Kartoon Studios, Inc. 10-Q

Item 1A. Risk Factors Except as set forth below, there have been no material changes to the Risk Factors set forth in our 2025 Annual Report. We must raise additional capital to fund our operations in order to continue as a going concern. As of March 31, 2026, we had an accumulated deficit of $770.2 million and total stockholders’ equity of $22.6 million. As of March 31, 2026, we had total current assets of $30.7 million, including cash of $5.0 million, and total current liabilities of $31.4 million. We had negative working capital of $0.7 million as of March 31, 2026, compared to working capital of $2.3 million as of December 31, 2025. Management has evaluated the significance of these conditions in relation to our ability to meet our 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 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 we will be able to complete any such financing, collaborative or strategic transactions in a timely manner or on acceptable terms, or at all. 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 March 31, 2026, we generated total revenues of $7.2 million and incurred a net loss of $6.4 million, while for the same period the previous year, we generated total revenue of $9.5 million and incurred a net loss of $6.6 million, respectively. 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. The financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern within one year after the date the financial statements are issued. 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 current and 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, and in certain cases has implemented, 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. In May 2025, President Trump announced an intention to impose tariffs on films made outside of the United States, which he reiterated in September 2025 and again in January 2026. Although our parent company is based in the United States, our primary animation production operations are located in Canada. To date, no formal executive order or implementing regulations specific to filmed or animated content have been issued, and the scope and extent of any such proposed measures remain undefined. 46 The broader legal landscape governing U.S. tariff authority has also evolved materially. In February 2026, the U.S. Supreme Court held in Learning Resources, Inc. v. Trump that the International Emergency Economic Powers Act ("IEEPA") does not authorize the President to impose tariffs, invalidating a broad set of tariffs that had been imposed under that authority. Following the ruling, the administration moved promptly to impose new tariffs under alternative statutory authorities, signaling its continued intent to pursue tariff measures through other available legal mechanisms. Additionally, a World Trade Organization moratorium on customs duties applicable to electronic transmissions, which had previously served as a potential constraint on the imposition of tariffs on digitally distributed content, expired in March 2026. The full implications of these developments for the potential imposition of tariffs on filmed or animated content remain uncertain. There is a risk that tariff 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 measures, as well as by the potential expansion of existing tariffs or the 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 lower profit margins 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 small number of 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 March 31, 2026, three customers each accounted for more than 10% of our total consolidated revenue. These customers accounted for an aggregate of 59.6% of our total revenue. As of March 31, 2026, we had four customers, the accounts receivable for each of which exceeded 10% of our total accounts receivable. These customers accounted for an aggregate of 62.4% of the total accounts receivable as of March 31, 2026. 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 or upon 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. As of May 14, 2026, approximately 56,713,071 shares of common stock of the 59,142,534 shares of common stock issued are outstanding and freely trading. As of March 31, 2026, there were 39,960,004 warrants outstanding. Lastly, as of March 31, 2026, there are 871,998 shares of common stock underlying outstanding options granted, 2,579,478 shares of common stock underlying outstanding restricted stock units (“RSUs”) and 7,183,707 shares reserved for issuance under our Kartoon Studios, Inc. 2020 Incentive Plan. 47 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended March 31, 2026, the Company did not make any unregistered sales of equity securities that were not disclosed in SEC filings. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable.