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 and six months ended June 30, 2026 and June 30, 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, and SuperKitties . This content is being produced for leading platforms and broadcasters such as Disney Junior, PBS Kids, Netflix, CBC, 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. 38 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. Subsequent to the end of the quarter, the Company sold its interest in Frederator Networks, Inc. For additional information, see Recent Events, Sale of Frederator Networks, Inc. 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 Frederator’s creator network, Channel Frederator Network . Additionally, advertising revenue is derived from Kartoon Channel! branded channels on Free Ad Supported Streaming TV services. Subsequent to the end of the quarter, the Company sold its interest in Frederator Networks, Inc. In connection with such sale, the Company entered into a three-year Channel Distribution Agreement. For additional information, see Recent Events, Sale of Frederator Networks, Inc. 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 and 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. 39 Recent Events Section 3(a)(10) Accounts Payable Settlement On November 18, 2025, we entered into an agreement to engage in a transaction under Section 3(a)(10) of the Securities Act with CCI, to settle an additional $1.0 million of accounts payable in exchange for issuing 1,695,072 shares of common stock. Under the terms of the agreement, CCI makes payments to our vendors in cash and, in exchange, we issued 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. During the six months ended June 30, 2026, we settled $0.6 million of accounts payable and issued an aggregate of 977,360 shares of common stock to CCI. During the six months ended June 30, 2026, we 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 our condensed consolidated statements of operations. The transaction was carried out in stages and completed as of June 30, 2026. On April 8, 2026, we entered into a new agreement to settle an aggregate of $1.1 million of outstanding 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 an additional past obligations up to $0.3 million in exchange for issuing 551,250 shares of common stock. The terms were consistent with the November 2025 arrangement. The transaction was carried out in stages and completed as of June 30, 2026. During the three months ended June 30, 2026, we recognized a loss of $0.6 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 our condensed consolidated statements of operations. Section 16(b) Litigation Settlement Between May 29, 2026 and June 11, 2026, we entered into settlement agreements with six defendants (the “Settling Parties”) in the action styled Todd Augenbaum v. Anson Investments Master Fund LP, et al., Case No. 1:22-cv-00249 (S.D.N.Y.) , an action brought under Section 16(b) of the Securities Exchange Act of 1934 by a stockholder on behalf of and for our benefit, in which we were named only as a nominal defendant, seeking disgorgement of alleged short-swing profits realized by certain investors in the 2020 private placements. The Settling Parties agreed to pay aggregate settlement amounts of $78.5 million minus fees and expenses of plaintiff’s counsel (in an amount not yet determined), subject to certain terms and conditions, and the parties agreed to mutual releases. Pursuant to the settlement agreements, 50% of each settlement amount, or $39.2 million in the aggregate, was paid directly to us during June 2026, and the remaining 50% was deposited into escrow to fund the court-awarded fees and expenses of plaintiff’s counsel, with any residual balance payable to us after the applicable approval orders become final. We recognized the $39.2 million received as a non-recurring, non-operating gain, included in Other Income (Expense), net, on our condensed consolidated statements of operations for the three months ended June 30, 2026. In connection with the settlement with the Anson Investments Master Fund LP and its affiliates (collectively, the “Anson Parties”), on June 10, 2026, we entered into a standstill and voting agreement with the Anson Parties, under which we agreed to pay the Anson Parties $4.0 million and the Anson Parties agreed to certain voting commitments and standstill restrictions through June 11, 2027. We recognized this amount as a non-operating loss, included in Other Income (Expense), net, on the condensed consolidated statements of operations for the three months ended June 30, 2026. The related liability was included in current liabilities on the condensed consolidated balance sheet as of June 30, 2026 and was paid in July 2026. In accordance with ASC 450-30-25-1, any residual amounts distributable to us from escrow constitute a gain contingency and will be recognized if and when realized. Adoption of Stockholder Rights Plan and Related Measures On July 1, 2026, the Board of Directors adopted a Preferred Stock Rights Agreement (a stockholder rights plan), filed a related Certificate of Designation designating 300,000 shares of a new Series D Participating Preferred Stock, and adopted amendments to our Bylaws. The stockholder rights plan is intended as a protective measure to guard against coercive or unfair takeover tactics and the accumulation of a controlling interest in the Company without negotiation with the Company’s Board. The Series D Participating Preferred Stock was designated solely to support the stockholder rights plan; no shares have been issued, and the rights issued under the plan become exercisable only upon the occurrence of certain triggering events. These actions did not affect our financial condition, results of operations or shares of common stock outstanding as of or for the period covered by this report. For additional information, see Note 22, Subsequent Events, to our condensed consolidated financial statements included in this report, Part II, Item 1A, Risk Factors , and our Form 8-K filed with the SEC on July 2, 2026, as amended on July 6, 2026, and our Registration Statement on Form 8-A filed on July 2, 2026. 40 Sale of Frederator Networks, Inc. On July 8, 2026, we sold all of the issued and outstanding common stock of Frederator Networks, Inc. (“Frederator Networks”), which operated the Frederator Channel network business, to Project Robot LLC, an unaffiliated third party, pursuant to a stock purchase agreement dated June 18, 2026. We will retain key intellectual property of Frederator Studios, LLC, a wholly owned subsidiary, including Bee and PuppyCat, Bravest Warriors, Castlevania, and Catbug , for distribution and product licensing opportunities. The transaction was part of our strategic realignment to focus on monetization of premium intellectual property and franchise development. Upon closing, we ceased to have a controlling financial interest in Frederator Networks. The base purchase price under the purchase agreement was $0.5 million in cash, subject to customary post-closing adjustments for net working capital, indebtedness, and cash and cash equivalents, on a cash-free, debt-free basis. We expect to recognize a loss on disposal of approximately $0.3 million (before income taxes), representing the excess of Frederator Networks’ net carrying amount over the estimated net consideration to be received. This estimate is preliminary, unaudited, and subject to change pending finalization of the post-closing working capital true-up pursuant to the purchase agreement, which is expected to be completed within 60 days of closing. Because the transaction closed after June 30, 2026, Frederator Networks’ assets, liabilities, and results of operations continue to be included in our condensed consolidated financial statements as of and for the three and six months ended June 30, 2026, on a continuing-operations basis. Frederator Networks did not meet the held-for-sale criteria of ASC 360-10-45-9 as of June 30, 2026. Management concluded that the disposition does not represent a strategic shift that has, or will have, a major effect on our operations or financial results, and accordingly, the transaction does not qualify for discontinued-operations presentation under ASC 205-20. In connection with the closing, Frederator Networks, Inc. and Project Robot LLC entered into a three-year Channel Distribution Agreement with Frederator Studios, LLC. Under this arrangement, Frederator Studios, LLC will continue to receive a declining share of net YouTube receipts (85% in year one, decreasing to 5% by year three) generated from certain retained channels through YouTube CMS infrastructure. Frederator Studios, LLC and Frederator Networks, Inc. will each retain a 50% ownership interest in the Frederator trademark. Management does not believe this continuing involvement affects the conclusions and estimates described above. Results of Operations Net income for the three months ended June 30, 2026 was $27.0 million, compared to a net loss of $6.3 million for the three months ended June 30, 2025. The increase was primarily attributable to a non-recurring, non-operating gain of $39.2 million from the Section 16(b) litigation settlement received in June 2026. Excluding this one-time gain, we would have incurred a net loss from operations for the three months ended June 30, 2026. As a result, period-over-period comparisons of net income are not indicative of underlying operational performance. For additional information regarding the settlement, see Recent Events Section 16(b) Litigation Settlement . In addition, our results for the three months and six months ended June 30, 2026 include the operations of Frederator Networks, Inc., which was sold on July 8, 2026. In the future, we expect to focus on monetization of premium intellectual property and franchise development. For additional information regarding the Frederator Networks sale, see Recent Events Sale of Frederator Networks, Inc. Our summary results for the three months ended June 30, 2026 and 2025 are below: Revenue Three Months Ended June 30, 2026 2025 Change % Change (in thousands, except percentages) Production Services $ 3,459 $ 7,359 $ (3,900 ) (53 )% Content Distribution 1,853 1,992 (139 ) (7 )% Licensing and Royalties 61 86 (25 ) (29 )% Media Advisory and Advertising Services 448 842 (394 ) (47 )% Total Revenue $ 5,821 $ 10,279 $ (4,458 ) (43 )% 41 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 June 30, 2026 was 53% lower than the production services revenue recognized during the three months ended June 30, 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 advanced 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 June 30, 2026, decreased by 7% as compared