Item 1. Legal Proceedings
ITEM 1. LEGAL PROCEEDINGS.
As of June 30, 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, 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). 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”). 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 alleged that the Company made numerous
false or misleading statements about the Company’s business and business prospects over an expanded alleged class period, which
they say violated Section 10(b) and 20(a) of the Exchange Act. The lead plaintiffs again sought 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. On July 15, 2022, the Court issued a decision dismissing the second amended complaint
in its 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. The Company cannot predict the outcome of that appeal or the timing of a decision on it.
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 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 securities class action. The Company cannot predict the impact of the securities class action’s dismissal
on the shareholder derivative lawsuits.
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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 requested and received court permission to file motions to dismiss the action, and motions were filed July 25,
2022, and plaintiff has opposed the motions. Briefing is scheduled to close on August 22, 2022. There is otherwise no current activity
in the case. The Company cannot predict the outcome of the motions to dismiss, 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 of the 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 believes the indemnification demands lack merit; however, it is in discussions
with investors who have made demands. The Company cannot predict the outcome of those discussions or the magnitude of any potential indemnification
liability.
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. At
the hearing on this Motion to Dismiss on June 14, 2022, the Company was successful in having (1) the Indemnification claim dismissed with
prejudice and (2) the claim for Breach of Escrow Agreement stayed pending arbitration of this claim before the American Arbitration Association
(“AAA”). The Company’s Answer to the Amended Complaint with these two claims dismissed and stayed respectively is due
on August 11, 2022. No trial date has been set and discovery continues in the case.
On June 3, 2022, Plaintiffs
commenced their AAA arbitration proceeding regarding their claim for Breach of Escrow Agreement by filing their Arbitration Demand. The
parties are presently in the process of selecting an arbitrator in this proceeding.
On June 6, 2022, Plaintiffs
filed a Request for Emergency Relief in the AAA proceeding seeking a mandatory injunction to release the Company shares held in escrow
pending indemnification claims under the terms of the PSA. The Company opposed this Emergency Relief Request on multiple grounds (including,
without limitation, the lack of any irreparable harm, the adequacy of money damages and the Company’s indemnification claim applicable
to the escrowed shares) and the hearing on this Emergency Relief Request occurred at the AAA offices in New York on June 24, 2022. The
parties are still awaiting the ruling from the Emergency Arbitrator regarding this requested relief.
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.
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