Kartoon Studios, Inc. 10-Q

ITEM 1. LEGAL PROCEEDINGS. As of March 31, 2022, 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, 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). Initially, 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. The defendants moved to dismiss lead plaintiffs’ amended complaint; and in a decision issued on August 30, 2021, the Court dismissed the amended complaint but granted lead plaintiffs a further opportunity to plead a claim. On September 27, 2021, the lead plaintiffs filed a second amended complaint, naming the same defendants. The new complaint alleges that the Company made numerous false or misleading statements about the Company’s business and business prospects over an alleged class period running from March 11, 2020, through March 30, 2021, which they say violated Section 10(b) and 20(a) of the Exchange Act. 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. None of these investors (save Mr. Heyward, who is not alleged to have sold his shares) is named as a defendant in the securities action. The lead plaintiffs again seek unspecified damages on behalf of the alleged class—persons who invested in the Company’s common stock during the newly alleged class period. In November 2021, defendants filed a motion to dismiss the second amended complaint, and the motion is fully briefed. Shortly before a scheduled argument on the motion, the court cancelled the hearing and is expected to rule based on the parties’ written submissions. 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, together with Messrs. Heyward and Denton have been named as defendants in several putative 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 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 stockholder 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. The Company is also a nominal defendant in an action filed January 11, 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 again purports to be brought on behalf and for the benefit of the Company, seeks the 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. Plaintiff Augenbaum, who purports to be a Company stockholder, filed his lawsuit after issuing a demand to the Company’s Board of Directors asking that the Company sue the investor defendants. The Company rejected the demand in late December 2021, and Mr. Augenbaum sued a few weeks later, as Section 16(b) permits him to do. No Company officer or director is among the defendants. The defendant investors in the action have requested court permission to file motions to dismiss the action, as that court’s rules contemplate. These requests are currently pending; there is otherwise no current activity in the case. The Company cannot predict the outcome of the requests to file the motions to dismiss, the timing of court action on the requests, or the outcome of the lawsuit more generally, but again notes that plaintiff seeks no relief against the Company. 43 On January 18, 2022, the Company was named as a defendant in a lawsuit filed in the Supreme Court of the State of New York, County of New York styled Harold Chizick and Jennifer Chizick v. Genius Brands International, Inc., ChizComm Ltd., Index No. 650278/2022, alleging: (1) breach of employment agreement, (2) breach of duty of good faith, (3) constructive dismissal, (4) indemnification, (5) violation of the Employment Standards Act 2000 of Ontario, and (6) defamation. On February 25, 2022, the Company filed a Motion to Dismiss on the ground that venue is improper. In response, Plaintiffs’ counsel has advised that they will be amending their complaint to address the arguments in the Company’s venue motion. Plaintiffs filed their Amended Complaint on March 17, 2022, adding a claim for Reformation of the Plaintiffs’ Employment Agreements to address the Company’s lack of venue argument and a claim for Breach of Escrow Agreement regarding alleged release of shares held in escrow pursuant to the parties’ Purchase and Sale Agreement. On April 25,2022, the Company filed a Motion for Partial Dismissal of the Plaintiffs’ Amended Complaint seeking (1) dismissal of Plaintiffs’ claims for Indemnification and Defamation and (2) a stay of Plaintiffs’ claim for Breach of Escrow Agreement pending the required arbitration of this claim. This Motion has not yet been ruled on and the case remains at the pleading stage with no trial date set. 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. 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, 2021.