toon-20230630

Table of Conten t s

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number: 000-54389

KARTOON STUDIOS, INC.

(Exact name of registrant as specified in its charter)


Nevada			20-4118216
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

190 N. Canon Drive, 4th FL

Beverly Hills, CA 90210

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: 310-273-4222

______________________________

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each class	Trading Symbol(s)	Name of Exchange where registered
Common Stock, par value $0.001 per share	TOON	The NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o	Accelerated filer	o
Non-accelerated filer x	Smaller reporting company	x
	Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 14, 2023, the registrant had 35,060,546 shares of common stock outstanding.

Table of Conten t s

Kartoon Studios, Inc.

FORM 10-Q

For the Quarterly Period Ended June 30, 2023

Table of Contents


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).			3

Condensed Consolidated Balance Sheets			3

Condensed Consolidated Statements of Operations			4

Condensed Consolidated Statements of Comprehensive Loss			5

Condensed Consolidated Statements of Stockholders’ Equity			6

Condensed Consolidated Statements of Cash Flows			8

Notes to Condensed Consolidated Financial Statements			9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			41

Item 3. Quantitative and Qualitative Disclosures About Market Risk.			51

Item 4. Controls and Procedures.			51

PART II - OTHER INFORMATION			54

Item 1. Legal Proceedings.			54

Item 1A. Risk Factors.			55

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			55

Item 3. Defaults Upon Senior Securities.			55

Item 4. Mine Safety Disclosures.			55

Item 5. Other Information.			55

Item 6. Exhibits.			56

SIGNATURES			57

Table of Conten t s

PART I- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Kartoon Studios, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	June 30, 2023		December 31, 2022
	(unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents	$	4,839	$	7,432
Investments in Marketable Securities (amortized cost of $53,113)	49,498		83,706
Accounts Receivable, net	8,328		15,558
Tax Credits Receivable, net	25,093		26,255
Notes and Accounts Receivable from Related Party	1,487		2,844
Other Receivable	420		1,162
Prepaid Expenses and Other Assets	1,946		2,568
Total Current Assets	91,611		139,525

Noncurrent Assets:
Property and Equipment, net	2,136		2,400
Operating Lease Right of Use Assets, net	8,216		8,506
Finance Lease Right of Use Assets, net	2,533		2,338
Film and Television Costs, net	8,100		7,780
Investment in Your Family Entertainment AG	19,969		16,247
Intangible Assets, net	24,416		29,167
Goodwill	20,852		31,807
Other Assets	150		148
Total Assets	$	177,983	$	237,918

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	6,236	$	11,436
Participations Payable	2,168		2,965
Accrued Expenses	1,234		895
Accrued Salaries and Wages	2,578		2,484
Deferred Revenue	4,971		9,065
Margin Loan	27,613		60,810
Production Facilities, net	17,793		18,282
Bank Indebtedness	4,755		1,741
Current Portion of Operating Lease Liability	868		802
Current Portion of Finance Lease Liability	1,635		1,623
Warrant Liability	7,202		548
Due To Related Party	55		2
Other Current Liabilities	79		255
Total Current Liabilities	77,187		110,908

Noncurrent Liabilities:
Deferred Revenue	3,369		3,369
Operating Lease Liability, Net Current Portion	7,763		8,095
Finance Lease Liability, Net Current Portion	1,223		1,020
Deferred Tax Liability	–		705
Other Noncurrent Liabilities	928		952
Total Liabilities	90,470		125,049

Commitments and Contingencies (Note 19)

Stockholders’ Equity:
Preferred Stock Series A, $0.001 par value, 9,999,999 shares authorized, 0 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	–		–
Preferred Stock Series B, $0.001 par value, 1 share authorized, 1 share issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	–		–
Common Stock, $0.001 par value, 40,000,000 shares authorized, 35,054,573 and 31,918,552 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	351		319
Additional Paid-in Capital	773,377		762,418
Treasury Stock at Cost, 48,498 and 42,633 shares of common stock as of June 30, 2023 and December 31, 2022, respectively	(305)		(290)
Accumulated Deficit	(681,435)		(641,443)
Accumulated Other Comprehensive Loss	(6,218)		(9,925)
Total Kartoon Studios, Inc. Stockholders' Equity	85,770		111,079
Non-Controlling Interests in Consolidated Subsidiaries	1,743		1,790
Total Stockholders' Equity	87,513		112,869

Total Liabilities and Stockholders’ Equity	$	177,983	$	237,918

The accompanying notes are an integral part of these financial statements.

Table of Conten t s

Kartoon Studios, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Revenues:
Production Services	$	7,033	$	10,018	$	16,919	10,018
Content Distribution	3,012		8,529		6,313		8,942
Licensing & Royalties	103		2,495		149		2,536
Media Advisory & Advertising Services	890		1,082		1,846		2,067
Total Revenues	11,038		22,124		25,227		23,563

Operating Expenses:
Marketing and Sales	1,690		972		1,935		1,132
Direct Operating Costs	9,541		14,648		20,826		14,992
General and Administrative	8,370		15,105		17,595		25,962
Impairment of Property and Equipment	–		—		120		—
Impairment of Intangible Assets	–		–		4,023		–
Impairment of Goodwill	–		–		11,287		–
Total Operating Expenses	19,601		30,725		55,786		42,086

Loss from Operations	(8,563)		(8,601)		(30,559)		(18,523)

Interest Expense	(1,020)		(388)		(2,105)		(443)
Other Income (Expense), Net	(6,368)		(3,161)		(8,080)		2,256
Loss Before Income Tax Benefit	(15,951)		(12,150)		(40,744)		(16,710)

Income Tax Benefit	705		–		705		–

Net Loss	(15,246)		(12,150)		(40,039)		(16,710)

Net (Income) Loss Attributable to Non-Controlling Interests	16		(1,193)		47		(1,162)

Net Loss Attributable to Kartoon Studios, Inc.	$	(15,230)	$	(13,343)	$	(39,992)	$	(17,872)

Net Loss per Share (Basic)	$	(0.47)	$	(0.42)	$	(1.24)	$	(0.58)
Net Loss per Share (Diluted)	$	(0.47)	$	(0.42)	$	(1.24)	$	(0.58)

Weighted Average Shares Outstanding (Basic)	32,379,852		31,551,991		32,180,202		30,968,201
Weighted Average Shares Outstanding (Diluted)	32,379,852		31,551,991		32,180,202		30,968,201

The accompanying notes are an integral part of these financial statements.

Table of Conten t s

Kartoon Studios, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Net Loss	$	(15,246)	$	(12,150)	$	(40,039)	$	(16,710)
Change in Accumulated Other Comprehensive Income (Loss):
Change in Unrealized Gain/(Losses) on Marketable Securities	(87)		(1,095)		743		(4,595)
Realized Losses on Marketable Securities Reclassified from AOCI into Earnings	720		44		2,257		123
Foreign Currency Translation Adjustments	704		(1,477)		707		(1,440)
Total Change in Accumulated Other Comprehensive Loss	1,337		(2,528)		3,707		(5,912)
Total Comprehensive Net Loss	$	(13,909)	$	(14,678)	$	(36,332)	$	(22,622)
Net (Income) Loss Attributable to Non-Controlling Interests	16		(1,193)		47		(1,162)
Total Comprehensive Net Loss Attributable to Kartoon Studios, Inc.	$	(13,893)	$	(15,871)	$	(36,285)	$	(23,784)

The accompanying notes are an integral part of these financial statements.

