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 have incurred net losses from operations since inception. We have a history of operating losses and incurred net operating losses in each fiscal quarter since our inception. During the three months ended June 30, 2026, we generated total revenues of $5.8 million and incurred a net loss from operations of $3.4 million, while for the same period the previous year, we generated total revenue of $10.3 million and incurred a net loss from operations of $3.2 million, respectively. These operating losses, among other things, have had an adverse effect on our results of operations, financial condition, stockholders’ equity, net current assets and working capital. Although we have net income for the three and six months ended June 30, 2026, the net income is not derived from operations and is instead attributed to non-recurring and non-operating cash receipt of $39.2 million from the court approved cash settlement received by us. 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 we are headquartered 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. The broader legal landscape governing U.S. tariff authority has continued to evolve materially. In February 2026, the U.S. Supreme Court held in Learning Resources, Inc. v. Trump that the International Emergency Economic Powers Act 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 imposed a temporary 10% global tariff under Section 122 of the Trade Act of 1974, which expired in July 2026 in accordance with that statute’s 150-day limit. In parallel, the Office of the U.S. Trade Representative initiated investigations under Section 301 of the Trade Act of 1974 covering a substantial number of U.S. trading partners and, following one such investigation, in July 2026 imposed tariffs on goods of approximately 60 trading partners, reflecting the administration’s stated intent to reestablish broad-based tariff measures under alternative statutory authorities. In addition, 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, and the joint review of the United States-Mexico-Canada Agreement, which prohibits customs duties on digital products transmitted electronically between the parties, commenced in July 2026. Any renegotiation or modification of that agreement’s digital trade provisions could reduce or eliminate one of the remaining legal constraints on the imposition of duties on content produced by our Canadian operations. The full implications of these developments for the potential imposition of tariffs or fees on filmed or animated content remain uncertain. 54 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. We are subject to laws governing children’s privacy and online safety, including the FTC’s amended COPPA rule, which became fully enforceable in April 2026, and compliance requires ongoing operational measures. Our digital distribution properties, including Kartoon Channel!, are directed to children, and we are subject to the Children’s Online Privacy Protection Act (COPPA) and the FTC’s implementing rule, which govern the online collection, use, disclosure, and retention of personal information from children under the age of 13. In April 2025, the FTC published significant amendments to the COPPA Rule, and operators were required to be in full compliance by April 22, 2026. Among other changes, the amended rule expanded the definition of personal information to include biometric identifiers, requires separate verifiable parental consent before disclosing children’s personal information to third parties for purposes not integral to our service (including targeted advertising and training artificial intelligence technologies), and requires operators to maintain a written information security program and data retention policy applicable to children’s personal information. Because a portion of our revenue is derived from advertising on child-directed services, these requirements, particularly the separate consent requirement for third-party advertising disclosures, affect how we and our advertising partners may collect and use viewer data. Compliance involves ongoing operational, contractual, and technological measures, including monitoring third-party vendors’ use of data collected through our services. In addition, a growing number of states have enacted laws imposing further restrictions on the processing of minors’ personal information, and additional federal and state rulemaking, including with respect to age verification, remains under active consideration. We implemented the changes necessary to comply with the amended rule by the required date, and doing so has not to date had a material effect on our operations or advertising-supported revenue. However, because these requirements are not uniform across jurisdictions and continue to evolve, compliance with the most restrictive applicable standard could increase our costs or constrain our advertising-supported revenue model in the future. Failure to comply with COPPA or analogous state laws could result in investigations, enforcement actions, civil penalties, and reputational harm with parents, distributors, and advertisers, any of which could adversely affect 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 June 30, 2026, three customers each accounted for more than 10% of our total consolidated revenue. These customers accounted for an aggregate of 74.2% of our total revenue for the three months ended June 30, 2026. During the six months ended June 30, 2026, three customers each accounted for more than 10% of our total consolidated revenue. These customers accounted for an aggregate of 66.1% of our total revenue for the six months ended June 30, 2026. As of June 30, 2026, we had three customers, the accounts receivable for each of which exceeded 10% of the total accounts receivable. These customers accounted for an aggregate of 69.6% of the total accounts receivable as of June 30, 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. 