Kartoon Studios, Inc. 10-Q

ITEM 1. LEGAL PROCEEDINGS. As of March 31, 2021, 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, on August 18, 2020, the Company and its Chief Executive Officer Andy Heyward 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 Salvador Verdin v. Genius Brands International, Inc. and Andy Heyward , Case No. 2:20-cv-07457 DSF (RAOx). We were later served with a similar lawsuit Sumit Garg v. Genius Brands International, Inc. and Andy Heyward , Case No. 2:20-cv-07764. Both suits allege generally that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false or misleading statement regarding the Company’s business and business prospects, artificially inflating the Company’s stock price during an alleged class period running from March 11 through July 5, 2020. Plaintiffs seek unspecified damages on behalf of the alleged class of persons who invested in our common stock during the alleged class period. The securities suits have been consolidated into a single proceeding before Judge Dale Fischer in the U.S. District Court for the Central District of California. The proceeding will now be known as, styled In re Genius Brands International, Inc. Securities Litigation, Master File No. 2:20-cv-07457 DSF (RAOx). The Lead Plaintiffs filed an amended complaint in the consolidated actions on February 1, 2021. While asserting the same legal claims and class period, the amended complaint added a new defendant, Chief Financial Officer Robert Denton. On March 17, 2021, the defendants filed a motion to dismiss the amended complaint. Briefing of that motion is, by court-ordered schedule, expected to extend into June 2021, with a hearing currently scheduled for July 5, 2021. Pending resolution of the motion to dismiss, neither discovery nor other substantive proceedings are expected. Related to the securities class action, the Company’s directors, Chief Executive Officer and Chief Financial Officer 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 Correa, etc., v. Heyward, et. al., Case No. 2:20-cv-08277-DSF (RAOx). On November 20, 2020 a second case, Ly, etc. v. Heyward, et al. , Case No. 20STCV44611 was filed in the Los Angeles County Superior Court. More recently, two additional putative shareholder derivative lawsuits have been filed, one in the U.S. District Court for the Central District of California captioned Contorno, etc. v. Heyward et al., Case No. 2:21-cv-02331 DSF (RAOx), and another 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 by, among other things, causing the Company to issue the supposedly false and misleading statements that underlie the securities lawsuit, purportedly exposing the Company to liability and damaging the Company in an unspecified amount. By these derivative lawsuits, the plaintiffs seek no recovery from the Company. Instead, as a shareholder derivative action, the Company is named as Nominal Defendant; and plaintiffs, all alleged stockholders of the Company, purports to sue on behalf and for the benefit of the Company. Pursuant to agreements among the parties, the courts have stayed proceedings in the derivative litigations pending the outcome of anticipated motions to dismiss in the securities class action. Additionally, the parties to the Correa and Contorno actions have agreed to consolidate those two lawsuits and expect shortly to submit to the Court an agreement formally to do so. In all of the above-mentioned proceedings, defendants have denied and continue to deny any wrongdoing and intend to defend the claims vigorously. On July 7, 2020, we received a letter from a law firm alleging that rights Genius Brands had licensed from POW!, LLC, through its the Stan Lee Universe, LLC joint venture, had already been sold to another company, represented by that law firm. The law firm alleged that the Company is, inter alia, interfering with their contractual rights. This matter was referred to our outside litigation counsel. We have been informed that the matter is being adjudicated in an arbitration and that the arbitrator issued a gag order preventing further communications from Plaintiff to 3 rd parties. 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 fiscal year ended December 31, 2020.