to the three months ended June 30, 2025. The decrease of $0.1 million was due to a decrease in Frederator’s creator network revenue from YouTube by $0.7 million driven by overall less viewership as compared to the prior year period, partially offset by an increase in Mainframe content distribution revenue by $0.4 million due to delivery of episodes of Mainframe’s It’s Andrew! IP Project and distribution revenue from other Mainframe IP, and an increase in sales activity of Ameba and Kartoon Channel divisions by $0.2 million. Licensing and Royalties Revenue related to our licensing and royalties for the three months ended June 30, 2026 decreased by 29% as compared to the three months ended June 30, 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 June 30, 2026 decreased by 47% as compared to the three months ended June 30, 2025, primarily due to a reduced number of customer accounts in the period compared to the prior period. Expenses Three Months Ended June 30, 2026 2025 Change % Change (in thousands, except percentages) Marketing and Sales $ 139 $ 167 $ (28 ) (17 )% Direct Operating Costs 4,634 7,113 (2,479 ) (35 )% General and Administrative 4,458 6,214 (1,756 ) (28 )% Total Expenses $ 9,231 $ 13,494 $ (4,263 ) (32 )% Marketing and Sales Marketing and sales expenses for the three months ended June 30, 2026 decreased by approximately 17% as compared to the three months ended June 30, 2025. The decrease 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. 42 Direct Operating Costs Direct operating costs during the three months ended June 30, 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 35% decrease was primarily due to lower salary costs by $2.2 million driven by a lower headcount 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 and a decrease of $0.6 million of direct costs related to Frederator Networks. The decrease in direct operating costs was partially offset by an increase of $0.2 million in film amortization expense and an increase of $0.1 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 $1.8 million decrease in general and administrative expenses for the three months ended June 30, 2026, as compared to the three months ended June 30, 2025, was driven by a decrease of $0.7 million in salaries and wages primarily due to the capitalization of certain wages associated with a new film project and reduced headcount, a decrease of $0.6 million in professional fees reflecting reduced use of external consulting services and timing of the annual shareholder meeting costs, a decrease of $0.3 million in various administrative costs, mainly IT infrastructure and other equipment costs, a decrease of $0.1 million in bad debt expense due to certain receivables being written down in prior year quarter, and a gain on disposal of equipment of $0.1 million recorded in the current period. 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. Impairment Charge During the three months ended June 30, 2026 and June 30, 2025, we reassessed our nonfinancial assets, including our definite-lived intangible assets and our indefinite-lived intangible assets for impairment. No indicators of impairment or triggering events were identified during the periods, and we concluded that no impairment charges were required. On July 8, 2026, we completed the sale of Frederator Networks, Inc. We assessed the Frederator Networks, Inc. asset group for recoverability using the executed Stock Purchase Agreement price as the primary evidence of fair value and determined that any impairment indicated as of June 30, 2026 would be limited to the aggregate shortfall on the transaction of approximately $0.3 million. Because the sale closed on July 8, 2026, this shortfall will be reflected in the loss on deconsolidation of Frederator recognized in the third quarter of 2026. Accordingly, no impairment charge was recorded during the three months ended June 30, 2026. For additional information, see Note 22, Subsequent Events, to the Company’s condensed consolidated financial statements included in this report. Our summary results for the six months ended June 30, 2026 and 2025 are below: Revenue Six Months Ended 2026 2025 Change % Change (in thousands, except percentages) Production Services $ 7,552 $ 13,931 $ (6,379 ) (46 )% Content Distribution 4,126 3,973 153 4 % Licensing and Royalties 134 170 (36 ) (21 )% Media Advisory and Advertising Services 1,247 1,709 (462 ) (27 )% Total Revenue $ 13,059 $ 19,783 $ (6,724 ) (34 )% 43 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 six months ended June 30, 2026 was 46% lower than the production services revenue recognized during the six months ended June 30, 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 six months ended June 30, 2026, increased by 4% as compared to the six months ended June 30, 2025. The increase was primarily driven by revenue recognized from the delivery of episodes of Mainframe’s It’s Andrew! IP Project and distribution revenue from other Mainframe IP of $1.2 million, and an increase in sales activity of Ameba and Kartoon Channel divisions by $0.2 million. The increase was partially offset by a decline in content revenue from Frederator’s creator network on YouTube of $1.2 million for the six months ended June 30, 2026 as compared to the six months ended June 30, 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 six months ended June 30, 2026 