KARTOON STUDIOS, INC. Form 10-Q

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 September 30, 2024

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, 4^th 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 November 13, 2024, the registrant had 39,568,887 shares of common stock outstanding.

Kartoon Studios, Inc.

FORM 10-Q

Table of Contents

PART I - FINANCIAL INFORMATION	Page Number

Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2024 (unaudited) and December 31, 2023	3
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2024 and 2023	4
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months ended September 30, 2024 and 2023	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, 2024 and 2023	6
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2024 and 2023	8
Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	30

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	39

Item 4. Controls and Procedures.	39

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.	41

Item 1A. Risk Factors.	43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	46

Item 3. Defaults Upon Senior Securities.	46

Item 4. Mine Safety Disclosures.	46

Item 5. Other Information.	46

Item 6. Exhibits.	47

SIGNATURES	48

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Kartoon Studios, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and par value data)


	As of
	September 30, 2024			December 31, 2023
	(Unaudited)
ASSETS
Current Assets:
Cash	$	4,581		$	4,095
Investments in Marketable Securities (amortized cost of $4,266 and $12,838, respectively)		4,079			11,950
Accounts Receivable (net of allowance of $241 and $189, respectively)		11,893			18,072
Tax Credits Receivable (net of allowance of $610 and $527, respectively)		12,929			20,714
Notes and Accounts Receivable from Related Party		1,471			1,435
Other Receivable		1,327			103
Prepaid Expenses and Other Assets		900			740
Total Current Assets		37,180			57,109

Noncurrent Assets:
Property and Equipment, net		1,655			1,877
Operating Lease Right-of-Use Assets, net		6,365			7,076
Finance Lease Right-of-Use Assets, net		1,026			1,867
Film and Television Costs, net		1,858			1,295
Investment in Your Family Entertainment AG		17,965			19,094
Intangible Assets, net		21,126			22,993
Other Assets		124			125
Total Assets	$	87,299		$	111,436

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	12,043		$	16,864
Participations Payable		1,188			1,915
Accrued Expenses		1,132			691
Accrued Salaries and Wages		1,707			1,926
Deferred Revenue		5,015			3,127
Margin Loan		1,069			782
Production Facilities		8,739			15,336
Bank Indebtedness		592			2,905
Current Portion of Operating Lease Liabilities		1,120			908
Current Portion of Finance Lease Liabilities		923			1,120
Warrant Liability		–			63
Due to Related Party		4			3
Other Current Liabilities		168			–
Total Current Liabilities		33,700			45,640

Noncurrent Liabilities:
Deferred Revenue		3,371			3,458
Operating Lease Liabilities, Net Current Portion		5,912			6,736
Finance Lease Liabilities, Net Current Portion		107			928
Deferred Tax Liability, net		1,402			1,399
Other Noncurrent Liabilities		7			14
Total Liabilities		44,499			58,175

Commitments and Contingencies (Note 19)					–

Stockholders’ Equity:
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, as of September 30, 2024 and December 31, 2023		–			–
0% Series A Convertible Preferred Stock, $0.001 par value, 6,000 shares authorized, 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023		–			–
Series B Preferred Stock, $0.001 par value, 1 share authorized, 1 share issued and outstanding as of September 30, 2024 and December 31, 2023		–			–
Series C Preferred Stock, $0.001 par value, 50,000 shares authorized, 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023		–			–
Common Stock, $0.001 par value, 190,000,000 shares authorized, 39,630,851 and 35,323,217 shares issued and 39,555,161 and 35,247,744 outstanding as of September 30, 2024 and December 31, 2023, respectively		40			352
Additional Paid-in Capital		778,438			773,986
Treasury Stock at Cost, 75,690 and 75,473, shares of common stock as of September 30, 2024 and December 31, 2023, respectively		(339	)		(339	)
Accumulated Deficit		(733,521	)		(718,546	)
Accumulated Other Comprehensive Loss		(3,376	)		(3,883	)
Total Kartoon Studios, Inc. Stockholders' Equity		41,242			51,570
Non-Controlling Interests in Consolidated Subsidiaries		1,558			1,691
Total Stockholders' Equity		42,800			53,261

Total Liabilities and Stockholders’ Equity	$	87,299		$	111,436

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

Kartoon Studios, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023
Revenues:
Production Services	$	4,898		$	6,360		$	12,756		$	23,279
Content Distribution		2,348			2,562			7,002			8,815
Licensing & Royalties		37			153			235			362
Media Advisory & Advertising Services		1,425			997			3,177			2,820
Total Revenues		8,708			10,072			23,170			35,276

Operating Expenses:
Marketing and Sales		290			522			1,026			2,457
Direct Operating Costs		5,766			13,475			15,936			34,301
General and Administrative		5,199			8,679			19,710			26,274
Impairment of Property and Equipment		–			–			–			120
Impairment of Intangible Assets		–			–			–			4,023
Impairment of Goodwill		–			–			–			11,287
Total Operating Expenses		11,255			22,676			36,672			78,462

Loss from Operations		(2,547	)		(12,604	)		(13,502	)		(43,186	)

Interest Expense		(176	)		(672	)		(625	)		(2,777	)
Other Income (Expense), net		602			(2,236	)		(981	)		(6,783	)

Loss Before Income Tax Benefit		(2,121	)		(15,512	)		(15,108	)		(52,746	)

Income Tax Benefit		–			–			–			934

Net Loss		(2,121	)		(15,512	)		(15,108	)		(51,812	)

Net Loss Attributable to Non-Controlling Interests		64			36			133			83

Net Loss Attributable to Kartoon Studios, Inc.	$	(2,057	)	$	(15,476	)	$	(14,975	)	$	(51,729	)

Net Loss per Share (Basic)	$	(0.05	)	$	(0.44	)	$	(0.40	)	$	(1.56	)
Net Loss per Share (Diluted)	$	(0.05	)	$	(0.44	)	$	(0.40	)	$	(1.56	)

Weighted Average Shares Outstanding (Basic)		39,499,680			35,088,333			37,734,415			33,160,228
Weighted Average Shares Outstanding (Diluted)		39,499,680			35,088,333			37,734,415			33,160,228

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

Kartoon Studios, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023
Net Loss	$	(2,121	)	$	(15,512	)	$	(15,108	)	$	(51,812	)
Change in Accumulated Other Comprehensive Income (Loss):
Change in Unrealized Gain on Marketable Securities		134			164			197			907
Realized Losses on Marketable Securities Reclassified from AOCI into Earnings		148			1,897			505			4,154
Foreign Currency Translation Adjustments		41			(550	)		(195	)		157
Total Change in Accumulated Other Comprehensive Loss		323			1,511			507			5,218
Total Comprehensive Net Loss		(1,798	)		(14,001	)		(14,601	)		(46,594	)
Net Loss Attributable to Non-Controlling Interests		64			36			133			83
Total Comprehensive Net Loss Attributable to Kartoon Studios, Inc.	$	(1,734	)	$	(13,965	)	$	(14,468	)	$	(46,511	)

