity and media purchases from clients, which were impacted by continued U.S. tariffs legislative uncertainty. Expenses Three Months Ended March 31, 2026 2025 Change % Change (in thousands, except percentages) Marketing and Sales $ 192 $ 186 $ 6 3% Direct Operating Costs 4,718 6,684 (1,966 ) (29% ) General and Administrative 5,131 5,713 (582 ) (10% ) Total Expenses $ 10,041 $ 12,583 $ (2,542 ) (20% ) 35 Marketing and Sales Marketing and sales expenses for the three months ended March 31, 2026 increased by approximately 3% as compared to the three months ended March 31, 2025. The increase is considered immaterial, and overall marketing and sales spending remained largely consistent period-over-period, reflecting no significant changes in the Company's corporate awareness initiatives or advertising activities. Direct Operating Costs Direct operating costs during the three months ended March 31, 2026 consisted primarily of salaries and related expenses for the animation production services employees of Wow. Creator network 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 29% decrease was primarily due to lower salary costs by $2.5 million driven by a lower headcount included in Production Services related to the delivered projects, that were in the advanced production stages in the prior year quarter compared to the current period. The decrease in direct operating costs was partially offset by an increase of $0.3 million in film amortization expense and an increase of $0.2 million in participation expenses arising from new contractual agreements entered into during the period as well as existing agreements, consistent with the corresponding increase in owned-IP revenue. General and Administrative The $0.6 million decrease in general and administrative expenses for the three months ended March 31, 2026, as compared to the three months ended March 31, 2025, was driven by a decrease of $0.5 million in salaries and wages and a decrease of $0.3 million in professional fees, reflecting reduced use of external consulting services. The decrease was partially offset by an increase of $0.1 million in share-based compensation expense due to new awards granted in recent periods and an increase of $0.1 million in other administrative costs, mainly IT infrastructure and other equipment costs. Impairment Charge During the three months ended March 31, 2026 and March 31, 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 periods. Other Expense, net Components of Other Income (Expense), net, are summarized as follows (in thousands): Three Months Ended March 31, 2026 2025 Interest Expense (a) $ (233 ) $ (128 ) Gain on Revaluation of Warrants (b) – 446 Loss on Revaluation of Equity Investment in YFE (c) (2,957 ) (3,640 ) Realized Gain on Marketable Securities Investments (d) – 4 (Loss) Gain on Foreign Exchange (e) (372 ) 667 Loss on Debt Settlement (f) (124 ) (944 ) Interest Income (g) 35 54 Finance Lease Interest Expense (h) (4 ) (4 ) Other (i) 53 33 Other Expense, net $ (3,369 ) $ (3,384 ) 36 Three Months Ended March 31, 2026 and March 31, 2025 (a) Interest Expense during the three months ended March 31, 2026, primarily consisted of $0.2 million interest incurred on production facilities and on the factoring liability. Interest expense during the three months ended March 31, 2025, primarily consisted of $0.1 million of interest incurred on production facilities. (b) During the three months ended March 31, 2025, the Company recorded a $0.4 million fair value gain due to a revaluation of the outstanding 7,894,736 Series A warrants and 7,894,736 Series B warrants issued in December 2024. These warrants were classified as a liability in the quarter ended March 31, 2025. (c) As the investment in YFE is accounted for under the fair value option, the Company recognized a loss on revaluation of its equity investment in YFE of approximately $3.0 million and $3.6 million for the three months ended March 31, 2026 and March 31, 2025, respectively. The loss reflected decreases in YFE’s stock price during the current reporting periods compared to the respective prior reporting periods. The impact of foreign currency translation is excluded and presented separately. (d) The realized gain on marketable securities investments recorded during the three months ended March 31, 2025, reflects the gain on the sale of marketable securities prior to maturity date. (e) The loss on Foreign Exchange during the three months ended March 31, 2026, primarily related to the revaluation of the YFE investment, resulting in a loss of $0.1 million due to the Euro depreciating against the U.S. dollar as compared to prior period and a loss of $0.2 million due to the remeasurement of foreign currency transactions of the Company’s non-U.S. subsidiary. The gain on foreign exchange during the three months ended March 31, 2025 primarily related to the remeasurement of the YFE investment, resulting in a gain of $0.7 million, due to the depreciation of the U.S. dollar against the Euro relative to prior periods. (f) The loss on debt settlement recorded during the three months ended March 31, 2026, includes a loss of $0.1 million arising from the Section 3(a)(10) transaction completed during the quarter. The loss on debt settlement recorded during the three months ended March 31, 2025, includes a loss of $0.9 million related to the loan settlement agreement with YFE. (g) Interest Income during the three months ended March 31, 2026, primarily consisted of income from investments in marketable securities, net of premium amortization expense. Interest Income during the three months ended March 31, 2025, primarily consisted of income from investments in marketable securities, net of premium amortization expense, and interest income related to an Employee Retention Tax Credit (“ERTC”) receivable. 