decreased by 21% as compared to the six months ended June 30, 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 six months ended June 30, 2026 decreased by 27% as compared to the six months ended June 30, 2025, primarily due to a reduced number of customer accounts in the period compared to prior period. Expenses Six Months Ended June 30, 2026 2025 Change % Change (in thousands, except percentages) Marketing and Sales $ 331 $ 353 $ (22 ) (6 )% Direct Operating Costs 9,352 13,797 (4,445 ) (32 )% General and Administrative 9,589 11,927 (2,338 ) (20 )% Total Expenses $ 19,272 $ 26,077 $ (6,805 ) (26 )% 44 Marketing and Sales Marketing and sales expenses for the six months ended June 30, 2026 decreased by approximately 6% as compared to the six months ended June 30, 2025. The decrease 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 six months ended June 30, 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 32% decrease was primarily due to lower salary costs of $4.0 million driven by a lower headcount in Production Services related to the delivered projects, that were in the advanced production stages in the prior year quarter compared to the current quarter, a decrease of $1.2 million of direct costs related to Frederator Networks and the elimination of $0.1 million from the restructuring of our international operations. The decrease in direct operating costs was partially offset by an increase of $0.5 million in film amortization expense and an increase of $0.3 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. Additionally, $0.1 million in product development costs was not capitalized. General and Administrative The $2.3 million decrease in general and administrative expenses for the six months ended June 30, 2026, as compared to the six months ended June 30, 2025, was driven by a decrease of $1.2 million in salaries and wages primarily due to the capitalization of certain wages associated with a new film project and reduced headcount, a decrease of $0.9 million in professional fees, reflecting reduced use of external consulting services and timing of the annual shareholder meeting costs, a decrease of $0.2 million in other administrative costs, mainly IT infrastructure and other equipment costs, and a gain on disposal of equipment of $0.1 million recorded in the current period. The decrease was partially offset by an increase of $0.2 million in share-based compensation expense due to new awards granted in recent periods. Impairment Charge During the six months ended June 30, 2026 and June 30, 2025, we reassessed our nonfinancial assets, including our definite-lived intangible assets and our indefinite-lived intangible assets for impairment. No indicators of impairment or triggering events were identified during the periods, and we concluded that no impairment charges were required. On July 8, 2026, we completed the sale of Frederator Networks, Inc. We assessed the Frederator Networks, Inc. asset group for recoverability using the executed Stock Purchase Agreement price as the primary evidence of fair value and determined that any impairment indicated as of June 30, 2026 would be limited to the aggregate shortfall on the transaction of approximately $0.3 million. Because the sale closed on July 8, 2026, this shortfall will be reflected in the loss on deconsolidation of Frederator recognized in the third quarter of 2026. Accordingly, no impairment charge was recorded during the six months ended June 30, 2026. For additional information, see Note 22, Subsequent Events, to the Company’s condensed consolidated financial statements included in this report. 45 Other Expense, net Components of Other Income (Expense), net, are summarized as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 Interest Expense (a) $ (175 ) $ (165 ) $ (408 ) $ (293 ) Other Income (Expense), net (b-l) Loss on Revaluation of Warrants (b) – (678 ) – (232 ) Loss on Revaluation of Equity Investment in YFE (c) (514 ) (3,778 ) (3,471 ) (7,418 ) Realized Loss on Marketable Securities Investments (d) – (32 ) – (28 ) (Loss) Gain on Foreign Exchange (e) (412 ) 1,713 (784 ) 2,380 Loss on Debt Settlement (f) (630 ) – (754 ) (944 ) Interest Income (g) 47 12 82 66 Finance Lease Interest Expense (h) (4 ) (6 ) (8 ) (10 ) Gain on Lease Modification (i) – 4 – 4 Legal Settlement Income (j) 39,238 – 39,238 – Loss on Standstill Agreement (k) (4,000 ) – (4,000 ) – Other (l) (2,618 ) (122 ) (2,565 ) (89 ) Other Income (Expense), net $ 31,107 $ (2,887 ) $ 27,738 $ (6,271 ) Three Months and Six Months Ended June 30, 2026 (a) Interest Expense during the three months and six months ended June 30, 2026, primarily consisted of $0.2 million and $0.4 million in interest, respectively, incurred on production facilities and the factoring liability. (b) For the three months and six months ended June 30, 2026, the Company did not record any gain related to warrant revaluation. (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 $0.5 million and $3.5 million for the three months and six months ended June 30, 2026, 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) For the three months and six months ended June 30, 2026, the Company did not record any loss related to marketable securities. (e) The loss on foreign exchange during the three months ended June 30, 2026, primarily related to the remeasurement of foreign currency transactions of the Company’s non-U.S. subsidiary, resulting in a loss of $0.4 million. The loss on foreign exchange during the six months ended June 30, 2026, primarily related to the revaluation of the YFE investment, resulting in a loss of $0.2 million due to the Euro depreciating against the U.S. dollar as compared to prior period and a loss of $0.6 million due to the remeasurement of foreign currency transactions of the Company’s non-U.S. subsidiary. (f) The loss on debt settlement recorded during the three months and six months ended June 30, 2026, includes a loss of $0.6 million and $0.8 million, respectively, arising from the Section 3(a)(10) transaction completed during the periods. (g) Interest Income during the three months and six months ended June 30, 2026, primarily consisted of income from investments in marketable securities. (h) The finance lease interest expense represents the interest portion of the finance lease obligations for equipment purchased under an equipment lease line. (i) For the three months and six months ended June 30, 2026, the Company did not record any gain related to lease modification. (j) Between May 29, 2026 and June 11, 2026, the Company received aggregate cash of $39.2 million representing 50% of the court-approved settlement payments under the Section 16(b) litigation settlement agreements. For additional information, see Note 1, Organization and Business - Recent Transactions , to our condensed consolidated financial statements. (k) In connection with the legal settlement with the Anson Investments Master Fund LP and its affiliates, on June 10, 2026, Kartoon Studios Inc. entered into a standstill and voting agreement with the Anson Parties, under which the Company agreed to pay the Anson Parties $4.0 million and the Anson Parties agreed to certain voting commitments and standstill restrictions through June 11, 2027. The amount was recognized as a non-operating loss for the three months and six months ended June 30, 2026. For additional information, see Note 1, Organization and Business - Recent Transactions , to our condensed consolidated financial statements. (l) Other loss of $2.6 million primarily consists of non-operating losses related to legal fees directly attributable to the legal settlement, recorded during the three months and six months ended June 30, 2026. 46 Three Months and Six Months Ended June 30, 2025 (a) Interest Expense during the three months and six months ended June 30, 2025 consisted of $0.2 million and $0.3 million, respectively, primarily due to interest incurred on production facilities. (b) The loss on revaluation of warrants during the three months ended June 30, 2025 was related to the remeasurement occurred immediately before reclassification of the outstanding 7,894,736 Series A warrants and 7,894,736 Series B warrants from liability to equity. The loss on revaluation of warrants during the six months ended June 30, 2025 consisted of $0.7 million loss recorded at remeasurement offset by a $0.4 million fair value gain in the period ended March 31, 2025 of the outstanding 7,894,736 Series A warrants and 7,894,736 Series B warrants. These warrants were classified as a liability in the period ended March 31, 2025 and change in their fair value resulted in a recorded gain due to a decrease of expiration period. (c) As accounted for using the fair value option, the loss on revaluation of equity investment in YFE of $3.8 million and $7.4 million, respectively, recorded in the three months and six months ended June 30, 2025, was a result of the decreases in YFE’s stock price as of the reporting period when compared to the prior reporting period. This excluded the impact of foreign currency recorded separately. (d) The realized loss on marketable securities investments of $32,145 recorded during the three months ended June 30, 2025, was related to the Loss of $37,197 on sale of certain securities prior to the maturity date, offset by the gain of $5,053 attributable to the sale of U.S. Treasury Securities. The realized loss on marketable securities investments of $27,691 recorded during the six months ended June 30, 2025 was related to the loss of $37,197 on sale of certain securities prior to the maturity date, offset by the gain of $9,507 attributable to the sale of U.S. Treasury securities. (e) The gain on foreign exchange during the three months and six months ended June 30, 2025 primarily related to the revaluation of the YFE investment and remeasurement of foreign currency transactions of the Company’s non-U.S. subsidiary, resulting in a gain of $1.7 million and $2.4 million, respectively, due to the depreciation of the U.S. dollar against the Euro relative to prior periods. (f) In April 2025, a settlement agreement with YFE related to the shareholder loan agreement was finalized. As the settlement was considered probable and the loss reasonably estimable as of March 31, 2025, the Company recorded a loss of approximately $0.9 million during the first quarter of 2025. (g) Interest Income during the three and six months ended June 30, 2025, primarily consisted of income from investments in marketable securities, net of premium amortization expense, as well as other transactions, including interest income related to Employee Retention Tax Credit (“ERTC”) receivable and interest income related to the shareholder loan. 