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

Kartoon Studios, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

(in thousands, except share data)


	Common Stock				Preferred Stock			Additional Paid-In		Treasury Stock				Accumulated			Accumulated Other Comprehensive			Non- Controlling
	Shares	Amount			Shares	Amount		Capital		Shares	Amount			Deficit			Loss			Interest			Total
Balance, December 31, 2023	35,247,744	$	352		1	$	–	$	773,986	75,473	$	(339	)	$	(718,546	)	$	(3,883	)	$	1,691		$	53,261

Issuance of Common Stock for Services	53,497		–		–		–		74	–		–			–			–			–			74
Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes	49,949		–		–		–		–	–		–			–			–			–			–
Share Based Compensation	–		–		–		–		226	–		–			–			–			–			226
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss	–		–		–		–		–	–		–			–			161			–			161
Currency Translation Adjustment	–		–		–		–		–	–		–			–			(184	)		–			(184	)
Net Loss	–		–		–		–		–	–		–			(7,045	)		–			(19	)		(7,064	)

Balance, March 31, 2024	35,351,190	$	352		1	$	–	$	774,286	75,473	$	(339	)	$	(725,591	)	$	(3,906	)	$	1,672		$	46,474

Issuance of Common Stock for Services	73,745		–		–		–		83	–		–			–			–			–			83
Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes	38,582		–		–		–		25	217		–			–			–			–			25
Proceeds from Securities Purchase Agreement, Net	4,000,000		4		–		–		3,325	–		–			–			–			–			3,329
Share Based Compensation	–		–		–		–		164	–		–			–			–			–			164
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss	–		–		–		–		–	–		–			–			259			–			259
Currency Translation Adjustment	–		–		–		–		–	–		–			–			(52	)		–			(52	)
Net Loss	–		–		–		–		–	–		–			(5,873	)		–			(50	)		(5,923	)

Balance, June 30, 2024	39,463,517	$	356		1	$	–	$	777,883	75,690	$	(339	)	$	(731,464	)	$	(3,699	)	$	1,622		$	44,359

Issuance of Common Stock for Services	91,644		–		–		–		84	–		–			–			–			–			84
Reclassification Related to Reverse Stock Split	–		(316	)	–		–		316	–		–			–			–			–			–
Share Based Compensation	–		–		–		–		155	–		–			–			–			–			155
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss	–		–		–		–		–	–		–			–			282			–			282
Currency Translation Adjustment	–		–		–		–		–	–		–			–			41			–			41
Net Loss	–		–		–		–		–	–		–			(2,057	)		–			(64	)		(2,121	)

Balance, September 30, 2024	39,555,161	$	40		1	$	–	$	778,438	75,690	$	(339	)	$	(733,521	)	$	(3,376	)	$	1,558		$	42,800

Kartoon Studios, Inc.

Condensed Consolidated Statements of Stockholders' Equity (Continued)

(Unaudited)

(in thousands, except share data)

	Common Stock			Preferred Stock			Additional Paid-In			Treasury Stock				Accumulated			Accumulated Other Comprehensive			Non- Controlling
	Shares	Amount		Shares	Amount		Capital			Shares	Amount			Deficit			Loss			Interest			Total
Balance, December 31, 2022	31,918,552	$	319	1	$	–	$	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	–		–		(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
Currency Translation Adjustment	–		–	–		–		–		–		–			–			3			–			3
Net Loss	–		–	–		–		–		–		–			(23,828	)		–			(31	)		(23,859	)

Balance, March 31. 2023	32,113,784	$	320	1	$	–	$	763,327		46,333	$	(299	)	$	(665,271	)	$	(7,555	)	$	1,759		$	92,281

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	–		–		(29	)	2,165		(6	)		–			–			–			(6	)
Proceeds From Warrant Exchange, net	2,311,550		2	–		–		4,855		–		–			–			–			–			4,857
Share Based Compensation	–		–	–		–		717		–		–			–			–			–			717
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss	–		–	–		–		–		–		–			–			633			–			633
Currency Translation Adjustment	–		–	–		–		–		–		–			–			704			–			704
Net Loss	–		–	–		–		–		–		–			(12,425	)		–			(16	)		(12,441	)

Balance, June 30, 2023	35,054,573	$	351	1	$	–	$	769,867		48,498	$	(305	)	$	(677,696	)	$	(6,218	)	$	1,743		$	87,742

Issuance of Common Stock for Services	26,152		–	–		–		43		–		–			–			–			–			43
Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes	64,756		–	–		–		–		2,441		(9	)		–			–			–			(9	)
Share Based Compensation	–		–	–		–		465		–		–			–			–			–			465
Realized Loss Reclassified from AOCI to Earnings, net change in Unrealized Loss	–		–	–		–		–		–		–			–			2,061			–			2,061
Currency Translation Adjustment	–		–	–		–		–		–		–			–			(550	)		–			(550	)
Net Loss	–		–	–		–		–		–		–			(15,476	)		–			(36	)		(15,512	)

Balance, September 30, 2023	35,145,481	$	351	1	$	–	$	770,375		50,939	$	(314	)	$	(693,172	)	$	(4,707	)	$	1,707		$	74,240

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

Kartoon Studios, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2024			2023
Cash Flows from Operating Activities:
Net Loss	$	(15,108	)	$	(51,812	)

Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Amortization of Film and Television Costs		176			612
Depreciation and Amortization of Property, Equipment & Intangible Assets		1,791			1,943
Amortization of Right-of-Use Asset		1,400			2,179
Amortization of Premium on Marketable Securities		59			369
Share-Based Compensation Expense		545			2,091
Impairment of Film and Television Costs		–			6,172
Impairment of Intangible Assets		–			4,023
Impairment of Goodwill		–			11,287
Impairment of Property and Equipment		–			120
Deferred Income Taxes		–			(934	)
Loss on Early Lease Termination		–			232
Marketing Expenses in Exchange for Stock		–			1,195
(Gain) Loss on Revaluation of Equity Investments in Your Family Entertainment AG		1,342			(1,102	)
Unrealized (Gain) Loss on Foreign Currency of Equity Investments in Your Family Entertainment AG		(212	)		205
Gain on Revaluation of Warrants		(63	)		(8,999	)
Realized Loss on Marketable Securities		505			4,154
Warrant Incentive Expense		–			12,664
Stock Issued for Services		242			1,040
Credit Loss Expense		144			351
Other Non-Cash Items		(10	)		2

