Item 1. Legal Proceedings
Item 1. Legal Proceedings
As of June 30, 2026,
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 as described below. Each of the proceedings described below was previously reported in Part I, Item 3 of the Company’s Annual Report
on Form 10-K for the year ended December 31, 2025, filed with the SEC on March 31, 2026 (the “2025 Annual Report”), and in Part
II, Item 1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2026 (the “Q1 2026 Form 10-Q”), which
descriptions are incorporated herein by reference. The following summarizes material developments during the quarter ended June 30,
2026.
Securities Litigation:
As previously reported, the
Company and its Chief Executive Officer Andy Heyward are defendants in a putative securities class action pending in the U.S. District
Court for the Central District of California, styled In re Genius Brands International, Inc. Securities Litigation, Master File No. 2:20-cv-07457
DSF (RAOx). Plaintiffs seek unspecified damages on behalf of a putative class of persons who invested in the Company’s common stock during
the alleged class period. Following the District Court’s February 4, 2025 and August 5, 2025 orders, a single alleged misstatement under
Plaintiffs’ Third Amended Complaint remains at issue in the case. The alleged misstatement appeared in a press release issued March 17,
2020, and was repeated in a shareholder letter issued March 20, 2020. It stated that the Nickelodeon cable platform Nick Jr. had increased
its airing of the Company’s cartoon series Rainbow Rangers to 26 times a week. Plaintiffs claim this statement was false and was issued
with an intent to deceive investors. Defendants have denied and continue to deny any wrongdoing.
As previously reported, the
parties mediated the dispute, together with the shareholder derivative actions referenced below, before Phillips ADR in December 2024.
The case did not settle during the mediation. In light of the District Court’s February 4, 2025 order, the mediator reached out to the
parties to determine whether there is a basis now to resolve the dispute. The mediator has not reported back concerning his discussions
with Plaintiffs’ counsel. The Company cannot predict whether the parties will decide to continue with mediation or, if they do, whether
they will be able to reach a settlement of the case and of the related shareholder derivative litigation on terms acceptable to the parties.
The Company cannot predict the outcome of the securities class action.
At the status conference held
January 12, 2026, the Court referred the case to Magistrate Judge Oliver to resolve questions about the scope of discovery and concerning
proposals by Defendants to streamline the Defendants’ formal Answer to the Third Amended Complaint, in both cases to focus on the small
portion of the Third Amended Complaint remaining. Since that time, the parties have served discovery demands and responses, and Judge
Oliver has resolved a number of discovery disputes in a manner that has limited the scope of discovery being sought by Plaintiffs. Additionally,
Plaintiffs designated a few dozen paragraphs of their Third Amended Complaint that they felt should be formally answered by Defendants,
and Defendants have filed their Answer. Discovery is ongoing, with both parties having substantially completed their document productions.
The Court has not issued a scheduling order.
Shareholder Derivative
Actions:
There have been no material
developments during the quarter in the previously reported shareholder derivative actions, including Cohen v. Heyward, et al., Case No.
A-25-929617-C (District Court of Clark County, Nevada). The Company is named only as a nominal defendant, and the plaintiffs seek no recovery
from the Company. All of the derivative actions remain stayed, or are expected to be stayed, pending the outcome of the securities class
action, whose outcome, and therefore the outcome of the derivative actions, the Company cannot predict.
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Section 16(b) Litigation:
As previously reported, the
Company is a nominal defendant in Todd Augenbaum v. Anson Investments Master Fund LP, et al., Case No. 1:22-cv-00249 AS (S.D.N.Y.), an
action brought under Section 16(b) of the Exchange Act by a stockholder on behalf and for the benefit of the Company. The action seeks
disgorgement of alleged short-swing profits realized by certain investors in the Company’s 2020 private placements. No Company officer
or director is among the defendants. The plaintiff seeks no relief from the Company, and the Company stands to receive any recovery obtained
in the action.
Settlements with six of the
eight defendants. Between May 29, 2026 and June 11, 2026, the Company and plaintiff’s counsel entered into settlement agreements with
six of the eight defendants, resolving the plaintiff’s claims against those defendants subject to the terms and conditions of the settlement
agreements. The settling parties agreed to pay aggregate settlement amounts of approximately $78.5 million (gross of plaintiff’s counsel’s
fees and expenses, which have not yet been awarded), and the parties agreed to mutual releases. The settling defendants also waived any
indemnity claims against the Company relating to the action. Fifty percent of each settlement amount, or $39.2 million in the aggregate,
was paid directly to the Company during June 2026. The remaining fifty percent was deposited into escrow to fund the court-awarded fees
and expenses of plaintiff’s counsel, with any residual balance payable to the Company after the applicable approval orders become final.
Plaintiff’s application for attorneys’ fees and expenses is expected to occur in the coming months. In connection with the settlement
with the Anson Investments Master Fund LP and its affiliates, on June 10, 2026, the Company entered into a standstill and voting agreement
under which the Company agreed to pay the Anson parties $4.0 million. This amount was paid in July 2026. For the accounting treatment
of the settlement receipts, the escrowed balance, and the standstill and voting agreement, see Note 1 and Note 2 to the condensed consolidated
financial statements.
Trial as to the non-settling
defendants. The Court held trial beginning June 8, 2026 and concluding June 18, 2026, after which the jury returned a verdict in favor
of the two non-settling defendants and awarded no damages. Following the verdict, plaintiff’s counsel filed a motion for judgment as a
matter of law and, in the alternative, for a new trial. If the motions are denied, the Company anticipates the plaintiff will appeal to
the United States Court of Appeals for the Second Circuit. Should the Court of Appeals rule in the plaintiff’s favor, the Company may
have an opportunity to recover funds from the non-settling defendants, whether through a judgment as a matter of law or a favorable verdict
in a second trial. If the jury verdict is instead upheld, the case will conclude with no further damages awarded. The Company cannot predict
the outcome of the pending motions, any future appeal, or a potential second trial.
As previously reported in
the Q1 2026 Form 10-Q, one of the non-settling defendants, Empery Asset Management and affiliated entities, filed an action against the
Company styled Empery Asset Master Ltd., et al. v. Kartoon Studios, Inc., Index No. 650906/2026 (Supreme Court of the State of
New York, New York County). The action alleges breach of contract and seeks declaratory relief in connection with the Company’s denial
of their indemnification demands, with damages of approximately $3.5 million plus a declaration that the Company is obliged to advance
their defense expenses on an ongoing basis. During the quarter, following the parties’ stipulation, the federal court entered an order
on May 13, 2026 remanding the action to state court. On June 22, 2026, Empery filed an amended complaint adding the second non-settling
defendant, Brio Capital Master Fund Ltd. and an affiliated entity, as additional plaintiffs and asserting damages of over $10 million.
The Company filed its answer responding to the amended complaint on July 28, 2026. The Company denies all liability.
As previously reported, the
Company’s indemnification matter with its placement agent, Special Equities Group (“SEG”), arising from a non-party subpoena
in the Augenbaum litigation, was resolved by an amicable agreement between the parties. The Company’s agreements with SEG differ in nature
from those at issue in the Empery litigation and have no bearing on the outcome of the claims in that litigation. There were no further
developments during the quarter.
In all of the aforementioned
active proceedings, the Company has denied and continues to deny any allegations of wrongdoing directed against it. The Company intends
to defend the claims asserted against it vigorously. The Company maintains a program of directors’ and officers’ liability
insurance, which, subject to the insurers’ reservations of rights, has to this point offset a substantial portion of the costs incurred
in defending the Securities Litigation and the Shareholder Derivative Actions, as well as the Augenbaum lawsuit.
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