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) On April 1, 2025, a subsidiary, Beacon Communications, executed a rent reassignment agreement relinquishing one floor of its office space in Toronto to a new tenant who assumed the lease obligation for that floor. This transaction resulted in a gain of $4,253 on lease modification recorded during the period ended June 30, 2025. (j) During the three months ended June 30, 2025, a net loss of $0.1 million was recognized in connection with the reversal of previously accrued other income related to Employee Retention Tax Credit (ERTC) claims. Other income had initially been recorded based on anticipated recoveries from submitted claims. Subsequent legislative developments reduced the expected recoverable amounts, resulting in a partial reversal of the accrued other income. The amount also included $11,991 of other income, primarily consisting of late fees from select clients on payment plans. For the six months ended June 30, 2025, other income primarily related to such late fees totaled $50,197. Liquidity and Capital Resources As of June 30, 2026, we had cash of $7.7 million (which does not include cash held in escrow from the Section 16(b) litigation settlement described above), which increased by $4.8 million as compared to December 31, 2025. The increase was primarily due to cash provided by operating activities of $31.4 million, cash provided by financing activities of $1.7 million, and the effect of exchange rate of $0.5 million, offset by cash used in investing activities of $28.8 million. The cash provided by operating activities of $31.4 million was primarily due to net income of $20.5 million, and a favorable impact of net change in non-cash adjustments of $15.1 million, partially offset by a net use of cash related to operating assets and liabilities of $4.2 million. Net income was driven primarily by a non-recurring and non-operating cash receipt of $39.2 million representing 50% of the court-approved settlement payments under the Section 16(b) litigation settlement agreements. The cash provided by financing activities of $1.7 million was primarily due to the drawdowns, net of repayments and debt issuance costs, from production facilities of $1.2 million, proceeds from a warrant exercise of $0.6 million, partially offset by finance lease payments of $0.1 million. The cash used in investing activities of $28.8 million was primarily due to the investment of the settlement proceeds in marketable securities of $32.8 million, offset by the proceeds received from the redemption of marketable securities purchased in prior periods of $4.0 million. 47 During the six months ended June 30, 2026, we received aggregate cash of $39.2 million representing 50% of the court-approved settlement payments under the Section 16(b) litigation settlement agreements. The Settling Parties agreed to pay us aggregate settlement amounts of $78.5 million minus fees and expenses of plaintiff’s counsel (in an amount not yet determined), subject to certain terms and conditions, and the parties agreed to mutual releases. Pursuant to the settlement agreements, 50% of each settlement amount, or $39.2 million in the aggregate, was paid directly to us during June 2026, and the remaining 50% was deposited into escrow to fund the court-awarded fees and expenses of plaintiff’s counsel, with any residual balance payable to us after the applicable approval orders become final. These receipts are non-recurring and non-operating in nature and do not represent a source of operating cash flow. We used a significant portion of these receipts to purchase $32.3 million of available-for-sale securities, primarily U.S. Treasury securities. As a result, the settlement receipts are reflected principally in the marketable securities balance rather than in the ending cash balance. We hold these securities as a source of liquidity and expect to draw on them to fund working capital and operating requirements. We have not received, and have not recognized, the portion of the settlement deposited into escrow. Any residual amounts distributable to us will become available as a source of liquidity if and when realized. On June 10, 2026, we entered into a standstill and voting agreement with the Anson Parties, under which we agreed to pay the Anson Parties $4.0 million for certain voting commitments and standstill restrictions through June 11, 2027. Subsequent to June 30, 2026, we sold our interest in Frederator Networks, Inc. for $0.5 million, subject to customary post-closing adjustments for net working capital, indebtedness, and cash and cash equivalents, on a cash-free, debt-free basis. Frederator Networks was not a material contributor to our consolidated operating cash flows, and the sale is not expected to have a material adverse effect on our liquidity. In connection with the sale, we entered into a three-year Channel Distribution Agreement under which we will receive a declining share of net YouTube receipts generated by certain retained channels. For additional information, see Recent Events - Sale of Frederator Networks, Inc. As of June 30, 2026, we held available-for-sale marketable securities with a fair value of $32.8 million, compared to $4.0 million as of December 31, 2025, representing an increase of $28.8 million. The increase was primarily due to purchases of $32.3 million of securities funded by the proceeds received under the Section 16(b) litigation settlement, together with $0.5 million of securities purchased in May 2026, partially offset by $4.0 million of securities redeemed upon maturity during the six months ended June 30, 2026. The available-for-sale securities consist principally of U.S. Treasury securities and are available as a source of liquidity. Working Capital As of June 30, 2026, we had total current assets of $63.0 million, including cash of $7.7 million, and marketable securities of $32.8 million, and our total current liabilities were $31.6 million. We had working capital of $31.4 million as of June 30, 2026 as compared to working capital of $2.3 million as of December 31, 2025. The increase of $29.1 million was du e to an increase of $27.3 million in current assets and a decrease of $1.9 million in current liabilities compared to the balances as of December 31, 2025. The increase in current assets is primarily driven by an increase of $28.8 million in marketable securities investments due to investments of a portion of the cash proceeds from the settlement of the Section 16(b) litigation in the marketable securities, an increase of $4.8 million in cash primarily due to the remaining settlement proceeds not allocated to marketable securities, an increase of $0.8 million in prepaid expenses, and an increase of $0.7 million in production tax credit receivable due to recognized credits for the ongoing projects, offset by a decrease of $7.6 million in accounts receivable related to the timing of contractual billing milestones in production projects and a decrease of $0.2 million in other receivables due to collection of insurance proceeds related to previously filed claims. The decrease in current liabilities is primarily driven by a decrease of $6.4 million in accounts payable primarily within the Media Advisory and Advertising Services segment, driven by the seasonality of the business, as sales peak during the holiday season, a decrease of $1.7 million in deferred revenue balance related to revenue recognized under the percentage-of-completion method on production projects, offset by a standstill agreement payable of $4.0 million which was outstanding as of June 30, 2026, an increase of $1.1 million in production facilities due to advance stages of production projects, an increase of $1.0 million in accrued expenses related mainly to billing timing and insurance policy renewals, and an increase of $0.1 million in participation payable due to timing of production related participant distributions. 48 During the six months ended June 30, 2026, we met our immediate cash requirements through existing cash balances. 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, and continue to explore opportunities to further strengthen our financial position. In parallel, management also plans to preserve liquidity, as needed, by implementing cost saving measures. For example, during the six months ended June 30, 2026, in order to improve liquidity, we settled approximately $1.7 million of outstanding accounts payable in transactions under Section 3(a)(10) of the Securities Act. Additionally, we also used equity and equity-linked instruments to pay for services and compensation. During the six months ended June 30, 2026, we received $39.2 million in direct cash proceeds from the settlement of the Section 16(b) litigation, which we have substantially deployed into available-for-sale marketable securities as a source of liquidity. Management has evaluated the significance of these conditions in relation to our ability to meet our obligations and noted that we have sufficient cash, marketable securities and investments to fund operations for the next 12 months from the issuance date of this 10-Q. As of June 30, 2026, we had access to production facilities with an outstanding balance of $12.9 million. Our production facilities are generally repayable on demand and bear interest at rates ranging from bank prime plus 1.00% to 1.25% per annum. Borrowings under these facilities are collateralized by a security interest in substantially all of the relevant production company’s tangible and intangible assets, including federal and provincial tax credits and production service agreements. We expect to continue utilizing production facilities to finance specific productions as projects advance through the production pipeline. For additional information regarding our production facilities, see Note 12, Bank Indebtedness and Production Facilities, to our condensed consolidated financial statements. Comparison of Cash Flows for the Six Months Ended June 30, 2026 and June 30, 2025 Our total cash as of June 30, 2026 and June 30, 2025 was $7.7 million and $2.6 million, respectively. Six Months Ended June 30, 2026 2025 Change (in thousands) Net Cash Provided by (Used in) Operating Activities $ 31,432 $ (6,290 ) $ 37,722 Net Cash Provided by (Used in) Investing Activities (28,826 ) 1,301 (30,127 ) Net Cash Provided by (Used in) Financing Activities 1,672 (273 ) 1,945 Effect of Exchange Rate Changes on Cash 521 (555 ) 1,076 Increase (Decrease) in Cash $ 4,799 $ (5,817 ) $ 10,616 Change in Operating Activities Change in operating activities of $37.7 million during the six months ended June 30, 2026, as compared to the six months ended June 30, 2025, include an increase in net income of $33.4 million driven primarily by the legal