Decrease (Increase) in Operating Assets:
Accounts Receivable		6,127			3,481
Other Receivable		(1,229	)		909
Tax Credits Earned (less capitalized)		(6,468	)		(12,327	)
Tax Credits Received		13,760			12,247
Film and Television Costs, net		(744	)		(778	)
Prepaid Expenses and Other Assets		(169	)		(178	)

Increase (Decrease) in Operating Liabilities:
Accounts Payable		(4,816	)		(1,875	)
Accrued Salaries & Wages		(190	)		(358	)
Accrued Expenses		439			(71	)
Accrued Production Costs		491			806
Participations Payable		(709	)		(942	)
Deferred Revenue		1,840			(6,208	)
Lease Liability		(429	)		(695	)
Due to Related Party		(3	)		55
Other Liabilities		162			(26	)
Net Cash Used in Operating Activities		(1,127	)		(20,168	)

Cash Flows from Investing Activities:
Repayments from/(Loans to) Related Party for Note Receivables		(37	)		1,393
Proceeds from Principal Collections on Marketable Securities		–			460
Proceeds from Sales and Maturities of Marketable Securities		8,009			67,633
Purchase of Property & Equipment		(70	)		(68	)
Net Cash Provided by Investing Activities		7,902			69,418

Cash Flows from Financing Activities:
Proceeds from Margin Loan		9,054			17,619
Repayments of Margin Loan		(8,767	)		(76,182	)
Proceeds from Production Facilities		6,492			11,161
Repayment of Production Facilities		(13,168	)		(9,451	)
(Repayments of )/Proceeds from Bank Indebtedness, net		(2,253	)		573
Proceeds from Securities Purchase Agreement		3,329			5,299
Principal Payments on Finance Lease Obligations		(1,040	)		(1,555	)
Debt Issuance Costs		(116	)		(18	)
Shares Withheld for Taxes on Vested Restricted Shares		25			(25	)
Payment for Warrant Put Option Exercise		–			(250	)
Net Cash Used in Financing Activities		(6,444	)		(52,829	)

Effect of Exchange Rate Changes on Cash		155			34

Net Increase (Decrease) in Cash		486			(3,545	)
Beginning Cash		4,095			7,432
Ending Cash	$	4,581		$	3,887

Supplemental Disclosures of Cash Flow Information
Cash Paid for Interest	$	145		$	285

Non-Cash Financing and Investing Activities
Leased Assets Obtained in Exchange for New Finance Lease Liabilities	$	–		$	1,432
Warrants Issued for Services	$	–		$	443
Warrant Modification	$	–		$	3,510

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

Kartoon Studios, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2024

Note 1: Organization and Business

Organization and Nature of Business

Kartoon Studios, Inc. (formerly known as Genius Brands International, Inc.; 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 TV, as well as linear streaming platforms. These streaming platforms include Comcast, Cox, DISH, Sling TV, Amazon Prime Video, Amazon Fire, Roku, Apple TV, Apple iOS, Android TV, Android mobile, Pluto TV, Xumo, Tubi, YouTube, YouTube Kids and KartoonChannel.com, as well as Samsung and LG smart TVs. The Company's in-house owned and produced animated shows include Stan Lee’s Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama starring Jennifer Garner, and 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, Paramount+, Max, Samsung TV Plus, LG Smart TVs, Amazon, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world.

Through the Company’s investments in Germany’s Your Family Entertainment AG (“YFE”), a publicly traded company on the Frankfurt Stock Exchange (RTV-Frankfurt), it has gained access to a leading producer and distributor of high-quality children’s and family programming. YFE owns and operates one of Europe’s largest channel-independent libraries of around 150 titles and 3,500 half-hour episodes.

Through the ownership of Wow, the Company 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”), the largest animation focused creator network on YouTube with over 2,500 channels. Frederator also owns Frederator Studios, focused on developing and producing shorts and series for and with partners. Over the past 20 years, Frederator Studios has partnered with Cartoon Network, Nickelodeon, Nick Jr., Netflix, Sony Pictures Animation and Amazon.

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”). Known by his signature phrase “Excelsior!”, Stan Lee is one of the most prolific and legendary creators of all time. As Marvel's editor-in-chief, Stan "The Man" Lee helped build a universe of interlocking continuity, one where fans felt as if they could turn a street corner and run into a superhero from Spider-Man to the Fantastic Four, Thor, Iron Man, the Hulk, the X-Men, and more. Stan went on to become Marvel’s editorial director and publisher in 1972 and was eventually named chairman emeritus. He was the co-creator of characters appearing in 3 of the top 10 box office movies of all time, which featured Spider-Man, Iron Man, the Hulk, Thor, Guardians of the Galaxy, Black Panther, and of course the Avengers, accounting for billions of dollars of revenue for Marvel and the Walt Disney Company.

The Company also owns The Beacon Media Group, LLC (“Beacon Media”) and The Beacon Communications Group, Ltd. (“Beacon Communications”) (collectively, “Beacon”), a North American marketing and media agency specializing in creating impactful connections between consumers and brands across various industries. With a focus on in-depth research and analysis the agency equips brands with a deep understanding of media landscapes, trends, and platform patterns across generations along with developing highly effective media strategies that deliver results for clients. Beacon represents over 20 kids and family clients including Bandai Namco, Moose Toys, Bazooka Candy Brands, Goliath Games, Playmates Toys, Cepia LLC, Cra-Z-Art, and Zebra Pens.

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

Recent Transactions

The Company announced the initial closing of its registered direct offering of up to $7,000,000 (the “Offering”) on April 23, 2024. In the initial closing, the Company sold 3,900,000 shares of its common stock, par value $0.001 per share (the “Common Stock”), and pre-funded warrants to purchase up to 100,000 shares of Common Stock (the “Pre-funded Warrants”) to an institutional investor (the "Investor"), at $1.00 per share of Common Stock and $0.99 per Pre-funded Warrant, for aggregate gross proceeds of approximately $4,000,000, prior to deducting placement agent fees and other offering expenses, pursuant to a securities purchase agreement, dated April 18, 2024 (the “SPA”). Pursuant to the terms of the SPA, the Investor had the sole option to purchase up to an additional 3,000,000 shares of Common Stock and/or Pre-funded Warrants as part of the Offering, at $1.00 per share of Common Stock and $0.99 per Pre-Funded Warrant, which has since expired. Additionally, the Company has 4,784,909 warrants with a reprice option that was triggered by the registered direct offering which reduced the exercise price from $2.50 per share to $1.00 per share.