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) During the three months ended March 31, 2026, other income of $28,000 was recognized from the recovery of previously written-off accounts receivable, and $24,810 from credit card and other rebates. During the three months ended March 31, 2025, other income of $32,522 was recognized primarily related to credit card rewards. Liquidity, Going Concern, and Capital Resources As of March 31, 2026, we had cash of $5.0 million, which increased by $2.1 million as compared to December 31, 2025. The increase was primarily due to cash provided by investing activities of $2.9 million, cash provided by financing activities of $1.8 million, and the effect of exchange rate of $0.2 million, offset by cash used in operating activities of $2.9 million. The cash provided by investing activities of $2.9 million was primarily due to proceeds from the sale and maturities of marketable securities. The cash provided by financing activities of $1.8 million, was primarily due to the drawdowns, net of repayments and debt issuance costs, from production facilities. The cash used in operating activities of $2.9 million was primarily due to net loss of $6.4 million, and net change in operating asset and liabilities of $2.3 million, partially offset by net change in non-cash adjustments of $5.9 million. As of March 31, 2026, we held available-for-sale marketable securities with a fair value of $1.0 million. A decrease of $3.0 million as compared to December 31, 2025, was due to a sale of securities during the three months ended March 31, 2026. The available-for-sale securities consist principally of government debt securities and are also available as a source of liquidity. 37 Working Capital As of March 31, 2026, we had total current assets of $30.7 million, including cash of $5.0 million, and marketable securities of $1.0 million, and our total current liabilities were $31.4 million. We had negative working capital of $0.7 million as of March 31, 2026 as compared to working capital of $2.3 million as of December 31, 2025. The decrease of $3.0 million was du e to a decrease of $5.0 million in current assets, offset by a decrease of $2.0 million in current liabilities compared to the balances as of December 31, 2025. The decrease in current assets is primarily driven by a decrease of $6.3 million in accounts receivable related to the timing of contractual billing milestones in production projects, a decrease of $3.0 million in marketable securities investments due to the sale of a portion of the marketable securities, offset by an increase of $2.1 million in cash primarily due to proceeds from the sale of a portion of the marketable securities, an increase of $1.7 million in production tax credit receivable due to recognized credits for the ongoing projects , an increase of $0.3 million in prepaid expenses, and an increase of $0.2 million in other receivable due to collection of insurance proceeds related to previously filed claims. The decrease in current liabilities is primarily driven by a decrease of $5.0 million in accounts payable driven by the settlements under Section 3(a)(10) of the Securities Act, a decrease of $0.8 million in deferred revenue balance related to revenue recognized under the percentage-of-completion method on production projects, offset by an increase of $1.8 million in accrued expenses related mainly to billing timing and insurance policy renewals, and an increase of $1.8 million in production facilities due to advance stages of production projects. During the three months ended March 31, 2026, 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 March 31, 2026, management concluded 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 going forward. We continue to navigate macroeconomic challenges in the animation and advertising industries, including ongoing government tariffs and intensified competition. In the prior periods, we have demonstrated resilience in our financing activities, having successfully raised net proceeds through public offerings. In parallel, management also plans to preserve liquidity, as needed, by implementing cost saving measures. For example, during the three months ended March 31, 2026, in order to improve liquidity, we settled $0.6 million of outstanding accounts payable in a transaction under Section 3(a)(10) of the Securities Act. 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. Our ability to sell securities registered under 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 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 our business, financial condition and results of operations would be materially harmed. 