Kartoon Studios, Inc. 10-Q

ITEM 1. LEGAL PROCEEDINGS. As of September 30, 2021, 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. On June 16, 2021, the Company was named as a defendant in a lawsuit filed in the U.S. District Court for the Central District of California styled A Parent Media Co. Inc. v. Genius Brands International, Inc. , Case No. 2:21-CV-04897, alleging that the Company has infringed the plaintiff’s federally registered trademarks KIDOODLE.TV, KIDOODLE and KIDOODLETV by sponsoring Google Ads in which the plaintiff’s trademarks appeared. The parties have agreed to entry of a stipulation that the alleged conduct did in fact constitute trademark infringement; however, because the number of consumer impressions was small, the Company contends that the plaintiff’s damages are nominal or zero. The case is scheduled for trial on the issue of damages in December 2021. As previously disclosed, the Company, its Chief Executive Officer Andy Heyward and its Chief Financial Officer Robert Denton are 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). In a consolidated amended complaint filed February 1, 2021, the 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 making materially false or misleading statements regarding the Company’s business and business prospects, artificially inflating the Company’s stock price during an alleged class period running from March 11, 2020 through July 5, 2020. Plaintiffs sought unspecified damages on behalf of the alleged class of persons who invested in our common stock during the alleged class period. On March 17, 2021, the defendants filed a motion to dismiss the amended complaint. After full briefing, the Court took the motion under submission without oral argument and, on August 30, 2021, issued a decision dismissing the amended complaint but granting the lead plaintiffs a further opportunity to plead a claim if they filed a further amended complaint by September 27, 2021. On September 27, 2021, the lead plaintiffs above filed a second amended complaint, naming the same defendants. The new complaint alleges that the Company made numerous false or misleading statements over a class period running from March 11, 2020, through March 30, 2021. The lead plaintiffs also allege a “scheme to defraud” during 2020 that involved several private placements of Company stock with an allegedly “insider” group of investors that purportedly then issued press releases that inflated the stock price, after which these investors purportedly sold their shares at higher prices. Other than Mr. Heyward, who invested $1 million in a private offering at the beginning of the alleged class period but who did not subsequently sell his shares, no member of the supposed investor group is identified or named as a defendant. Nonetheless, the lead plaintiffs again allege violations of Sections 10(b) and 20(a) of the Exchange Act and seek unspecified damages on behalf of the alleged class—persons who invested in the Company’s common stock during the newly alleged class period. Defendants intend to file a motion to dismiss the second amended complaint, and under a Court-ordered briefing schedule, that motion is to be filed by November 22, 2021. The briefing schedule on the motion to dismiss extends into the first quarter of 2022. The Company cannot predict the outcome of the motion or the timing of a decision from the Court. Pending resolution of the motion to dismiss, neither discovery nor other substantive proceedings are occurring nor expected. Related to the securities class action, the Company’s directors, Chief Executive Officer and Chief Financial Officer have been named as defendants in several putative shareholder 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 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 a nominal defendant. The plaintiffs, all alleged stockholders of the Company, purport to sue on behalf and for the benefit of the Company. Pursuant to agreements among the parties, the courts in all of the derivative lawsuits have stayed proceedings pending the outcome of the motion to dismiss in the securities action. 46 On July 7, 2020, the Company received a letter from a law firm alleging that rights that Genius Brands had licensed from POW!, LLC, through its joint venture, Stan Lee Universe, LLC, had already been sold to another company, Proxima, represented by that law firm. The law firm alleged that the Company is, inter alia, interfering with Proxima’s contractual rights. This matter was referred to our outside litigation counsel. The Company has 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 third parties. On or about November 4, 2021, POW! and Proxima entered a binding settlement agreement resolving all the claims made by Proxima. In all of the above-mentioned proceedings, the Company has denied and continues to deny any wrongdoing and intends to defend the claims vigorously. 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. 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.