Table of Conten t s

Kartoon Studios, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share data)

Common Stock

Preferred Stock

Additional Paid-In Capital

Treasury Stock

Accumulated Deficit

Accumulated Other Comprehensive Loss

Non-Controlling Interest

Total

Amount

Balance, December 31, 2022

31,918,552

319

–

762,418

42,633

(290)

(641,443)

(9,925)

1,790

112,869

Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes

78,088

–

(1)

3,700

(9)

–

(9)

Fractional Shares Issued Upon Reverse Stock Split

117,144

–

Share Based Compensation

–

910

–

910

Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss

–

2,367

–

2,367

Foreign Translation Adjustment

–

Net Loss

–

(24,762)

–

(31)

(24,793)

Balance, March 31, 2023

32,113,784

320

–

763,327

46,333

(299)

(666,205)

(7,555)

1,759

91,347

Issuance of Common Stock for Services

404,251

–

997

–

997

Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes

224,988

–

(29)

2,165

(6)

–

(6)

Proceeds From Warrant Exchange, net

2,311,550

–

4,854

–

4,856

Warrant Inducement

–

3,511

–

3,511

Share Based Compensation

–

717

–

717

Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss

–

633

–

633

Foreign Translation Adjustment

–

704

–

704

Net Loss

–

(15,230)

–

(16)

(15,246)

Balance, June 30, 2023

35,054,573

351

—

773,377

48,498

(305)

(681,435)

(6,218)

1,743

87,513

Table of Conten t s

Balance, December 31, 2021

30,337,914

303

–

739,495

–

(595,848)

(1,221)

1,924

144,653

Issuance of Common Stock for Services

38,620

–

311

–

311

Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes

60,366

–

(1)

–

Share Based Compensation

–

4,491

–

4,491

Unrealized Loss on Marketable Securities

–

(3,421)

–

(3,421)

Foreign Translation Adjustment

–

Net Loss

–

(4,531)

–

(31)

(4,562)

Balance, March 31, 2022

30,436,900

304

–

744,296

–

(600,379)

(4,605)

1,893

141,509

Shares Issued for Wow Acquisition

1,105,708

–

11,543

–

11,554

Fair Value of Replacement Options Related to Wow Acquisition

–

1,213

–

1,213

Issuance of Common Stock for Services

73,667

–

441

–

442

Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes

107,241

–

(1)

–

Share Based Compensation

–

4,245

–

4,245

Unrealized Loss on Marketable Securities

–

(1,051)

–

(1,051)

Foreign Translation Adjustment

–

(1,477)

–

(1,477)

Distributions to Non-Controlling Interests

–

(1,200)

Net Loss

–

(13,341)

–

1,193

(12,148)

Balance, June 30, 2022

31,723,516

317

—

761,737

–

—

(613,720)

(7,133)

1,886

143,087

The accompanying notes are an integral part of these financial statements.

Table of Conten t s

Kartoon Studios, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)


	June 30, 2023		June 30, 2022
Cash Flows from Operating Activities:
Net Loss	$	(40,039)	$	(16,710)

Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Amortization of Film and Television Costs	474		2,253
Depreciation and Amortization of Property, Equipment & Intangible Assets	1,324		1,103
Amortization of Right of Use Asset	1,486		700
Amortization of Premium on Marketable Securities	322		545
Share Based Compensation Expense	1,627		8,736
Impairment Loss of Intangible Assets	4,023		–
Impairment of Goodwill	11,287		–
Impairment of Property and Equipment	120		–
Warrant Incentive Expense	16,174		–
Deferred Income Taxes	(705)		–
Marketing Expenses in Exchange for Stock	1,195		–
Gain on Revaluation of Equity Investments in Your Family Entertainment AG	(3,427)		(2,901)
Unrealized (Gain) Loss for Foreign Currency of Equity Investments in Your Family Entertainment AG	(295)		1,296
Gain on Warrant Revaluation	(6,202)		(269)
Realized Loss on Marketable Securities	2,257		123
Stock Issued for Services	997		312
Bad Debt Expense	246		51
Other Non-Cash Items	(3)		–

Decrease (Increase) in Operating Assets:
Accounts Receivable, net	7,217		6,078
Other Receivable	749		384
Tax Credits Earned (less capitalized)	(8,931)		(4,247)
Tax Credits Received, net	10,419		1,702
Film and Television Costs, net	(689)		(6,015)
Prepaid Expenses and Other Assets	(563)		(469)

Increase (Decrease) in Operating Liabilities:
Accounts Payable	(5,219)		(4,439)
Accrued Salaries & Wages	54		338
Accrued Expenses	339		(2,048)
Accrued Production Costs	473		(1,438)
Participations Payable	(813)		1,283
Deferred Revenue	(4,216)		(3,455)
Lease Liability	(297)		(352)
Due To Related Party	53		(63)
Other Liabilities	(24)		(42)
Net Cash Used in Operating Activities	$	(10,587)	$	(17,544)

Cash Flows from Investing Activities:
Cash Payment for Wow, net of Cash Acquired	–		(37,311)
Cash Payment for Equity Investment in Your Family Entertainment	–		(9,540)
Cash Payment for Ameba, net of Cash Acquired	–		(3,893)
Repayments from/(Loans to) Related Party for Note Receivables	1,357		(128)
Proceeds from Principal Collections on Marketable Securities	460		4,420
Proceeds from Sales and Maturities of Marketable Securities	34,169		5,536
Investment in Intangible Assets, net	–		(22)
Purchase of Property & Equipment	(38)		(401)
Net Cash Provided by (Used in) Investing Activities	35,948		(41,339)

Cash Flows from Financing Activities:
Proceeds from Margin Loan	8,582		58,980
Repayments of Margin Loan	(41,778)		(4,522)
(Repayments of)/Proceeds from Production Facilities, net	(1,494)		2,495
Proceeds from Bank Indebtedness, net	2,931		1,291
Proceeds from Warrant Exchange, net	5,299		–
Repayments of Notes Payable	–		(9)
Principal Payments on Finance Lease Obligations	(1,216)		(442)
Distributions to Non-Controlling Interest	–		(1,200)
Shares Withheld for Taxes on Vested Restricted Shares	(15)		–
Payment for Warrant Put Option Exercise	(250)		–
Net Cash (Used in) Provided by Financing Activities	(27,941)		56,593

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(13)		46

Net Decrease in Cash, Cash Equivalents and Restricted Cash	(2,593)		(2,244)
Beginning Cash, Cash Equivalents and Restricted Cash	7,432		10,060
Ending Cash, Cash Equivalents and Restricted Cash	$	4,839	$	7,816

Schedule of Non-Cash Financing and Investing Activities
Leased Assets Obtained in Exchange for New Finance Lease Liabilities	$	1,216	$	–
Warrants Issued for Services	$	443	$	–
Shares Issued for Wow Acquisition	$	–	$	11,554
Fair Value of Replacement Options Granted Related to Wow Acquisition	$	–	$	1,213

The accompanying notes are an integral part of these financial statements.

Table of Conten t s

Kartoon Studios, Inc. And Subsidiaries

Notes to Condensed Consolidated Financial Statements

June 30, 2023

Note 1: Organization and Business

Organization and Nature of Business

Kartoon Studios, Inc. (formerly known as Genius Brands International, Inc.; “we,” “us,” “our,” or the “Company”) is a global content and brand management company that creates, produces, licenses, and broadcasts timeless and educational, multimedia animated content for children. Led by experienced industry personnel, the Company distributes its content primarily on streaming platforms and television and licenses properties for a broad range of consumer products based on the Company’s characters. The Company is a “work for hire” producer for many of the streaming outlets and animated content intellectual property (“IP”) holders. In the children’s media sector, the Company’s portfolio features “content with a purpose” for toddlers to tweens, providing enrichment as well as entertainment. With the exception of selected WOW Unlimited Media Inc. ("Wow") titles, the Company’s programs, along with licensed programs, are being broadcast in the United States on the Company’s wholly-owned advertisement supported video on demand (“AVOD”) service, its free ad supported TV (“FAST”) channels and subscription video on demand (“SVOD”) outlets, Kartoon Channel! and Ameba. These streaming services are available on Apple TV, Apple iOS, Android TV, Android mobile, Amazon Prime, Amazon Fire, Tubi, Roku, Comcast, Cox, Dish/Sling, Xumo, Pluto, Samsung Smart TVs, LG Smart TVs, as well as YouTube, among other platforms. The Company's in-house owned and produced animated shows include Stan Lee’s Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama starring Jennifer Garner, Rainbow Rangers, KC Pop Quiz and Shaq’s Garage starring Shaquille O’Neal. The Company’s library titles include the award-winning Baby Genius, adventure comedy Thomas Edison’s Secret Lab®, and Warren Buffett’s Secret Millionaires Club, created with and starring iconic investor Warren Buffett, Team Zenko Go!, Reboot, Bee & PuppyCat: Lazy in Space and Castlevania.

The Company also licenses its programs to other services worldwide, in addition to the operation of its own channels, including but not limited to Netflix, HBO Max, Paramount+, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world.

Through the Company’s investments in Germany’s Your Family Entertainment (“YFE”), a publicly traded company on the Frankfurt Exchange (RTV-Frankfurt), it has gained access to one of the largest animation catalogues in Europe with over 50 titles consisting of over 1,600 episodes, and a global distribution network which currently covers over 60 territories worldwide.

Through the ownership of Wow, the Company has established an affiliate relationship with Mainframe Studios, which is one of the largest animation producers in the world. In addition, Wow owns Frederator Networks Inc. (“Frederator”) and its Channel Frederator Network, the largest animation focused multi-channel network on YouTube with over 2,500 channels.

The Company has rights to a select amount of valuable IP, including among them a controlling interest in Stan Lee Universe, LLC (“SLU”), through which it controls the name, likeness, signature, and all consumer product and IP rights to Stan Lee (the “Stan Lee Assets”).