On June 21, 2024, the Company announced the launch of “Winnie-the-Pooh” on the Kartoon Channel through a $30.0 million joint venture with Catalyst Venture Partners (the “JV”). The JV stipulates after Catalyst Venture Partners recoup their investment, the ownership and profit split between the partners is 60% to Kartoon Studios and 40% to Catalyst Venture Partners. “Winnie-the-Pooh” is based on the designs and stories of one of the most successful brands of all time, A.A. Milne’s “Winnie-the-Pooh,” a property that has generated over $80 billion in sales over the last four decades and is estimated to currently generate $3-$6 billion per year. Catalyst Venture Partners will provide the full amount of the production finance with the plan to include an animated holiday movie, five holiday specials and 4 seasons of episodic series.

Liquidity, Going Concern, and Capital Resources

As of September 30, 2024, the Company had cash of $4.6 million, which increased by $0.5 million as compared to December 31, 2023. The increase was primarily due to cash provided by investing activities of $7.9 million, offset by cash used in financing activities of $6.4 million and cash used for operating activities of $1.1 million. The cash provided by investing activities was primarily due to sales of marketable securities of $8.0 million. The cash used in financing activities was primarily due to repayments of the production facilities, finance lease obligations, and bank indebtedness, net of proceeds from each, resulting in net cash used of $10.0 million, offset by net proceeds from the Offering of $3.3 million and margin loan of $0.3 million.

As of September 30, 2024, the Company held available-for-sale marketable securities with a fair value of $4.1 million, a decrease of $7.9 million as compared to December 31, 2023 due to sales and maturities during the nine months ended September 30, 2024. The available-for-sale securities consist principally of corporate and government debt securities and are also available as a source of liquidity.

As of September 30, 2024 and December 31, 2023, the Company’s margin loan balance was $1.1 million and $0.8 million, respectively. During the nine months ended September 30, 2024, the Company borrowed an additional $9.1 million from its investment margin account and repaid $8.8 million primarily with cash received from sales and maturities of marketable securities. The borrowed amounts were primarily used for operational costs. The interest rates for the borrowings fluctuate based on the Fed Funds Upper Target plus 0.60%. The weighted average interest rates were 0.46% and 0.98%, respectively, on average margin loan balances of $1.0 million and $27.4 million as of September 30, 2024 and December 31, 2023, respectively.

For the three months ended September 30, 2024 and September 30, 2023, the Company incurred interest expense on the margin loan of $11,070 and $0.2 million, respectively. The Company incurred interest expense on the margin loan of $42,131 and $1.5 million during the nine months ended September 30, 2024 and September 30, 2023, 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.

The Company is subject to financial and customary affirmative and negative non-financial covenants on the revolving demand facility and equipment lease agreements that have an aggregate total outstanding balance of $1.2 million U.S. dollars (“USD”) or $1.6 million of Canadian dollars (“CAD”).

During March 2024, the Company amended the revolving demand facility, equipment lease line, and treasury risk management facility. As a result of the amendment, the revolving demand facility allows for draws of up to $0.7 million (CAD 1.0 million) to be made by way of CAD prime rate loans, CAD overdrafts, USD base rate loans or letters of credit up to a maximum of $200,000 in either CAD or USD and having a term of up to 1 year. The CAD prime borrowings and overdrafts bear interest at a rate equal to bank prime plus 2.00% per annum. The USD base rate borrowings bear interest at a rate equal to bank base rate plus 2.00% per annum. In addition, the equipment lease line was terminated, however, the Company has and will continue to make the regular principal and interest payments under the specific financing terms of the existing equipment lease agreements. The amendment removed the treasury risk management facility that allowed for advances of up to $0.4 million (CAD 0.5 million). As of the date of the amendment and December 31, 2023, there were no outstanding amounts drawn under the treasury risk management facility. The amendment also introduced revised financial covenants that are effective as of March 15, 2024. As of September 30, 2024, the Company was not in compliance with a financial covenant to maintain a minimum liquidity threshold. Due to financial covenant violations in the second quarter of 2024, the Company’s remaining equipment lease agreements with the lender of $0.6 million (CAD 0.8 million) as of September 30, 2024, are subject to early repayment. During the three months ended September 30, 2024, the lender and the Company agreed to a repayment plan for the equipment leases under the equipment lease line to be completed prior to the end of the fourth quarter of 2024. On August 30, 2024, the Company paid $0.1 million (CAD 0.1 million) to the lender as part of its early repayment plan for the existing equipment lease line agreements. Subsequent to September 30, 2024, the Company paid $0.3 million (CAD 0.4 million) to the lender as part of its repayment plan for the equipment lease line. The amendment and covenant violation did not have any impact on the Company’s production facilities that are separate from the revolving demand facility and are used for financing specific productions.

In accordance with Accounting Standards Codification (“ASC”), Presentation of Financial Statements – Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern for at least one year after the date the condensed consolidated financial statements are issued.

Historically, the Company has incurred net losses. For the three months ended September 30, 2024 and September 30, 2023, the Company reported net losses of $2.1 million and $15.5 million, respectively. For the nine months ended September 30, 2024 and September 30, 2023, the Company reported net losses of $15.1 million and $51.8 million, respectively. The Company reported net cash used in operating activities of $1.1 million and net cash used in operating activities of $20.2 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. As of September 30, 2024, the Company had an accumulated deficit of $733.5 million primarily due to approximately $450 million of expenses related to non-operational warrant and stock option expense recorded in 2020 and 2021, and total stockholders’ equity of $42.8 million. As of September 30, 2024, the Company had total current assets of $37.2 million, including cash of $4.6 million and marketable securities of $4.1 million, and total current liabilities of $33.7 million. The Company had working capital of $3.5 million as of September 30, 2024, compared to working capital of $11.5 million as of December 31, 2023. Based on our current expected level of operating expenditures and the cash and cash equivalents on hand at September 30, 2024, management concludes that there is substantial doubt about our ability to continue as a going concern for a period of at least 12 months subsequent to the issuance of the accompanying condensed consolidated financial statements. Historically, the Company has financed its operations primarily through revenue generated from operations, loans and sales of its securities, and the Company expects to continue to seek and obtain additional capital in a similar manner. The Company has filed a registration statement on Form S-3 on December 22, 2023, as amended, registering the sale of up to $75 million of the Company’s securities pursuant to a shelf registration statement, and a registration statement on Form S-1 on September 27, 2024, as amended, in connection with a best efforts public offering of up to $8 million of the Company’s securities. However, the Company does not have any committed sources of financing at this time, and it is uncertain whether any additional funding will be available when it needs it on terms that will be acceptable to it, or at all. The Company’s ability to sell securities registered on its registration statement on From S-3 is limited until such time that the market value of its voting securities held by non-affiliates is $75 million or more. In addition, the number of shares of common stock and securities convertible or exercisable for common stock that the Company can sell, under certain circumstances, will be limited by NYSE American rules and regulations. There can be no assurance that the Company will be able to raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of its existing shareholders will be diluted. The issuance of debt can result in restrictive covenants that limit operations. If funding is not available or not available at terms acceptable to the Company, the Company will seek to reduce overhead costs and reduce its weekly cash obligations in the short term as needed. In addition, the Company can look to divest or bring in equity partners for our various divisions and bring in near term capital.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

The accompanying interim condensed consolidated financial statements of the Company have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on April 9, 2024. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the condensed consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates.