settlement cash receipts, an increase of $5.6 million in net non-cash expense adjustments, and an increase of $1.3 million in cash flows from operating assets activity, offset by a decrease of $2.6 million in cash flows from operating liabilities activity. Items necessary to reconcile net loss to cash provided by operating activities included net non-cash expenses of $15.1 million for the six months ended June 30, 2026 as compared to net non-cash expenses of $9.5 million for the six months ended June 30, 2025. The increase of $5.6 million in non-cash expenses compared to prior year was primarily due to a $4.0 million accrued expense related to the standstill agreement recorded in the current period, an increase of $2.0 million non-cash adjustment due to stock issued for services, an absence of foreign currency YFE investment remeasurement recorded in the six months ended June 30, 2025 resulting in a $1.9 million change compared to the prior year, a noncash reduction of $1.7 million in accounts payable due to corresponding stock issuances to CCI, an increase of $0.8 million in loss on debt settlement related to the transaction under Section 3(a)(10) of the Securities Act of 1933, an increase of $0.4 million in Film and Television amortization related to the projects delivered in prior year, and an increase of $0.2 million in stock-based compensation expense due to new awards granted. These movements were offset by a decrease of $3.9 million in expense related to fair value adjustment of YFE investment, an absence of $1.3 million loss on debt related to the settlement agreement of the loan from related party recorded in prior year period, and an absence of $0.2 million loss related to revaluation of the warrants recorded in prior year period. 49 Change in cash provided by 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 net decrease of $4.2 million in cash during the six months ended June 30, 2026, as compared to a net decrease of $2.9 million in cash during the six months ended June 30, 2025. The changes resulted in an increase in use of cash related to operating asset and liability cash flows of $1.3 million compared to prior year. This was primarily due to a decrease in cash flows from the operating liabilities by $2.6 million, offset by an increase in net cash flows generated by the operating assets activity by $1.3 million. The decrease in cash flows used by the operating liabilities by $2.6 million was primarily due to unfavorable impact of deferred revenue movement of $1.7 million representing revenue recognized related to cash received in advance in prior periods, generally more accounts payable settled in cash by $1.2 million, an unfavorable impact of lower accrued salaries and wages costs of $0.6 million, and an unfavorable impact of lower media purchases accrued expenses of $0.2 million, offset by favorable impact of accrued participation costs movement of $0.5 million due to timing of payment obligation and an increase of $0.3 million related to timing of Mainframe production costs accruals. Net cash flows generated by the operating assets activity by $1.3 million compared to the prior year period was due to generally higher net receipts of outstanding accounts receivable by $2.5 million, a favorable impact of $0.4 million attributable to other receivables, partially offset by higher capitalized costs related to ongoing productions by $1.1 million, lower net receipts of tax credits during the current period by $0.4 million and more cash spent on prepaid services by $0.1 million as compared to the prior year period. Change in Investing Activities The cash used in investing activities increased by $30.1 million, primarily due to investment of a portion of the legal settlement proceeds in the marketable securities totaling to $31.0 million, partially offset by an increase in proceeds from the redemption of marketable securities of $0.8 million during the six months ended June 30, 2026. Change in Financing Activities The increase in cash provided by financing activities of $1.9 million was primarily due to higher net proceeds from borrowing from our margin loan and production facilities of $1.2 million during the six months ended June 30, 2026 as compared to the six months ended June 30, 2025, proceeds from warrants exercise of $0.6 million, and lower finance leases payments by $0.1 million. 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 $26.9 million as of June 30, 2026, of which $16.8 million could be owed within one year. Included in the amount that could be due within one year is the production facilities balance of $12.9 million. In addition, we expect to incur significant production costs in connection with the development and launch of Hundred Acre Wood’s: Winnie and Friends , which is scheduled to premiere with preliminary activities in Q4 2026 and a full launch anticipated in Q1 2027. We expect to fund these production costs through a combination of existing cash and marketable securities, production facilities, and potential licensing and distribution advances. We plan to utilize our liquidity (as described above) to fund our material cash requirements. As of June 30, 2026, we had $0.2 million in commitments for capital expenditures, related to equipment leases. 50 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. 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.