The Company also owns Beacon Media Group (“Beacon”), the largest media buying service for children in North America. Beacon represents over 30 major toy companies, including Playmobile, Bandai Toys, Bazooka and Moose Toys.

In addition, the Company owns the Canadian company Ameba Inc. (“Ameba”), which distributes SVOD service for kids and has become the focal point of revenue growth for TOON Media Networks’ subscription offering.

The Company and its affiliates provide world class animation production studios a catalogue representing thousands of hours of premium global content for children, a broadcast system for delivering that content and an in-house consumer products licensing infrastructure to fully exploit the content.

On June 23, 2023, the Company was renamed Kartoon Studios, Inc. On June 26, 2023, the Company transferred its listing to NYSE American LLC (“NYSE American”). In connection with listing on NYSE American, the Company

Table of Conten t s

voluntarily delisted from the Nasdaq Capital Market (“Nasdaq”). The Company’s common stock began trading on NYSE American under the new symbol “TOON” on June 26, 2023.

Table of Conten t s

Recent Developments

Common Stock

On February 6, 2023, the Company’s board of directors approved a 1-for-10 reverse stock split of the Company’s outstanding shares of common stock. The reverse stock split was effected on February 10, 2023 at 5:00 p.m. Eastern time. At the effective time, every 10 issued and outstanding shares of the Company’s common stock were converted into one share of common stock. Any fractional shares of common stock resulting from the reverse stock split were rounded up to the nearest whole post-split share and no shareholders received cash in lieu of fractional shares. The par value of each share of common stock remained unchanged. The reverse stock split proportionately reduced the number of shares of authorized common stock from 400,000,000 to 40,000,000 shares. The reverse stock split also applied to common stock issuable upon the exercise of the Company's outstanding warrants and stock options. The reverse stock split did not affect the authorized preferred stock of 10,000,000 shares. Unless noted, all references to shares of common stock and per share amounts contained in this Quarterly Report on Form 10-Q have been retroactively adjusted to reflect a 1-for-10 reverse stock split.

Exercise of 2021 Warrants and Issuance of New Warrants

On June 26, 2023, the Company entered into warrant exercise inducement offer letters (the “Letter Agreements”) with certain existing institutional and accredited investors pursuant to which such investors agreed to exercise for cash certain warrants issued by the Company in January 2021 (the “2021 Warrants”) to purchase 2,311,550 shares of common stock (the “Exercise”). To induce the Exercise by holders of the 2021 Warrants, the Company also amended the exercise price of the 2021 Warrants from $23.70 per share (as adjusted pursuant to a 1-for-10 reverse stock split of our outstanding shares of common stock effected on February 10, 2023) to $2.50 per share pursuant to the terms of the 2021 Warrants. In consideration for the Exercise, the exercising holders received warrants to purchase up to 4,623,100 shares of common stock, and The Special Equities Group, LLC, a division of Dawson James Securities, which acted as the warrant solicitation agent for the Exercise, received a warrant to purchase up to 161,809 shares of common stock (collectively, the “Warrants”). Prior to closing of the Exercise, the Company had 32,755,748 shares of common stock outstanding. Following the repricing of the 2021 Warrants, certain 2021 Warrants were exercised for an aggregate of 2,311,550 shares, resulting in 35,067,298 outstanding shares. Therefore, the issuance of 4,784,909 shares of common stock upon exercise of the Warrants would have constituted an excess of 19.99% of the outstanding shares of common stock of the Company (determined as of the date of, and without regard for, the issuance of the Warrants and the shares issued upon exercise of the repriced 2021 Warrants). The Warrants will be exercisable at any time at a price per share of $2.50 upon approval by the Company’s shareholders of (a) a proposal to approve an amendment to the articles of incorporation to increase the authorized shares of common stock from 40,000,000 shares to 190,000,000 shares with a corresponding increase in the total number of authorized shares of capital stock of the Company from 50,000,000 shares to 200,000,000 shares (the “Share Increase Proposal”) and (b) approve, in accordance with 713(A) of the NYSE American Company Guide, the issuance of more than 19.99% of the Company’s outstanding common stock upon the exercise of the Warrants (the “Warrant Exercise Proposal” and together with the Share Increase Proposal, the “Proposals”). The Company is holding its annual shareholder meeting on August 25, 2023, at which the Company will seek the shareholders approval of the Proposals. The Warrants have a term of exercise of five years from the date of Shareholder Approvals. Pursuant to the Letter Agreements, the Company filed a registration statement on Form S-3 covering the resale of the shares of common stock issuable upon the exercise of the Warrants on July 26, 2023, which registration statement is currently pending with the Securities and Exchange Commission (“SEC”).

Liquidity

As of June 30, 2023, the Company had cash and cash equivalents of $4.8 million, which decreased by $2.6 million as compared to December 31, 2022. The decrease was primarily due to cash used in financing activities of $27.9 million, primarily due to repayment of the margin loan, net proceeds, offset by the cash received from the warrant exchange and $10.6 million used in operating activities. The cash used was offset by cash provided by sales and maturities of marketable securities of $34.2 million.

As of June 30, 2023, the Company held available-for-sale marketable securities with a fair value of $49.5 million, which decreased by $34.2 million as compared to December 31, 2022 due to sales and maturities during the six months

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ended June 30, 2023. The available-for-sale securities consist principally of corporate and government debt securities and are also available as a source of liquidity.

The Company borrowed an additional $8.6 million from its investment margin account during the six months ended June 30, 2023 and repaid $41.8 million primarily with cash received from sales and maturities of marketable securities. During the six months ended June 30, 2023, the borrowed amounts were primarily used for operational costs. The interest rates for the borrowings fluctuate based on the Federal Funds Rate plus 0.65%. The weighted average interest rates were 0.67% and 1.66% on average margin loan balances of $44.2 million and $27.1 million as of June 30, 2023 and December 31, 2022, respectively. The Company incurred interest expense on the loan of $0.6 million and $0.2 million during the three months ended June 30, 2023 and June 30, 2022, respectively. The Company incurred interest expense on the loan of $1.3 million and $0.2 million during the six months ended June 30, 2023 and June 30, 2022, respectively. The investment margin account borrowings do not mature but are collateralized by the marketable securities held by the same custodian and the custodian can issue a margin call at any time, effecting a payable on demand loan. Due to the call option, the margin loan is recorded as a current liability on the Company’s condensed consolidated balance sheets. As of June 30, 2023 and December 31, 2022, the Company’s margin loan balances were $27.6 million and $60.8 million, respectively.

The Company is subject to financial and customary affirmative and negative non-financial covenants on the revolving demand facility, revolving equipment lease line and treasury risk management facility that have an aggregate total outstanding balance of $6.7 million USD ($8.9 million CAD). The Company was in technical violation of two financial covenants requiring a minimum fixed charge ratio and a maximum senior funded debt to EBITDA ratio as of June 30, 2023. The Company has continued to make its regular principal and interest payments in a timely basis since the effective borrowing date.

The revolving demand facility and the treasury risk management facility can be called at anytime by the lender as per the original terms of the facilities. The risk of the lender demanding repayment can be deemed greater due to the breach of covenants, however, at the time the financial statements were available for issuance, the lender has not provided the Company with a formal notification of a covenant breach.

Historically, the Company has incurred net losses. For the three months ended June 30, 2023 and June 30, 2022, the Company reported net losses of $15.2 million and $13.3 million, respectively. For the six months ended June 30, 2023 and June 30, 2022, the Company reported net losses of $40.0 million and $17.9 million, respectively. The Company reported net cash used in operating activities of $10.6 million and $17.5 million for the six months ended June 30, 2023 and June 30, 2022, respectively. As of June 30, 2023, the Company had an accumulated deficit of $681.4 million and total stockholders’ equity of $87.5 million. As of June 30, 2023, the Company had current assets of $91.6 million, including cash and cash equivalents of $4.8 million and marketable securities of $49.5 million, and current liabilities of $77.2 million. The Company had working capital of $14.4 million as of June 30, 2023, compared to working capital of $28.6 million as of December 31, 2022.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”).

The accompanying condensed consolidated financial statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to state fairly the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Loss, Statements of Stockholders’ Equity, and Statements of Cash Flows for all periods presented.

Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

Out-of-Period Adjustment

The Company identified an error in the Company’s condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2023 and balance sheet for the period ended March 31, 2023. The Company’s deferred tax liability, and net loss for the period ended March 31, 2023, are overstated by $705,000. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” The Company believes

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that the impact of the error was not material to the financial statements for the three months ended March 31, 2023, based on an evaluation of both quantitative and qualitative factors. As a result, the Company determined that correcting the prior period financial statements for such an immaterial error would not require the Form 10-Q for the three months ended March 31, 2023 to be amended. The Company has elected to record an out-of-period adjustment and record the amount in the condensed consolidated balance sheet as of June 30, 2023, the condensed consolidated statement of operations and comprehensive loss for the three and six months ended June 30, 2023, the condensed consolidated statement of cash flow for the six months ended June 30, 2023 and the condensed consolidated statements of stockholders’ equity for the three months ended June 30, 2023. The Company does not believe recording the amount in the condensed consolidated statement of operations and comprehensive loss for the three months ended June 30, 2023 has a material impact on the Company’s results of operations.

Segments

The Company determines its operating segments on the same basis that it assesses performance and makes operating decisions. The Company principally operates in two distinct business segments: the Content Production & Distribution Segment, which produces and distributes children’s content, and the Media Advisory & Advertising Services Segment, which provides media and advertising services. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company has identified its Chief Executive Officer as the CODM. The segments are organized around the products and services provided to customers and represent the Company’s reportable segments.

The accounting policies for each segment are the same as for the Company as a whole. Refer to Note 21 for additional information.

Principles of Consolidation and Basis of Presentation

The Company’s condensed consolidated financial statements include the accounts of Kartoon Studios, Inc. and its wholly-owned subsidiaries. The Company consolidates all majority-owned subsidiaries and variable interest entities where the Company has been determined to be the primary beneficiary. The interests in a variable interest entity which the Company does not control are recorded as non-controlling interests. Non-consolidated investments are accounted for using the equity method or the fair value option and recorded at fair value with changes recognized within Other Income (Expense), Net on the condensed consolidated statements of operations and comprehensive income (loss). All significant intercompany accounts and transactions have been eliminated upon consolidation.

Business Combinations

The Company accounts for transactions that are classified as business combinations in accordance with the Financial Accounting Standards Boards’ (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). Once a business is acquired, the Company allocates the fair value of the purchase consideration to the tangible assets, liabilities, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. As required, preliminary fair values are determined upon acquisition, with the final determination of the fair values being completed within the one-year measurement period from the date of acquisition. The valuation of acquired assets and assumed liabilities requires significant judgment and estimates, especially with respect to intangible assets. The valuation of intangible assets requires that the Company use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and other costs, and discount rates. The Company estimates the fair value based upon assumptions that management believes to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination and are expensed as incurred.

Variable Interest Entities

The Company holds an interest in Stan Lee University, LLC (“SLU”), an entity that is considered a variable interest entity (“VIE”). The variable interest relates to 50% ownership in the entity that is comprised of the Stan Lee Assets

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and that requires additional financial support from the Company to continue operations. The Company is considered the primary beneficiary and is required to consolidate the VIE.

In evaluating whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and the Company’s decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.

In determining whether the Company has the right to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE, the Company evaluates all of its economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design, including: the entity’s capital structure, contractual rights to earnings (losses), subordination of the Company’s interests relative to those of other investors, contingent payments, as well as other contractual arrangements that have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of the Company’s economic interests is a matter that requires the exercise of professional judgment. The Company continuously assesses whether it is the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in the Company consolidating its collaborators or partners.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Foreign Currency

The Company considers the U.S. dollar (“USD”) to be its functional currency for its United States and certain Canadian based operations. The Canadian dollar (“CAD”) is the functional currency of Wow, a wholly-owned subsidiary of the Company. Accordingly, the financial information is translated from CAD to USD for inclusion in the Company’s condensed consolidated financial statements. Revenue and expenses are translated at average exchange rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Resulting translation adjustments are included as a component of Accumulated Other Comprehensive Income (Loss), net in stockholders’ equity.

Foreign exchange transaction gains and losses are included in Other Income (Expense), Net on the condensed consolidated statements of operations.

Foreign Currency Forward Contracts

The Company’s wholly-owned subsidiary, Wow, is exposed to fluctuations in various foreign currencies against its functional currency, the Canadian dollar. Wow uses foreign currency derivatives, specifically foreign currency forward contracts (“FX forwards”), to manage its exposure to fluctuations in the CAD-USD exchange rates. FX forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The FX forwards are typically settled in CAD for their fair value at or close to their settlement date. The Company does not currently designate any of the FX forwards under hedge accounting and therefore reflects changes in fair value as unrealized gains or losses immediately in earnings as part of the revenue generated from the transactions hedged. The Company does not hold or use these instruments for speculative or trading purposes.

Per FASB ASC 815-10-45, Derivatives and Hedging, the Company has elected an accounting policy to offset the fair value amounts recognized for eligible forward contract derivative instruments. Therefore, the Company presents the asset or liability position of the FX forwards that are with the same counterparty net as either an asset or liability in its condensed consolidated balance sheets.

As of June 30, 2023, the gross amounts of FX forwards in an asset and liability position subject to a master netting arrangement were $17.7 million and $17.7 million, respectively, resulting in an asset recorded within Prepaid Expenses and Other Assets on the condensed consolidated balance sheet. The change in fair value of $0.1 million and $0.2 million for the

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three and six months ended June 30, 2023, respectively, was recorded as an unrealized gain within Production Services Revenue on the condensed consolidated statement of operations. The Company did not hold FX forwards prior to the Wow Acquisition.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with initial maturities of three months or less to be cash equivalents. As of June 30, 2023 and December 31, 2022, the Company had cash and cash equivalents of $4.8 million and $7.4 million, respectively, that at times could exceed FDIC or CDIC limits.

Allowance for Doubtful Accounts

Accounts receivables are presented on the condensed consolidated balance sheets, net of estimated uncollectible amounts. The carrying amounts of trade accounts receivable and unbilled accounts receivable represent the maximum credit risk exposure of these assets. On a quarterly basis, in accordance with FASB ASC 326, Measurement of Credit Losses on Financial Instruments (“ASC 326”), the Company evaluates the collectability of outstanding accounts receivable balances to determine an allowance for doubtful accounts that reflects its best estimate of the lifetime expected credit losses. The allowance for credit loss is based on an assessment of past events, current economic conditions, and forecasts of future events. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. As of June 30, 2023 and December 31, 2022, the Company recorded an allowance for doubtful accounts of $112,250 and $65,421, respectively.

The Company limits its exposure to this credit risk through a credit approval process and credit monitoring procedures. In addition, Wow’s contracts with customers usually require upfront and milestone payments throughout the production process. The Company’s customer base is mainly comprised of major Canadian, American, and worldwide studios, distributors, broadcasters, toy companies and AVOD and SVOD platforms that have been customers for several years.

Tax Credits Receivable

The Canadian federal government and certain provincial governments in Canada provide programs that are designed to assist film and television production in the form of refundable tax credits or other incentives.

Estimated amounts receivable in respect of refundable tax credits are recorded as an offset to the related production operating cost, or to investment in film and television costs when the conditions for eligibility of production assistance based on the government’s criteria are met, the qualifying expenditures are made and there is reasonable assurance of realization. Determination of when and if the conditions of eligibility have been met is based on management’s judgment, and the amount recognized is based on management’s estimates of qualifying expenditures. The ultimate collection of previously recorded estimates is subject to ordinary course audits from the CRA and provincial agencies. Changes in administrative policies by the CRA or subsequent review of eligibility documentation may impact the collectability of these estimates. The Company continuously reviews the results of these audits to determine if any circumstances arise that in management’s judgment would result in a previously recognized amount to be considered no longer collectible.

The Company classifies the tax credits receivable as current based on their normal operating cycle. Government assistance, in the form of refundable tax credits, is relied upon as a key component of production financing. These amounts are claimed from the CRA through the submission of income tax returns and can take up to 18 to 24 months from the date of the first tax credit dollar being earned to being received. As this financing is fundamental to the Company’s ability to produce animated productions and generate revenue in the normal course of business, the normal operating cycle for such assets is considered to be a 12 to 24-month period, or the time it takes for the CRA to assess and refund the tax credits earned.

As of June 30, 2023 and December 31, 2022, $25.1 million and $26.3 million in current tax credit receivables related to Wow’s film and television productions were recorded, net of $0.4 million and $0.2 million recorded as an allowance for doubtful accounts, respectively.

Marketable Debt Securities

The Company purchases high quality, investment grade securities from diverse issuers. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet

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date. Currently, the Company classifies its investments in marketable securities as available-for-sale (“AFS”) and records these investments at fair value. The securities are available to support current operations and, accordingly, the Company classifies the investments as current assets without regard to their contractual maturity.