Prior Periods and Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on the Company’s reported total revenues, expenses, net loss, current assets, total assets, current liabilities, total liabilities, stockholders’ equity, non-controlling interests or cash flows. No reclassifications of prior period balances were material to the unaudited condensed consolidated financial statements.

Interim results are not necessarily indicative of financial results for a full year or any other period. The information included in this Form 10-Q should be read in conjunction with the Company’s 2023 Annual Report on Form 10-K.

The following is provided to update the Company’s significant accounting policies previously described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Foreign Currency Forward Contracts

As of September 30, 2024, the gross amounts of foreign currency (“FX”) forward contracts in an asset and liability position subject to a master netting arrangement resulted in a net liability of $0.2 million recorded within Other Current Liabilities on the condensed consolidated balance sheets. As of December 31, 2023, the FX contracts were fully settled and netted to zero on the Company’s condensed consolidated balance sheets.

For the three and nine months ended September 30, 2024, the Company recorded a realized gain of $35,601 and $86,355, respectively, on FX forward contracts within Production Services Revenue on the condensed consolidated statements of operations. For the three and nine months ended September 30, 2023, the Company recorded a realized loss of $14,890 and $40,294, respectively, on FX forward contracts within Production Services Revenue on the condensed consolidated statements of operations.

Trade Accounts Receivable and Allowance for Credit Loss

As of September 30, 2024 and December 31, 2023, the Company recorded an allowance for credit loss of $0.2 million and $0.2 million, respectively.

Tax Credits Receivable

As of September 30, 2024 and December 31, 2023, $12.9 million and $20.7 million, respectively, in current tax credit receivables related to Wow’s film and television productions were recorded, net of $0.6 million and $0.5 million, respectively, recorded as an allowance for credit loss. It is estimated that the Company will collect the receivables balance; therefore, no additional reserve was recorded.

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 CAD 100,000. As of September 30, 2024 and December 31, 2023, the Company had twelve and ten bank deposit accounts with an aggregate uninsured balance of $3.0 million and $2.5 million, respectively.

The Company has a managed account with a financial institution. The managed account maintains its investments in marketable securities of approximately $4.1 million and $12.0 million as of September 30, 2024 and December 31, 2023, 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 September 30, 2024 and December 31, 2023, 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 September 30, 2024, the Company had four customers, whose total revenue exceeded 10% of the total consolidated revenue. These customers accounted for 77.2% of the total revenue.

During the nine months ended September 30, 2024, the Company had three customers, whose total revenue exceeded 10% of the total consolidated revenue. These customers accounted for 60.2% of the total revenue. As of September 30, 2024, the Company had three customers whose total accounts receivable exceeded 10% of the total accounts receivable. These customers accounted for 59.4% of the total accounts receivable as of September 30, 2024.

During the three months ended September 30, 2023, the Company had four customers whose total revenue exceeded 10% of the total consolidated revenue. These customers accounted for 73.1% of the total revenue.

During the nine months ended September 30, 2023, the Company had four customers, whose total revenue exceeded 10% of the total consolidated revenue. These customers accounted for 79.3% of the total revenue. As of September 30, 2023, the Company had three customers whose total accounts receivable exceeded 10% of the total accounts receivable. These customers accounted for 55.6% of the total accounts receivable as of September 30, 2023.

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 credit losses.

Fair Value of Financial Instruments

The following table summarizes the marketable securities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2024 (in thousands):


	Level 1		Level 2		Total Fair Value
Investments in Marketable Securities:
Corporate Bonds	$	1,035	$	–	$	1,035
U.S. agency and government sponsored securities		–		1,913		1,913
U.S. states and municipalities		–		1,131		1,131
Total	$	1,035	$	3,044	$	4,079

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 the Financial Accounting Standards Board (“FASB”) ASC 320, Investments – Debt and Equity Securities. An allowance for credit loss was not recorded for the marketable securities as of September 30, 2024 and December 31, 2023. Refer to Note 5 for additional details.

New Accounting Standards Issued but Not Yet Adopted

In October 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-06, Disclosure Improvements. The new guidance clarifies or improves disclosure and presentation requirements on a variety of topics in the codification. The amendments will align the requirements in the FASB Accounting Standard Codification with the SEC’s regulations. The amendments are effective prospectively on the date each individual amendment is effectively removed from Regulation S-X or Regulation S-K. The Company is in the process of evaluating the impact that the adoption of this ASU will have to the condensed consolidated financial statements and related disclosures, which is not expected to be material.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting – Improvements to Reportable Segments Disclosures. The amendments enhance disclosures of significant segment expenses by requiring disclosure of significant segment expenses regularly provided to the chief operating decision maker (CODM), extend certain annual disclosures to interim periods, and permit more than one measure of segment profit or loss to be reported under certain conditions. The amendments are effective for the Company in fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption of the amendment is permitted, including adoption in any interim periods for which financial statements have not been issued. The Company is in the process of evaluating the impact that the adoption of this ASU will have to the condensed consolidated financial statements and related disclosures, which is expected to result in enhanced disclosures.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires that an entity, on an annual basis, disclose additional income tax information, primarily related to the rate reconciliation and income taxes paid. The amendment in the ASU is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this ASU are effective for annual periods beginning after December 15, 2024. The Company is in the process of evaluating the impact that the adoption of this ASU will have to the condensed consolidated financial statements and related disclosures, which is expected to result in enhanced disclosures and is not expected to be material.

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 months ended September 30, 2024 and September 30, 2023, SLU generated a net loss of $63,552 and $35,846, respectively. During the nine months ended September 30, 2024 and September 30, 2023, SLU generated a net loss of $132,750 and $83,179, respectively. There were no contributions or distributions during the three and nine months ended September 30, 2024 and September 30, 2023, and there were no changes in facts and circumstances that would result in a re-evaluation of the VIE assessment.