38 Comparison of Cash Flows for the Three Months Ended March 31, 2026 and March 31, 2025 Our total cash as of March 31, 2026 and March 31, 2025 was $5.0 million and $2.8 million, respectively. Three Months Ended March 31, 2026 2025 Change (in thousands) Net Cash Used in Operating Activities $ (2,856 ) $ (1,822 ) $ (1,034 ) Net Cash Provided by (Used in) Investing Activities 2,939 (1,186 ) 4,125 Net Cash Provided by (Used in) Financing Activities 1,781 (2,567 ) 4,348 Effect of Exchange Rate Changes on Cash 209 (38 ) 247 Increase (Decrease) in Cash and Restricted Cash $ 2,073 $ (5,613 ) $ 7,686 Change in Operating Activities Items necessary to reconcile net loss to cash used in operating activities included net non-cash expenses of $5.9 million for the three months ended March 31, 2026 as compared to net non-cash expenses of $4.6 million for the three months ended March 31, 2025. The increase of $1.3 million in non-cash expenses compared to prior year was primarily due to an increase of $0.6 million non-cash adjustment due to stock issued for services, the absence of $0.4 million gain on warrant revaluation recorded in prior year, an increase of $0.3 million in Film and Television amortization related to the projects delivered in prior year, an increase of $0.1 million in stock-based compensation expense due to new awards granted, and a loss of $0.8 million related to accounts payable debt settlement transactions. Additionally, we recorded a noncash reduction of $0.6 million in accounts payable due to corresponding stock issuances to CCI. These movements were offset by a $0.8 million net decrease in loss on debt settlement, reflecting a $1.0 million loss on the related party loan settlement in the prior year compared to a $0.2 million loss on accounts payable settlement transactions in the current year. Change in cash used in operating activities also includes fluctuations in working capital, including movements in operating assets and liabilities. Working capital adjustments reflect timing differences between the recognition of revenues and expenses and the related cash receipts or payments. Operating asset and liability activities resulted in a decrease of $2.3 million in cash during the three month ended March 31, 2026, and an increase of $0.2 million in cash during the three month ended March 31, 2025. The changes resulted in a net decrease in operating asset and liability cash flows of $2.5 million compared to prior year. This was primarily due to a decrease in net cash flows generated by the operating assets activity by $3.1 million, partially offset by a decrease in cash flows used by the operating liabilities by $0.6 million. The decrease in cash flows from operating activities by $3.1 million was primarily driven by a lower reduction in operating assets during the year, which generated less cash than in the comparative period. This was due to lower net receipts of tax credits during the current period by $4.1 million and higher capitalized costs related to ongoing productions by $1.2 million, and an unfavorable impact of $0.1 million attributable to other receivables, offset by cash flows generated by net receipts of outstanding accounts receivable by $1.9 million and less cash spent on prepaid services by $0.4 million. The decrease in cash flows used by the operating liabilities by $0.6 million was primarily due to generally less accounts payable settled in cash by $1.0 million, an increase of $0.5 million in accrued expenses representing additional costs recognized during the period that were outstanding as of March 31, 2026, offset by an unfavorable impact of deferred revenue movement of $0.8 million representing revenue recognized related to cash received in advance in prior periods, and a decrease of $0.1 million related to timing of Mainframe production costs accruals. Change in Investing Activities The increase in cash provided by investing activities of $4.1 million was primarily due to an increase in proceeds from the sales and maturities of marketable securities of $2.3 million during the three months ended March 31, 2026. In addition, during the three months ended March 31, 2025, we invested a portion of the financing proceeds from the prior year offering in the marketable securities totaling to $1.8 million. 39 Change in Financing Activities The increase in cash provided by financing activities of $4.3 million was primarily due to a decrease in repayments of our production facilities and margin loan of $5.0 million, and a decrease in borrowings from our margin loan and production facilities of $0.7 million during the three months ended March 31, 2026 as compared to the three months ended March 31, 2025. 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 $30.1 million as of March 31, 2026, of which $20.1 million could be owed within one year. Included in the amount that could be due within one year is the production facilities balance of $13.7 million. We plan to utilize our liquidity (as described above) to fund our material cash requirements. As of March 31, 2026, we had $0.3 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 2025 Annual Report and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2025 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. 40 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.