Unrealized gains or losses on available-for-sale securities for which the Company expects to fully recover the amortized cost basis are recognized in Accumulated Other Comprehensive Income (Loss), a component of stockholders’ equity. Gains and losses as a result of sales of securities are reclassified from previously unrealized gains and losses on AFS securities in Accumulated Other Comprehensive Income (Loss) to Other Income (Expense), Net, in the condensed consolidated statements of operations.

On a quarterly basis, the Company reviews its AFS securities to assess declines in fair value for credit losses. For each AFS security with an amortized cost that exceeds its fair value, the Company first determines if it intends to sell or is more-likely-than-not required to sell the debt security before the expected recovery of its amortized cost. If it intends to sell or will more-likely-than-not be required to sell the security, the Company recognizes the impairment as a credit loss in the condensed consolidated statements of operations by writing down the security’s amortized cost to its fair value. For AFS securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss. The portion of the decline in fair value that is due to factors other than a credit loss is recognized in Accumulated Other Comprehensive Income (Loss) as an unrealized loss.

The Company reports accrued interest receivable separately from the AFS securities and has elected not to measure an allowance for credit losses for accrued interest receivables. Uncollectible accrued interest is written off when the Company determines that no additional interest payments will be received. Classified within Other Receivables on the condensed consolidated balance sheets, approximately $0.2 million and $0.3 million in interest income were receivable as of June 30, 2023 and December 31, 2022, respectively.

Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums accounted for over the life of the security or, in the case of callable securities, through the first call date, using the level yield method, with no prepayment anticipated.

Equity-Method Investments

When the Company does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity’s common stock or in-substance common stock.

In general, the Company accounts for investments acquired at fair value. See Note 4 for further information about the Company’s investment in YFE’s equity securities accounted for under the fair value option.

Property and Equipment

Property and equipment are recorded at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to seven years. Maintenance, repairs, and renewals, which neither materially add to the value of the assets nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of property and equipment are reflected in the condensed consolidated statement of operations. Whenever events or circumstances change, an assessment is made as to whether there has been impairment to the value of long-lived assets by determining whether projected undiscounted cash flows generated by the applicable asset exceed its net book value as of the assessment date. During the first quarter of 2023, the Company performed an interim review of its long-lived assets due to decreases in the Company's market value. There were not any events or circumstances that required the Company to reassess its assets during the three months ended June 30, 2023. Refer to Note 6 for details.

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Right of Use Leased Assets

The Company determines at contract inception whether the arrangement is a lease based on its ability to control a physically distinct asset and determines the classification of the lease as either operating or finance under FASB ASC 842, Leases (“ASC 842”). For all leases, the Company combines all components of the lease including related nonlease components as a single component. Operating leases are reflected as Operating Lease Right of Use (“ROU”) Assets and Operating Lease Liabilities and finance leases are reflected as Finance Lease ROU assets and Finance Lease Liabilities on the condensed consolidated balance sheets.

Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company estimates the incremental borrowing rate to reflect the profile of collateralized borrowing over the expected term of the leases based on the information available on the lease commencement date or for leases existing upon the date of initial adoption of ASC 842, the date of adoption. The implicit rates within the Company’s existing finance leases are determinable and therefore used to determine the present value of finance lease payments.

The operating lease ROU assets also include any lease payments made prior to lease commencement date and excludes lease incentives. Specific lease terms used in computing the ROU assets and lease liabilities may include options to extend or terminate the lease when the Company is reasonably certain that it will exercise the option. The Company will reassess expected lease terms based on changes in circumstances that indicate options may be more or less likely to be exercised. Lease expense is recognized on a straight-line basis over the lease term within General and Administrative Expenses on the condensed consolidated statements of operations. Lease incentives are recognized as a reduction to the lease expense on a straight-line basis over the underlying lease term. Refer to Notes 7 and 19 for details of the Company’s leases.

Film and Television Costs

The Company capitalizes production costs for episodic series produced in accordance with FASB ASC 926-20, Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and amortized using the individual-film-forecast method, whereby these costs are amortized, and participations costs are accrued based on the ratio of the current period’s revenues to management’s estimate of ultimate revenue expected to be recognized from each production.

Productions in Development

Capitalized development costs are reclassified to productions in progress once the project is approved and physical production of the film or television program commences. Development costs include the costs of acquiring film rights to books, scripts or original screenplays and the third-party costs to adapt such projects, including visual development and design. Advances or contributions received from third parties to assist in development are deducted from these costs.

Productions in Progress

For the Company’s film and television programs in progress, capitalized costs include all direct production and financing costs incurred during production that are expected to provide future economic benefit to the Company. Borrowing costs and depreciation are capitalized to the cost of a film or television program until substantially all of the activities necessary to prepare the film or television program for its use intended by management are complete.

Completed Productions

Completed productions are carried at the cost of proprietary film and television programs which have been produced by the Company or to which the Company has acquired distribution rights, less accumulated amortization and accumulated impairment losses.

Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates have differed in the past from actual results and are likely to differ to some extent in the future from actual results. In addition, in the normal course of business, some titles are more successful or less successful than anticipated. Management reviews the ultimate revenue and cost estimates on a title-by-title basis, when an event or change in circumstances indicates that the fair value of the production may be less than its unamortized cost. This may result in a

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change in the rate of amortization of film costs and participations and/or a write-down of all or a portion of the unamortized costs of the film or television production to its estimated fair value. An impairment charge is recorded in the amount by which the unamortized costs exceed the estimated fair value. These write-downs are included in amortization expense within Direct Operating Expenses on the condensed consolidated statements of operations.

All capitalized costs that exceed the initial market firm commitment revenue are expensed in the period of delivery of the episodes. Additionally, for episodic series, from time to time, the Company develops additional content, improved animation and bonus songs/features for its existing content. After the initial release of the episodic series, the costs of significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the acquisition method. In accordance with FASB ASC 350, Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test for goodwill impairment, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit, of which the Company has two, is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a one-step approach. The fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values.

Intangible assets have been acquired, either individually or with a group of other assets, and were initially recognized and measured based on fair value. Annual amortization of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.

During the first quarter of 2023, the Company performed an interim review of its long-lived assets due to decreases in the Company’s market value. There were not any events or circumstances that required the Company to reassess its assets during the three months ended June 30, 2023. Refer to Note 9 for details.

Debt and Attached Equity-Linked Instruments

The Company measures issued debt on an amortized cost basis, net of debt premium/discount and debt issuance costs amortized using the effective interest rate method or the straight-line method when the latter does not lead to materially different results.

The Company analyzes freestanding equity-linked instruments including warrants attached to debt to determine whether the instrument meets the definition of the derivative and whether it is considered indexed to the Company’s own stock. If the instrument is not considered indexed to the Company’s stock, it is classified as an asset or liability recorded at fair value. If the instrument is considered indexed to the Company’s stock, the Company analyzes additional equity classification requirements per FASB ASC 815-40, Contract’s in Entity’s Own Equity. When the requirements are met, the instrument is recorded as part of the Company’s equity, initially measured based on its relative fair value with no subsequent re-measurement. When the equity classification requirements are not met, the instrument is recorded as an asset or liability and is measured at fair value with subsequent changes in fair value recorded in earnings.

When required, the Company also considers the bifurcation guidance for embedded derivatives per ASC 815-15, Embedded Derivatives.

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Treasury stock

The Company records the repurchase of shares of its common stock at cost on the trade date of the transaction. These shares are considered treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.

Revenue Recognition

The Company accounts for revenue according to standard FASB ASC 606, Revenue from Contracts with Customers (“ASC 606”).

Revenue is measured based on the consideration specified in a contract with a customer. Revenue is recognized when a customer obtains control of the products or services in a contract. Judgment is required in determining the timing of whether the transfer of control occurs at a point in time or over time and is discussed below. The Company evaluates each contract to identify separate performance obligations as a contract with a customer may have one or more performance obligations. Consideration in a contract with multiple performance obligations is allocated to the separate performance obligations based on their stand-alone selling prices. If a stand-alone selling price is not determinable, the Company estimates the stand-alone selling price using an adjusted market assessment approach. The Company’s 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.

The Company has identified the following material and distinct performance obligations:

•Providing animation production services.

•Licensing rights to exploit Functional Intellectual Property (“functional IP” is defined as intellectual property that has significant standalone functionality, such as the ability to be played or aired. Functional IP derives a substantial portion of its utility from its significant standalone functionality).

•Licensing rights to exploit Symbolic Intellectual Property (“symbolic IP” is intellectual property 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, including its ordinary business activities, such as the Company’s licensing and merchandising programs associated with its animated content).

•Providing media and advertising services to clients.

•Fixed and variable fee advertising and subscription-based revenue generated from the Kartoon Studios Kartoon Channel!, the Frederator owned and operated YouTube channels and revenues generated from the operation of its multi-channel network on YouTube.