Note 4: Investment in Equity Interest

As of September 30, 2024 and December 31, 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 September 30, 2024, the fair value of the investment was determined to be $18.0 million recorded within noncurrent assets on the Company’s condensed consolidated balance sheets. YFE shows a considerably lower trading volume compared to industry standards, especially within the broader media and entertainment sector. Under ASC 820, for an asset or liability to qualify as Level 1, it must have quoted prices in an active market. However, the standard also addresses situations where trading volume is low. ASC 820-10-35-41 states that an active market is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. When trading volume is low, determining whether the market is still active requires judgment. When considering the use of share price to value an investment in YFE the company had to weigh the arguments for and against the application of Level 1 inputs under ASC 820. An asset could remain in Level 1 if there are enough considerations to support that the market is accessible and reflects current pricing information, despite low volume. While the low trading volume raises concerns regarding the reliability of using share price as a Level 1 input under ASC 820, the company will closely monitor the trading volume and financial performance of the investee. This ongoing oversight will help ensure that any updates to the investment's fair value reflect true market conditions as they evolve over time, considering both the potential growth of the company and fluctuations in trading activity.

The fair value as of September 30, 2024 decreased by net $1.1 million, as compared to December 31, 2023. The decrease is the effect of foreign currency remeasurement from EURO to USD resulting in a gain of $0.2 million and share price fluctuations resulting in a loss of $1.3 million. The total change in fair value is recorded within Other Income (Expense), net on the Company’s condensed consolidated statements of operations. As of September 30, 2024 and December 31, 2023, the Company’s ownership in YFE was 44.8%.

Note 5: Marketable Securities

The Company classifies and accounts for its marketable debt securities as available-for-sale securities (“AFS”) and the securities are stated at fair value. Per ASC 326, the Company is required to recognize an allowance for credit losses on its AFS debt securities and recognize a credit loss expense once securities become impaired.

The investments in marketable securities had an adjusted cost basis of $4.3 million and a market value of $4.1 million as of September 30, 2024. The balances consisted of the following securities (in thousands):

Schedule of marketable securities
	Adjusted Cost		Unrealized Loss			Fair Value
Corporate Bonds	$	1,080	$	(45	)	$	1,035
U.S. Agency and Government Sponsored Securities		2,000		(87	)		1,913
U.S. States and Municipalities		1,186		(55	)		1,131
Total	$	4,266	$	(187	)	$	4,079

The investments in marketable securities as of December 31, 2023 had an adjusted cost basis of $12.8 million and a market value of $12.0 million. The balances consisted of the following securities (in thousands):

	Adjusted Cost		Unrealized Loss			Fair Value
Corporate Bonds	$	6,333	$	(425	)	$	5,908
U.S. Treasury		646		(37	)		609
U.S. Agency and Government Sponsored Securities		2,000		(148	)		1,852
U.S. States and Municipalities		3,859		(278	)		3,581
Total	$	12,838	$	(888	)	$	11,950

The Company holds 5 AFS securities, all of which were in an unrealized loss position and have been in an unrealized loss position for a period greater than 12 months as of September 30, 2024. The AFS securities held by the Company as of December 31, 2023 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 September 30, 2024 and December 31, 2023, 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 $0.1 million and $1.9 million were recognized in earnings during the three months ended September 30, 2024 and September 30, 2023, respectively. Realized losses of $0.5 million and $4.2 million were recognized in earnings during the nine months ended September 30, 2024 and September 30, 2023, respectively. The losses were due to selling securities prior to maturity to prevent further market condition losses on the securities.

The contractual maturities of the Company’s marketable investments as of September 30, 2024 were as follows (in thousands):


	Fair Value
Due within 1 year	$	–
Due after 1 year through 5 years		4,079
Total	$	4,079

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.

Note 6: Property and Equipment, net

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

Schedule of property and equipment, net
	As of
	September 30, 2024			December 31, 2023
Furniture and Equipment	$	117		$	117
Computer Equipment		226			219
Leasehold Improvements		2,208			2,200
Software		250			192
Property and Equipment, gross		2,801			2,728

Less Accumulated Depreciation		(985	)		(724	)
Foreign Currency Translation Adjustment		(161	)		(127	)
Property and Equipment, net	$	1,655		$	1,877

During the three months ended September 30, 2024 and September 30, 2023, the Company recorded depreciation expense of $0.1 million and $0.1 million, respectively. During the nine months ended September 30, 2024 and September 30, 2023, the Company recorded depreciation expense of $0.3 million and $0.3 million, respectively.

The Company did not incur any impairment charges on its property and equipment during the three and nine months ended September 30, 2024.

Due to a lease termination effective August 1, 2023, $0.1 million of property and equipment was written down to zero and recorded in loss on lease termination within Other Income (Expense), net on the condensed consolidated statement of operations during the three and nine months ended September 30, 2023. In addition, during the first quarter of 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 group’s property and equipment assets were written down to zero and an Impairment of Property and Equipment of $0.1 million was recorded within Operating Expenses in the condensed consolidated statement of operations.

Note 7: Leased Right-of-Use Assets, net

Leased right-of-use assets consisted of the following (in thousands):

Schedule of leased right of use assets
	As of
	September 30, 2024			December 31, 2023
Office Lease Assets	$	9,437		$	9,437
Equipment Lease Assets		5,360			5,360
Right-of-Use Assets, Gross		14,797			14,797

Accumulated Amortization		(6,637	)		(5,237	)
Foreign Currency Translation Adjustment		(769	)		(617	)
Leased Right-of-Use Assets, net	$	7,391		$	8,943

As of September 30, 2024, the weighted-average lease term for the Company’s operating leases was 76 months and the weighted-average discount rate was 11.1%. As of December 31, 2023, the weighted-average lease term for operating leases was 83 months and the weighted-average discount rate was 11.1%.

Operating lease costs during the three months ended September 30, 2024 and September 30, 2023 were $0.9 million and $0.4 million, respectively, recorded within General and Administrative Expenses on the Company’s condensed consolidated statements of operations. Operating lease costs during the nine months ended September 30, 2024 and September 30, 2023 were $1.2 million and $1.2 million, respectively, recorded within General and Administrative Expenses on the Company’s condensed consolidated statements of operations.

During the three and nine months ended September 30, 2024, the Company recorded right-of-use (“ROU”) amortization of $0.2 million and $1.0 million, respectively. During the three and nine months ended September 30, 2023, the Company recorded ROU amortization of $0.5 million and $1.6 million, respectively. ROU amortization is recorded within General and Administrative Expenses and accretion of interest expense is recorded within Other Income (Expense), net on the Company’s condensed consolidated statements of operations.

On August 2, 2023, Beacon Media, signed a Termination of Lease Agreement (the “Lease Termination”), effective August 1, 2023 (the “Effective Date”), related to the office space in Lyndhurst, NJ. The Lease Termination requires Beacon Media to pay an aggregate of $0.1 million in consideration for terminating the lease. The Company wrote off the ROU asset, lease liability, prepaid deposit and fixed assets on the Effective Date. Including fees, the Company recorded a total loss on lease termination of $0.2 million within Other Income (Expense), net on the Company’s condensed consolidated statement of operations during the three months ended September 30, 2023.