55 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 August 13, 2026, approximately 59,728,670 shares of common stock of the 62,204,105 shares of common stock issued are outstanding and freely trading. As of June 30, 2026, there were 38,960,004 warrants outstanding. Lastly, as of June 30, 2026, there are 839,998 shares of common stock underlying outstanding options granted, 2,576,561 shares of common stock underlying outstanding restricted stock units (“RSUs”) and 5,096,394 shares reserved for issuance under our Kartoon Studios, Inc. 2020 Incentive Plan. We are authorized to issue “blank check” preferred stock without stockholder approval, which could adversely impact the rights of holders of our common stock. Our Articles of Incorporation, as amended (our “Articles of Incorporation”), authorize us to issue up to 10,000,000 shares of blank check preferred stock without seeking approval of our shareholders. As of June 30, 2026, 6,000 shares of our authorized preferred stock have been designated as 0% Series A Convertible Preferred Stock, and 50,000 shares of our authorized preferred stock have been designated as Series C Preferred Stock, none of which shares were outstanding. On July 1, 2026, the Board of Directors designated 300,000 shares of our authorized preferred stock as Series D Participating Preferred Stock, none of which have been issued, in connection with our adoption of a stockholder rights plan on that date, as described elsewhere in this report. Any preferred stock that we issue in the future may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock. In addition, such preferred stock may contain provisions allowing those shares to be converted into shares of common stock, which could dilute the value of common stock to current stockholders and could adversely affect the market price, if any, of our common stock. In addition, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company. Although we have no present intention to issue any additional shares of authorized preferred stock, there can be no assurance that we will not do so in the future. Our stockholder rights plan and provisions of our amended Bylaws and Nevada law could discourage, delay or prevent a change in control and may adversely affect the market price of our common stock. On July 1, 2026, our Board of Directors adopted a stockholder rights plan (the “Rights Agreement”) and adopted amendments to our Bylaws. Under the Rights Agreement, if a person or group acquires beneficial ownership of 10% or more of our outstanding common stock without the approval of our Board, the rights held by that person or group would become void and each other holder of a right would become entitled to purchase shares of our common stock at a substantial discount, resulting in significant dilution to the acquiring person or group. In connection with the Rights Agreement, on July 1, 2026 our Board also designated a new series of participating preferred stock. In addition, the amendments to our Bylaws adopted on July 1, 2026, among other things, divide our Board into two classes with staggered terms, eliminate the ability of stockholders to act by written consent, provide that special meetings of stockholders may be called only by the Board, establish advance notice procedures for stockholder nominations and proposals, require a two-thirds supermajority stockholder vote to remove a director, and designate an exclusive forum for certain disputes. We are also subject to provisions of Nevada law that may have anti-takeover effects. These provisions, alone or in combination, could make it more difficult for a third party to acquire us, or for our stockholders to change the composition of our Board, even in a transaction that some or all of our stockholders might consider to be in their best interests or in which our stockholders might receive a premium over the then-current market price of our common stock. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock and could adversely affect the market price of our common stock and the ability of our stockholders to realize a premium for their shares. 56 Actions of activist stockholders could be disruptive and costly and could adversely affect our results of operations, financial condition, and/or share price. While we strive to maintain constructive communications with our stockholders, we may, from time to time, be subject to demands from activist stockholders. Any activist campaign against the Company that contests, conflicts with, or seeks to change, our board composition, leadership, strategic direction, or business mix could have an adverse effect on us because: (i) responding to actions by activist stockholders could disrupt our operations, be costly or time-consuming, or divert the attention of our board of directors and senior management from their regular duties, including diverting their attention from the operation of our business and the execution of our strategic plans, which could adversely affect our results of operations or financial condition; (ii) perceived uncertainties as to our future direction, including as a result of possible changes to the composition of our board, may lead to the perception of a change in the direction of the business or lack of continuity, any of which may be exploited by our competitors, cause concern to our customers, employees, and/or business partners and result in the loss of potential business opportunities, or make it more difficult to attract and retain qualified personnel and business partners, and may adversely affect our relationships with vendors, customers, business partners, and other third parties; (iii) these types of actions could cause significant fluctuations in our share price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business; and (iv) if individuals are elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended June 30, 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.