Kartoon Studios, Inc. 10-Q

ITEM 1. LEGAL PROCEEDINGS. As of March 31, 2023, there were no material pending legal proceedings to which the Company is a party or as to which any of its property is subject other than described below. As previously disclosed, the Company, its Chief Executive Officer Andy Heyward, and its Chief Financial Officer Robert Denton were named as defendants in a putative class action lawsuit filed in the U.S. District Court for the Central District of California and styled In re Genius Brands International, Inc. Securities Litigation , Master File No. 2:20-cv-07457 DSF (RAOx). Lead plaintiffs alleged generally that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by issuing allegedly false or misleading statements about the Company, initially over an alleged class period running from March into early July 2020, and, in their second amended complaint, over a class period alleged to extend into March 2021. Plaintiffs sought unspecified damages on behalf of the alleged class of persons who invested in the Company’s common stock during the alleged class period. Defendants filed motions to dismiss the different versions of lead plaintiffs’ pleading. Most recently, on July 15, 2022, the Court granted defendants’ motion directed to lead plaintiffs’ second amended complaint, ordering that the complaint and the action be dismissed in their entirety and with prejudice. On August 12, 2022, lead plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. Briefing of the appeal concluded earlier this year. The Company cannot predict whether the Court will entertain oral argument of the appeal, when a hearing might be scheduled, the outcome of the appeal or the timing of a decision on the appeal. In the meantime, there is no other activity in the case. Related to the securities class action, the Company’s directors (other than Dr. Cynthia Turner-Graham), together with Messrs. Heyward and Denton and former director Michael Klein, have been named as defendants in several punitive stockholder derivative lawsuits. As previously disclosed, these include a consolidated proceeding pending in the U.S. District Court for the Central District of California and styled In re Genius Brands Stockholder Derivative Litigation , Case No. 2:20-cv-08277 DSF (RAOx); an action filed in the Los Angeles County Superior Court captioned Ly, etc. v. Heyward, et al ., Case No. 20STCV44611; and an additional case pending in the U.S. District Court for the District of Nevada, styled Miceli, etc. v. Heyward, et al ., Case No. 3:21-cv-00132-MMD-WGC. While the allegations and legal claims vary somewhat among the derivative actions, they all generally allege that the defendants breached fiduciary duties owed to the Company. The plaintiffs, all alleged stockholders of the Company, purport to sue on behalf and for the benefit of the Company. Accordingly, the derivative plaintiffs seek no recovery from the Company. Instead, as a stockholder derivative action, the Company is named as a nominal defendant. Pursuant to agreements among the parties, the courts in all of the derivative lawsuits have stayed proceedings pending the outcome of the securities class action. The Company cannot predict the impact of the securities class action’s outcome on appeal on the shareholder derivative lawsuits. Finally, the Company is also a nominal defendant in an action filed in January 2022 in the U.S. District Court for the Southern District of New York and styled Todd Augenbaum v. Anson Investments Master Fund LP, et al ., Case No. 1:22-cv-00249-VM. The action, which purports to be brought on behalf and for the benefit of the Company, seeks recovery under Section 16(b) of the Exchange Act of supposed short-swing profits allegedly realized by roughly a dozen persons and entities that participated as investors in certain of the Company’s private placements of securities in 2020. No Company officer or director is among the defendants. The defendant investors filed a motion to dismiss, which the Court took under submission in mid-November 2022 after the completion of full briefing. By decision issued March 30, 2023, the Court granted defendants’ motion to dismiss with leave to amend. On May 1, 2023, plaintiff filed an amended complaint. The Company anticipates that defendants will renew their motions to dismiss, but no schedule for doing so has yet been set. There is otherwise no current activity in the case. The Company cannot predict the outcome of the anticipated motion to dismiss the amended complaint, the timing of court action on the requests, or the outcome of the lawsuit more generally. While the Company again notes that plaintiff seeks no relief against the Company, several defendant investors have made demands on the Company that it indemnify their costs of defending the action, invoking provisions in the agreements by which the investors acquired Company securities. The Company disagrees that it has indemnity obligations applicable to this action; however, the Company cannot predict the outcome of the indemnification issue. In all of the above-mentioned active proceedings, the Company has denied and continues to deny any wrongdoing and intends to defend the claims vigorously. The Company maintains a program of directors’ and officers’ liability insurance that, subject to the insurers’ reservations of rights, has offset a portion of the costs of defending the securities class action litigation, and that the Company expects will afford coverage for some costs of the other shareholder litigation should any of those cases proceed. 47 Table of Contents ITEM 1A. RISK FACTORS. There have been no material changes to the Risk Factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2022. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable.