Kartoon Studios, Inc. 10-Q

ITEM 1. LEGAL PROCEEDINGS. As of September 30, 2020, there were no material pending legal proceedings to which we are a party or as to which any of its property is subject other than described below. As previously disclosed, the Company and its Chief Executive Officer Andy Heyward are named as defendants in a putative securities class action lawsuit filed in August 2020 in the U.S. District Court for the Central District of California and styled Salvador Verdin v. Genius Brands International, Inc. and Andy Heyward, Case No. 2:20-cv-07457-DSF (RAO). Plaintiff alleges generally that defendants made false or misleading statements regarding the Company’s business and business prospects during an alleged class period that runs from March 17 through July 5, 2020. Subsequently, a second putative class action asserting substantially similar claims against the same defendants was filed in the same court. On October 19, 2020, applications were filed with the court by multiple persons and law firms seeking appointment as lead plaintiff and lead plaintiff’s counsel in the matter, as contemplated by procedures specified in the Private Securities Litigation Reform Act. The applicants also sought formal consolidation of the two suits. The court has advised the parties that it expects to resolve the motions and appoint a lead plaintiff and lead plaintiff’s counsel without oral argument. Pending that appointment, the Company anticipates little if any substantive activity in the litigation. Related to the securities class action, the Company’s directors have been named as defendants in a putative shareholder derivative lawsuit filed in September 2020 in the U.S. District Court for the Central District of California and styled Eduardo Correa, etc., v. Andy Heyward, et. al., Case No. 2:20-cv-08277-DSF (RAOx). The suit alleges generally that the defendants breached fiduciary duties owed to the Company by, among other things, causing the Company to issue the supposedly false and misleading statements that underlie the Verdin securities litigation and thereby purportedly exposing the Company to liability and damaging the Company in an unspecified amount. No recovery is sought from the Company. Instead, as a shareholder derivative action, the Company is named as Nominal Defendant; and plaintiff, an alleged stockholder of the Company, purports to sue on behalf and for the benefit of the Company. Pursuant to an agreement among the parties, the court has stayed proceedings in the derivative litigation pending the outcome of anticipated motions to dismiss in the securities class action. In both proceedings, defendants have denied and continue to deny any wrongdoing and intend to defend the claims vigorously.