Note 8: Film and Television Costs, net

The following table highlights the activity in Film and Television Costs as of September 30, 2024 and December 31, 2023 (in thousands):


Film and Television Costs, net as of December 31, 2023	$	1,295
Additions to Film and Television Costs		818
Disposals		(73	)
Film Amortization Expense		(176	)
Foreign Currency Translation Adjustment		(6	)
Film and Television Costs, net as of September 30, 2024	$	1,858

During the three months ended September 30, 2024 and September 30, 2023, the Company recorded film amortization expense of $61,672 and $0.1 million, respectively. During the nine months ended September 30, 2024 and September 30, 2023, the Company recorded amortization expense of $0.2 million and $0.5 million, respectively.

For the three and nine months ended September 30, 2023, the Company recorded film and television impairment write-downs of $6.2 million. The Company did not incur any film and television impairment write-downs during the three and nine months ended September 30, 2024.

Note 9: Intangible Assets, net

Intangible Assets, net

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

Intangible Assets, net

Schedule of intangible asset
	Weighted Average Remaining Amortization		As of
	Period		September 30, 2024			December 31, 2023
Customer Relationships		5.7	$	17,390		$	17,325
Digital Networks		13.5		803			803
Trade Names		66.7		10,100			9,970
Intangible Assets, gross				28,293			28,098

Less: Accumulated Amortization				(5,528	)		(3,794	)
Foreign Currency Translation Adjustment				(1,639	)		(1,311	)
Intangible Assets, net			$	21,126		$	22,993

During the three months ended September 30, 2024 and September 30, 2023, the Company recorded intangible asset amortization expense of $0.5 million for each reporting period. During the nine months ended September 30, 2024 and September 30, 2023, the Company recorded intangible asset amortization expense of $1.5 million and $1.6 million, respectively.

The Company did not incur any impairment charges on its definite and indefinite-lived intangible assets during the three and nine months ended September 30, 2024.

During the nine months ended September 30, 2023, 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, net of $0.6 million in accumulated depreciation, due to a decrease in an asset group’s estimated undiscounted cash flows. Furthermore, it was determined that the Frederator tradename, an indefinite-lived intangible asset, was impaired by $1.3 million.

Expected future amortization of intangible assets subject to amortization as of September 30, 2024 is as follows (in thousands):


Fiscal Year:
2024 (remainder of year)	$	516
2025		2,072
2026		2,062
2027		2,062
2028		2,062
Thereafter		6,792
Total	$	15,566

As of September 30, 2024, $5.6 million of the Company’s intangible assets related to the acquired trade names from the Wow acquisition had indefinite lives and are not subject to amortization.

Note 10: Deferred Revenue

As of September 30, 2024 and December 31, 2023, the Company had aggregate short term and long term deferred revenue of $8.4 million and $6.6 million, respectively. The increase in deferred revenue is primarily related to the stage of progress of various productions as of September 30, 2024, compared to the progress as of December 31, 2023. 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

The Company has certain credit facilities (together, the “Facilities”) that are comprised of the following:

Revolving Demand Facility

As of September 30, 2024 and December 31, 2023, the Company had an outstanding balance of $0.6 million (CAD 0.8 million) and $2.9 million (CAD 3.8 million), respectively, on the revolving demand facility by way of bank prime rate loan draws, included as Bank Indebtedness within current liabilities on the Company’s condensed consolidated balance sheets.

During March 2024, the Company amended the revolving demand facility. As a result of the amendment, the revolving demand facility allows for draws of up to $0.7 million (CAD 1.0 million) to be made by way of CAD prime rate loans, CAD overdrafts, USD base rate loans or letters of credit up to a maximum of $0.2 million in either CAD or USD and having a term of up to 1 year. The CAD prime borrowings and overdrafts bear interest at a rate equal to bank prime plus 2.00% per annum. The USD base rate borrowings bear interest at a rate equal to bank base rate plus 2.00% per annum.

Treasury Risk Management Facility

During March 2024, an amendment was entered into that removed the treasury risk management facility. As of the date of the amendment and December 31, 2023, there were no outstanding amounts drawn under the treasury risk management facility.

Production Facilities

The production facilities are used for financing specific productions. The Company’s production facilities bear interest at rates ranging from bank prime plus 1.00% - 1.25% per annum. The production facilities are generally repayable on demand and are guaranteed and secured by the Company with no limitations for maximum potential future payments. The security reflects substantially all of the Company's tangible and intangible assets including a combination of federal and provincial tax credits, other government incentives, production service agreements and license agreements.

As of September 30, 2024 and December 31, 2023, the Company had an outstanding balance of $8.7 million (CAD 11.8 million), including $1.3 million (CAD 1.7 million) of interest, and $15.3 million (CAD 20.3 million), including $1.4 million (CAD 1.9 million) of interest, respectively, recorded as Production Facilities, net within current liabilities on the Company’s condensed consolidated balance sheets.

Equipment Lease Line

During March 2024, the equipment lease line was terminated, however, the Company continued to make the regular principal and interest payments under the specific financing terms of the existing equipment lease agreements. Each existing transaction under the equipment lease line has specific financing terms in respect of the leased equipment such as term, finance amount, rate, and payment terms. The finance rates for these equipment leases range from 4.49% to 7.18% with remaining lease terms of 1 - 2 months as of September 30, 2024.

As of September 30, 2024, the outstanding balance of $0.6 million (CAD 0.8 million) was included within current Finance Lease Liabilities on the Company’s condensed consolidated balance sheets.

Equipment Lease Facility

The Company also entered into an equipment lease agreement with a Canadian bank. This additional equipment lease facility allows the Company to finance equipment purchases of up to $1.0 million (CAD 1.4 million) in total. Each transaction under the equipment lease facility has specific financing terms in respect of the leased equipment such as term, finance amount, rate, and payment terms. As of September 30, 2024, the Company has leases remaining under this facility with finance rates of 7.52% to 8.20% and remaining lease terms of 14 - 23 months.

As of September 30, 2024, the outstanding balance of $0.4 million (CAD 0.5 million) was included within current and noncurrent Finance Lease Liabilities on the Company’s condensed consolidated balance sheets.