•Options to renew or extend a contract at fixed terms (while this performance obligation is not significant for the Company’s current contracts, it could become significant in the future).

•Options on future seasons of content at fixed terms (while this performance obligation is not significant for the Company’s current contracts, it could become significant in the future).

Production Services

Animation Production Services

For revenue from animation production services, the customer controls the output throughout the production process. Each production is made to an individual customer’s specifications and if the contract is terminated by the customer, the Company is entitled to be reimbursed for any costs incurred to date, and for any prepaid commitments made, plus the agreed contractual mark-up. Revenue and the associated costs of such contracts are recognized over time on a percentage of completion basis - i.e., as the project is being produced, prior to it being delivered to the customer. The percentage-of-completion is calculated based upon the proportion of costs incurred cumulatively to total expected costs. Changes in revenue recognized as a result of adjustments to total expected costs are recognized in profit or loss on a prospective basis. Invoices related to these projects are issued based on the achievement of milestones during the project or other contractual terms. The difference between contractual payments received and revenue recognized is recorded as deferred revenue when receipts exceed revenue. When revenue exceeds milestone billings, the Company recognizes this

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difference as unbilled accounts receivable within other receivables on the Company’s condensed consolidated balance sheet. Unbilled accounts receivables are transferred to accounts receivable when the Company has an unconditional right to consideration.

When the outcome of an arrangement cannot be estimated reliably, revenue is recognized only to the extent of the expenses incurred that are recoverable.

Content Distribution

Film and Television Licensing

The Company recognizes revenue related to licensed rights to exploit functional IP in two ways; for minimum guarantees, the Company recognizes fixed revenue upon delivery of content and the start of the license period and for functional IP contracts with a variable component, the Company estimates revenue such that it is probable there will not be a material reversal of revenue in future periods. The Company recognizes revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has a different recognition pattern from functional IP, the valuation method is substantially the same, depending on the nature of the license.

Invoices related to these projects are issued based on the achievement of milestones during the project or other contractual terms. The difference between contractual payments received and revenue recognized is recorded as deferred revenue when receipts exceed revenue. When revenue exceeds milestone billings, the Company recognizes this difference as unbilled accounts receivable within other receivables on the Company’s condensed consolidated balance sheet. Unbilled accounts receivables are transferred to accounts receivable when the Company has an unconditional right to consideration.

Advertising revenues

The Company sells advertising and subscriptions on its wholly-owned AVOD service, Kartoon Channel!, and its SVOD distribution outlets, Kartoon Channel! Kidaverse, and Ameba TV. Advertising sales are generated in the form of either flat rate promotions or advertising impressions served. For flat rate promotions with a fixed term, revenue is recognized when all five revenue recognition criteria under ASC 606 are met. For impressions served, the Company delivers a certain minimum number of impressions on the channel to the advertiser for which the advertiser pays a contractual cost per mille impressions (“CPM”). Impressions served are reported on a monthly basis, and revenue is reported in the month the impressions are served. For subscription-based revenue, revenue is recognized when a customer downloads the mobile device application and their credit card is charged.

Upon the acquisition of Wow, the Company generates advertising revenue from Frederator’s owned and operated YouTube channels as well as revenues generated from the operation of its multi-channel network on YouTube. Revenue is recognized when services are provided in accordance with the Company’s agreement with YouTube, the price is fixed or determinable, and collection of the related receivable is probable. Receivables are usually collectable within 30 days.

Licensing & Royalties

Merchandising and licensing

The Company enters into merchandising and licensing agreements that allow licensees to produce merchandise utilizing certain of the Company’s intellectual property. For minimum guaranteed amounts that make up a contract, revenue is recognized over time, over the term of the license period commencing on the date at which the licensees can use and benefit from the licensed content. Variable consideration in excess of non-refundable guaranteed amounts, such as royalties and other contractual payments are recognized as revenue when the amounts are known and become due provided collectability is reasonably assured. Invoices are issued based on the contractual terms of an agreement and are usually payable within 30-45 days.

Product Sales

The Company recognizes revenue related to product sales when the Company completes its performance obligation, which is when the goods are transferred to the buyer.

Media Advisory & Advertising Services

Media and Advertising Services

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The Company provides media and advertising services to clients. Revenue is recognized when the services are performed. When the Company purchases advertising for clients on linear and across digital and streaming platforms and receives a commission, the commissions are recognized as revenue in the month the advertising is displayed.

Gross Versus Net Revenue Presentation

The Company evaluates individual arrangements with third parties to determine whether the Company acts as principal or agent under the terms. To the extent that the Company acts as the principal in an arrangement, revenues are reported on a gross basis, resulting in revenues and expenses being classified in their respective financial statement line items. To the extent that the Company acts as the agent in an arrangement, revenues are reported on a net basis, resulting in revenues being presented net of any expenses incurred in providing agency services. Determining whether the Company acts as principal or agent is based on an evaluation of which party has substantial risks and rewards of ownership under the terms of an arrangement. The most significant factors that the Company considers include identification of the primary obligor, as well as which party has credit risk, general and inventory risk and the latitude or ability in establishing prices.

Direct Operating Costs

Direct operating costs include costs of the Company’s product sales, non-capitalizable film costs, film and television cost amortization expense, impairment expenses related to film and television costs, and participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which the Company is obligated to share net profits of the properties on which they have rendered services. Upon the acquisition of Wow, the Company also includes the salaries and related service production employee costs of Wow as part of its direct operating costs.

Share-Based Compensation

The Company issues stock-based awards to employees and non-employees that are generally in the form of stock options or restricted stock units (“RSUs”). Share-based compensation cost is recorded for all options and RSUs based on the grant-date fair value of the award.

The fair value of stock options is estimated at the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model, which requires management to make assumptions with respect to the fair value on the grant date. The assumptions are as follows: (i) the expected term assumption of the award is based on the Company’s historical exercise and post-vesting behavior (ii) the expected volatility assumption is based on historical and implied volatilities of the Company’s common stock calculated based on a period of time generally commensurate with the expected term of the award; (iii) the risk-free interest rates are based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent expected term; (iv) and the expected dividend yields of the Company’s stock are based on history and expectations of future dividends payable. In the case of RSUs, the fair value is calculated based on the Company’s underlying common stock on the date of grant.

The Company recognizes compensation expense over the requisite service period ratably, using the graded attribution method, which is in-substance, recognizing multiple awards based on the vesting schedule. The Company has elected to account for forfeitures when they occur. The Company issues authorized shares available for issuance under the Company’s 2015 Incentive Plan and the Company’s 2020 Incentive Plan upon employees’ exercise of their stock options.

Debt Issuance Costs

Debt issuance costs relate to the issuance of Wow’s Production Facilities and are recorded as a reduction to the carrying amount of debt and amortized to interest expense using the effective interest method over the respective terms of the facilities. Debt issuance costs directly attributable to the acquisition or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time the assets are substantially ready for their intended use or sale. Debt issuance costs as of June 30, 2023 and December 31, 2022 were insignificant.

Earnings Per Share

Basic earnings (loss) per share of common stock (“EPS”) is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding, plus the assumed exercise of all dilutive securities using the treasury stock or “as converted”

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method, as appropriate. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are antidilutive.

Income Taxes

Deferred income tax assets and liabilities are recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enacted tax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and other possible sources of realization of deferred tax assets and records a valuation allowance that reduces the deferred tax assets to an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than not will be realized.

Concentration of Risk

The Company maintains its cash in bank deposit accounts which, at times, may exceed the Federal Deposit Insurance Corporation’s (“FDIC”) or the Canadian Deposit Insurance Corporation’s (“CDIC”) insured amounts. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account and deposits in banks in Canada are insured by the CDIC up to $100,000 CAD. As of June 30, 2023 and December 31, 2022, the Company had 14 and 12 bank deposit accounts with an aggregate uninsured balance of $3.1 million and $3.4 million, respectively.

The Company has a managed account with a financial institution. The managed account maintains its investments in marketable securities of $49.5 million and $83.7 million as of June 30, 2023 and December 31, 2022, respectively. Assets in the managed account are protected by the Securities Investor Protection Corporation (“SIPC”) up to $500,000 (with a limit of $250,000 for cash). In addition, the financial institution provides additional “excess of SIPC” coverage which insures up to $1.0 billion. As of June 30, 2023 and December 31, 2022, the Company did not have account balances held at this financial institution that exceed the insured balances.

The Company’s investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. The Company’s policy limits the amount of credit exposure to any one security issue or issuer and the Company believes no significant concentration of credit risk exists with respect to these investments.

During the three months ended June 30, 2023, the Company had four customers, whose total revenue exceeded 10% of the total consolidated revenue. These customers accounted for 81.2% of the total revenue.

During the six months ended June 30, 2023, the Company had three customers, whose total revenue exceeded 10% of the total consolidated revenue. These customers accounted for 71.4% of the total revenue. As of June 30, 2023, the Company had four customers whose total accounts receivable exceeded 10% of the total accounts receivable. These customers accounted for 70.4% of the total accounts receivable as of June 30, 2023.

During the three months ended June 30, 2022, the Company had five customers whose total revenue exceeded 10% of the total consolidated revenue. These customers accounted for 81.3% of the total revenue.

During the six months ended June 30, 2022, the Company had five customers whose total revenue exceeded 10% of the total consolidated revenue. These customers accounted for 76.3% of the total revenue. As of June 30, 2022, the Company had four customers whose total accounts receivable exceeded 10% of the total accounts receivable. These customers accounted for 65.0% of the total accounts receivable as of June 30, 2022.

There is significant financial risk associated with a dependence upon a small number of customers. The Company periodically assesses the financial strength of these customers and establishes allowances for any anticipated bad debt.

Fair value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

•Level 1 - Observable inputs such as quoted prices for identical instruments in active markets;

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•Level 2 - Inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

•Level 3 - Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The carrying amounts of cash, restricted cash, receivables, payables, accrued liabilities, bank indebtedness and the margin loan approximate fair value due to the short-term nature of the instruments. The Company used the fair values of the liability-classified derivative warrants revalued at the end of each reporting period determined using the BSM model (Level 2) with standard valuation inputs. Refer to Note 16 for additional details. The investment in YFE is also revalued at the end of each reporting period based on the trading price of YFE (Level 1). Refer to Note 4 for additional details. Upon the acquisition of Wow, foreign currency forward contracts that are not traded in active markets were assumed. These are fair valued using observable forward exchange rates at the measurement dates and interest rates corresponding to the maturity of the contracts (Level 2).

The fair values of the AFS securities are generally based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level 1 or Level 2 inputs for the determination of fair value to facilitate fair value measurements and disclosures. Level 2 securities primarily include corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities, United States Government securities, foreign government securities, and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or a variety of valuation techniques, incorporating inputs that are currently observable in the markets for similar securities.

The following table summarizes the marketable securities measured at fair value by level within the fair value hierarchy as of June 30, 2023 (in thousands):


	Level 1		Level 2		Total Fair Value
Marketable investments:
Corporate Bonds	$	18,299	$	–	$	18,299
U.S. Treasury	15,367		–		15,367
U.S. agency and government sponsored securities	–		6,343		6,343
U.S. states and municipalities	–		9,489		9,489
Total	$	33,666	$	15,832	$	49,498

Fair values were determined for each individual security in the investment portfolio. The Company’s marketable securities are considered to be available-for-sale investments as defined under FASB ASC 320, Investments – Debt and Equity Securities. An allowance for credit loss was not recorded for the marketable securities as of June 30, 2023 and December 31, 2022. Refer to Note 5 for additional details.

Financial and nonfinancial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs and include the Company’s goodwill, intangible assets and film and television costs.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The new model, referred to as the current expected credit loss (“CECL”) model, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to AFS debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13

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also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company, delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Early adoption is permitted for interim and annual reporting periods. The Company has adopted the ASU as of January 1, 2023. The adoption of this ASU resulted in updated disclosures within our financial statements, but did not impact the financial statements. Refer to Note 5 for additional details.

Note 3: Variable Interest Entity

In July 2020, the Company entered into a binding term sheet with POW! Entertainment, LLC. (“POW”) in which the Company agreed to form an entity with POW to exploit certain rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is called “Stan Lee Universe, LLC” (“SLU”). POW and the Company executed an Operating Agreement for the joint venture, effective as of June 1, 2021. The purpose of the acquisition was to enable the Company to assume the worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing, comic book, merchandising and licensing rights to Stan Lee and over 100 original Stan Lee creations (the “Stan Lee Assets”), from which the Company plans to develop and license multiple properties each year.

During the three and six months ended June 30, 2023, SLU generated an insignificant amount of net income. The Company's net investment as of June 30, 2023 of $0.8 million remained the same as compared to December 31, 2022. There were no changes in facts and circumstances that occurred during the six months ended June 30, 2023 that would result in a re-evaluation of the VIE assessment.

Note 4: Investment in Equity Interest

As of June 30, 2023, the Company owned 6,857,132 shares of YFE. At the time of the initial investment in 2021, it was determined that based on the Company’s 28.69% ownership in YFE, the Company had significant influence over the entity. Therefore, under the equity method of accounting, the Company elected to account for the investment at fair value under the fair value option. Under the fair value option, the investment is remeasured and recorded at fair value each reporting period, with the change recorded through earnings. As of June 30, 2023, the fair value of the investment was determined to be $20.0 million recorded within noncurrent assets on the Company’s condensed consolidated balance sheets. The fair value as of June 30, 2023 increased by $3.7 million, as compared to December 31, 2022. The increase is comprised of the net impact of an increase in YFE’s stock price, resulting in a gain in fair value of $3.4 million, and the effect of remeasuring the investment balance from the EURO to USD, resulting in a gain of $0.3 million. The total change in fair value is recorded within Other Income (Expense), Net on the Company’s condensed consolidated statement of operations. As of June 30, 2023 and December 31, 2022, the Company’s ownership in YFE was 44.8%.

Note 5: Marketable Securities

The Company classifies and accounts for its marketable debt securities as AFS and the securities are stated at fair value. On January 1, 2023, the Company adopted ASU 2016-13 Measurement of Credit Losses on Financial Instruments (Topic 326), which replaced the legacy GAAP other-than-temporary impairment (“OTTI”) model with a credit loss model. The credit loss model applicable to AFS debt securities requires the recognition of credit losses through an allowance account but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. The adoption of the ASU did not have a material impact on the Company's financial statements.

The investments in marketable securities had an adjusted cost basis of $53.1 million and a market value of $49.5 million as of June 30, 2023. The balances consisted of the following securities (in thousands):


	Adjusted Cost		Unrealized Gain/(Loss)		Fair Value
Corporate Bonds	$	19,594	$	(1,295)	$	18,299
U.S. Treasury	16,355		(988)		15,367
U.S. Agency and Government Sponsored Securities	6,899		(556)		6,343
U.S. States and Municipalities	10,265		(776)		9,489
Total	$	53,113	$	(3,615)	$	49,498

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The investments in marketable securities as of December 31, 2022 had an adjusted cost basis of $90.3 million and a market value of $83.7 million. The balances consisted of the following securities (in thousands):


	Adjusted Cost		Unrealized Gain/(Loss)		Fair Value
Corporate Bonds	$	40,823	$	(2,579)	$	38,244
U.S. Treasury	20,869		(1,313)		19,556
Mortgage-Backed	5,980		(606)		5,374
U.S. Agency and Government Sponsored Securities	10,781		(1,221)		9,560
U.S. States and Municipalities	11,801		(895)		10,906
Asset-Backed	67		(1)		66
Total	$	90,321	$	(6,615)	$	83,706

The Company holds 31 AFS securities, all of which were in an unrealized loss position and have been in an unrealized loss position for a period greater than twelve months as of June 30, 2023. The AFS securities held by the Company as of December 31, 2022 had also been in an unrealized loss position for a period greater than 12 months. The Company reported the net unrealized losses in accumulated other comprehensive income (loss), a component of stockholders’ equity. As of June 30, 2023 and December 31, 2022, an allowance for credit loss was not recognized as the issuers of the securities had not established a cause for default, various rating agencies had reaffirmed each security's investment grade status and the Company did not have the intent, nor is it required to sell its securities prior to recovery.

Realized losses of $0.7 million and $2.3 million were recognized in earnings during the three and six months ended June 30, 2023, respectively, primarily due to selling securities prior to maturity to prevent further market condition losses on the securities. In addition, realized losses of $44,241 and $123,292 were recognized during the three and six months ended June 30, 2022, respectively, due to prepayments of principal on certain mortgage-backed securities.

The contractual maturities of the Company’s marketable investments as of June 30, 2023 were as follows (in thousands):


	Fair Value
Due within 1 year	$	13,821
Due after 1 year through 5 years	35,677
Total	$	49,498

The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation.