Loan Covenants, Violations and Waiver

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 equipment lease line can be called at any time by the lender as per the original and amended terms of the facilities. As of September 30, 2024, the Company was not in compliance with a financial covenant to maintain a minimum liquidity threshold. Due to financial covenant violations in the second quarter of 2024, the Company’s remaining equipment lease agreements with the lender of $0.6 million (CAD 0.8 million) as of September 30, 2024, are subject to early repayment. During the three months ended September 30, 2024, the lender and the Company reached an agreement in principle for a repayment plan for the equipment leases under the equipment lease line. On August 30, 2024, the Company paid $0.1 million (CAD 0.1 million) to the lender as part of its early repayment plan for the existing equipment lease line agreements. Subsequent to September 30, 2024, the Company paid $0.3 million (CAD 0.4 million) to the lender as part of its repayment plan for the equipment lease line. The Company expects to enter into a written agreement with the lender prior to the end of the fourth quarter of 2024 to amend the revolving demand facility and equipment lease line.

Note 13: Stockholders’ Equity

Common Stock

As of September 30, 2024 and December 31, 2023, the total number of authorized shares of common stock was 190,000,000.

As of September 30, 2024 and December 31, 2023, there were 39,555,161 and 35,247,744 shares of common stock outstanding, respectively.

Preferred Stock

The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001 per share. The board of directors is authorized, subject to any limitations prescribed by law, without further vote or action by the Company’s stockholders, to issue from time-to-time shares of preferred stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by the board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.

In connection with the Company’s acquisition of Wow, certain eligible Canadian stockholders, noteholders and optionholders of Wow elected to receive the Exchangeable Shares in the capital of the Wow Exchange Co. Inc. (“ExchangeCo”) instead of shares of the Company’s common stock to which they were otherwise entitled.

The shares of ExchangeCo were exchangeable into shares of the Company’s common stock in accordance with their terms. Holders of the ExchangeCo shares were entitled to defined voting rights (the “Voting Rights”) in the Company pursuant to a voting and exchange trust agreement (the “Voting Agreement”) dated April 6, 2022 among the Company, ExchangeCo, 1329258 B.C. Ltd. (“CallCo”) and Computershare Trust Company of Canada (the “Voting Trustee”). The Voting Trustee holds a single share of Series B Preferred Stock in the capital of the Company (the “Special Voting Share”), which granted the Voting Trustee that number of votes at the meetings of the Company’s stockholders as is equal to the number of shares of the Company’s common stock that at such time have not been delivered pursuant to the tender of ExchangeCo shares. The Voting Trustee was required to exercise each vote attached to the Special Voting Share only as directed by the relevant holder of the underlying Company shares of common stock and, in the absence of any instructions, would not exercise voting rights with respect to the applicable shares. On August 16, 2024, CallCo acquired the balance of the remaining exchangeable shares of ExchangeCo in consideration for shares in the Company’s common stock. Accordingly, the shares of ExchangeCo are no longer held by the public and therefore, (i) the Voting Agreement automatically terminated, and (ii) there are no longer Voting Rights in respect of the shares of ExchangeCo or the Special Voting Share.

As of September 30, 2024 and December 31, 2023, there were 0 shares of Series A Convertible Preferred Stock outstanding. As of September 30, 2024 and December 31, 2023, there was 1 share of Series B Preferred Stock outstanding. As of September 30, 2024 and December 31,2023, there were 0 shares of Series C Preferred Stock outstanding.

Treasury Stock

During the nine months ended September 30, 2024 and September 30, 2023, 217 and 8,306 shares of common stock with a cost of $252 and $24,700, respectively, were withheld to cover taxes owed by certain employees, all of which were included as treasury stock outstanding and recorded at cost within Treasury Stock on the condensed consolidated balance sheet.

Note 14: Stock Options

On September 1, 2020, the Company adopted the Kartoon Studios, Inc. 2020 Incentive Plan (the “2020 Plan”) as voted by the Board of Directors. The Board of Directors approved the maximum number of shares available for issuance up to an aggregate of 3,000,000 shares of common stock, which does not include shares that the Company may issue related to acquisitions. On May 23, 2024, the Board of Directors approved the maximum number of shares available for issuance up to an aggregate of 5,000,000 shares from 3,000,000 shares of common stock in the initial 2020 Plan. The 2020 Plan replaced the previously adopted 2015 Incentive Plan (the “2015 Plan”) that had a total number of authorized shares of 216,767, however the remaining 12,000 outstanding shares granted under the 2015 Plan, as of September 30, 2024, remain to be governed under such plan. All expired or terminated shares granted under the 2015 Plan, that have not been vested or exercised, reverts to and again becomes available for issuance under the 2020 Plan.

During the nine months ended September 30, 2024 and September 30, 2023, the Company granted options to purchase 35,000 and no options, respectively. The 35,000 options to purchase common stock had a weighted-average grant date fair market value of $24,210.

The fair value of the options granted during the nine months ended September 30, 2024 were calculated using the Black-Scholes Merton (“BSM”) option pricing model based on the following assumptions:

Schedule of assumptions used
Exercise Price	$	0.95
Dividend Yield		– %
Volatility		92.1%
Risk-free interest rate		4.3%
Expected life of options		5.0 years

The following table summarizes the Company’s option activity:

Schedule of option activity
	Stock Options			Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price per Share
Outstanding at December 31, 2023		1,183,908			5.56	$	14.96
Granted		35,000			4.72	$	0.95
Exercised		–			–	$	–
Forfeited/Cancelled		(259,468	)		–	$	21.08
Expired		(5,800	)		–	$	19.90
Outstanding at September 30, 2024		953,640			5.04	$	12.75

Unvested at September 30, 2024		102,499			4.35	$	4.23
Vested and exercisable at September 30, 2024		851,141			5.12	$	13.77

During the nine months ended September 30, 2023, upon termination of certain employees, the Company accelerated the vesting of any unvested options held by the employees pursuant to their employment agreements. This resulted in 55,816 options becoming immediately vested on the separation date and $0.1 million in expense recognized by the Company.

During the three months ended September 30, 2024 and September 30, 2023, the Company recognized $23,804 and $0.2 million, respectively, in share-based compensation expense related to stock options. During the nine months ended September 30, 2024 and September 30, 2023, the Company recognized $0.1 million and $0.9 million, respectively, in share-based compensation expense related to stock options. Share-based compensation expense is included in General and Administrative Expense on the Company’s condensed consolidated statements of operations. The unrecognized share-based compensation expense at September 30, 2024 was $48,503 which will be recognized through the second quarter of 2025 assuming the underlying grants are not cancelled or forfeited. The outstanding shares as of September 30, 2024 had an aggregated intrinsic value of zero.

Note 15: Restricted Stock Units

Restricted stock units (“RSUs”) are granted under the Company’s 2020 Plan. During the nine months ended September 30, 2024 and September 30, 2023, the Company granted 286,324 and 76,508 fully vested RSUs to the Company’s board members, employees, and consultants, with a fair market value of $