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Note 6: Property and Equipment, Net

The Company has property and equipment as follows (in thousands):


	June 30, 2023		December 31, 2022
Furniture and Equipment	$	180	$	224
Computer Equipment	212		315
Leasehold Improvements	2,259		2,273
Software	184		263
Production Equipment	—		23
Property and Equipment, Gross	2,835		3,098

Less Accumulated Depreciation	(572)		(530)
Foreign Currency Translation Adjustment	(127)		(168)
Property and Equipment, Net	$	2,136	$	2,400

During the three months ended June 30, 2023 and 2022, the Company recorded depreciation expense of $0.1 million and $0.2 million, respectively. During the six months ended June 30, 2023 and 2022, the Company recorded depreciation expense of $0.2 million for both respective periods.

During the three months ended March 31, 2023, due to changes in the Company’s estimated undiscounted future cash flows, a reassessment of its long-lived assets was performed. As a result, the carrying value of one of the Company’s asset groups property and equipment assets was written down to zero and an Impairment of Property and Equipment of $119,727 was recorded within Operating Expenses in the condensed consolidated statement of operations.

Note 7: Right of Use Leased Asset

Right of use asset consisted of the following (in thousands):


	June 30, 2023		December 31, 2022
Office Lease Assets	$	10,313	$	10,313
Equipment Lease Assets	5,144		3,928
Right Of Use Asset, Gross	15,457		14,241

Accumulated Amortization	(4,091)		(2,587)
Foreign Currency Translation Adjustment	(617)		(810)
Right Of Use Asset, Net	$	10,749	$	10,844

Refer to Note 19 for details on the Company’s lease commitments.

As of June 30, 2023, the weighted-average lease term for the Company’s operating leases was 87 months and the weighted-average discount rate was 10.5%. As of December 31, 2022, the weighted-average lease term for operating leases was 93 months and the weighted-average discount rate was 10.4%.

Operating lease costs during the three and six months ended June 30, 2023 were $0.7 million and $0.8 million, respectively, recorded within General and Administrative Expenses on the Company’s condensed consolidated statement of operations.

During the three and six months ended June 30, 2023 the Company recorded finance lease costs of $0.6 million and $1.2 million, respectively, comprised of ROU amortization of $0.5 million and $1.1 million, respectively, recorded within General and Administrative Expenses on the Company’s condensed consolidated statement of operations and accretion of interest expense of $53,533 and $103,727, respectively, recorded within Other Income (Expense) on the Company’s condensed consolidated statement of operations.

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Lease costs during the three and six months ended June 30, 2022 were $0.6 million and $0.7 million, respectively, recorded within General and Administrative Expenses on the Company’s condensed consolidated statement of operations.

Note 8: Film and Television Costs, Net

The following table highlights the activity in Film and Television Costs as of June 30, 2023 and December 31, 2022 (in thousands):


Film and Television Costs, Net as of December 31, 2021	$	2,940
Additions to Film and Television Costs	18,364
Disposals	(11)
Film Amortization Expense & Impairment Losses	(12,996)
Foreign Currency Translation Adjustment	(517)
Film and Television Costs, Net as of December 31, 2022	7,780
Additions to Film and Television Costs	734
Disposals	(7)
Film Amortization Expense	(474)
Foreign Currency Translation Adjustment	67
Film and Television Costs, Net as of June 30, 2023	$	8,100

Note 9: Intangible Assets, Net and Goodwill

Intangible Assets, Net

The Company had the following intangible assets (in thousands) with their weighted average remaining amortization period (in years):

Intangible Assets, Net


	Weighted Average Remaining Amortization Period

		June 30, 2023		December 31, 2022
Customer Relationships	7.0	$	17,325	$	17,325
Digital Networks	14.8	803		3,537
Trade Names	67.9	10,360		11,783
Technology	–	–		293
Other Intangible Assets (a)	–	–		325
Intangible Assets, Gross		28,488		33,263

Less Accumulated Amortization		(2,752)		(2,398)
Foreign Currency Translation Adjustment		(1,320)		(1,698)
Intangible Assets, Net		$	24,416	$	29,167

_______________________

(a)Represents the remaining unamortized logo and website intangible assets related to the merger with A Squared.

During the three months ended June 30, 2023 and 2022, the Company recorded intangible asset amortization expense of $0.5 million and $0.9 million, respectively. During the six months ended June 30, 2023 and 2022, the Company recorded intangible asset amortization expense of $1.1 million and $0.7 million, respectively.

Pursuant to ASC 350-30, General Intangibles Other than Goodwill, the Company reviews its intangible assets periodically to determine if the value should be retired or impaired due to recent events. During the three months ended March 31, 2023, due to changes in the Company’s financial projections, the Company reassessed its definite and indefinite-

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lived intangible asset values to determine whether impairments existed. As a result, the Company recorded a total Impairment of Intangible Assets of $4.0 million within Operating Expenses in the condensed consolidated statement of operations. The impairment charge consisted of a write-down of definite-lived intangible assets of $2.8 million due to a decrease in an asset group’s estimated undiscounted cash flows. In addition, due to a decrease in its estimated present value of cash flows, it was determined that the Frederator tradename, an indefinite-lived intangible asset, was impaired by $1.3 million.

The Company did not incur any impairment charges during the six months ended June 30, 2022.

Expected future amortization of intangible assets subject to amortization as of June 30, 2023 is as follows (in thousands):


Fiscal Year:
2023	1,051
2024	2,098
2025	2,098
2026	2,098
2027	2,098
Thereafter	8,933
Total	$	18,376

As of June 30, 2023, $6.0 million of the Company’s intangible assets related to the acquired trade names from the Wow acquisition have indefinite lives and are not subject to amortization.

Goodwill

In 2013, the Company recognized $10.4 million in goodwill as a result of its merger with A Squared, which was allocated to the Content Production and Distribution reporting unit. During the first quarter of 2021, the Company recognized $9.7 million in goodwill as a result of its acquisition of Beacon, which was allocated to its Media Advisory and Advertising Services reporting unit.

As a result of the Ameba Acquisition during the first quarter of 2022 and the Wow Acquisition during the second quarter of 2022, the Company recorded goodwill of $1.5 million, including a tax basis step-up of $0.8 million and $21.4 million, respectively. The goodwill resulting from the Ameba and Wow Acquisitions was allocated to the Content Production and Distribution reportable segment. As Wow's functional currency is the CAD, goodwill changes each period due to currency exchange differences.

As of December 31, 2022, the goodwill allocated to the Company’s Media Advisory and Advertising Services reporting unit was written down to zero due to impairment.

During the three months ended March 31, 2023, the Company reassessed its remaining goodwill allocated to the Content Production and Distribution reporting unit for impairment. As a result, the Company recorded an Impairment of Goodwill of $11.3 million within Operating Expenses in its condensed consolidated statement of operations. Included in the goodwill impairment was $0.9 million of goodwill allocated to Ameba. Due to the write-off of Ameba’s intangible assets and goodwill, the deferred income tax liability balance of $0.7 million, recorded as of December 31, 2022 as part of the estimated underlying tax basis of the acquired assets, was reversed and recorded as an income tax benefit on the condensed consolidated statement of operations during the six months ended June 30, 2023.

The Company did not incur any impairment charges during the six months ended June 30, 2022.

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The following table summarizes the changes in the carrying amount of goodwill by reporting unit (in thousands):


	Content Production & Distribution		Media Advisory & Advertising Services		Total
Goodwill as of December 31, 2022	$	31,807	$	–	$	31,807
Goodwill Impairment	(11,287)		–		(11,287)
Foreign Currency Translation Adjustment	332		–		332
Goodwill as of June 30, 2023	$	20,852	$	–	$	20,852

Note 10: Deferred Revenue

As of June 30, 2023 and December 31, 2022, the Company had total short term and long term deferred revenue of $8.3 million and $12.4 million, respectively. The decrease in deferred revenue is primarily related to productions on various shows nearing completion of the project as of June 30, 2023, compared to the progress as of December 31, 2022. Wow's deferred revenue balance relates to cash received from customers for productions in progress. Revenue is fully recognized upon production completion. Deferred revenue also includes both (i) variable fee contracts with licensees and customers in which the Company collected advances and minimum guarantees against future royalties and (ii) fixed fee contracts. The Company recognizes revenue related to these contracts when all revenue recognition criteria have been met.

Note 11: Margin Loan

Note 12: Bank Indebtedness and Production Facilities

Upon the acquisition of Wow, the Company assumed certain credit facilities (together the “Facilities”). The Facilities are comprised of the following:

Revolving Demand Facility

On December 15, 2022, the Company amended the revolving demand facility. Draws of up to $8.0 million CAD (previously $5.0 million CAD) under the revolving demand facility can be made in Canadian or US dollars at the option of the Company by way of bank prime rate loans, Canadian Bankers’ Acceptances, Secured Overnight Financing Rate (“SOFR”) or letters of credit. Canadian or US dollar bank prime borrowings bear interest at a rate equal to bank prime plus