UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
For the transition period from ________ to _________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including
area code:
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| The | ||
| The Capital Market |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 4, 2022, shares of the registrant’s common stock were outstanding.
GROM SOCIAL ENTERPRISES, INC.
Table of Contents
| Part I – FINANCIAL INFORMATION | Page | |
| Item 1. | Financial Statements | 4 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 36 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 45 |
| Item 4. | Controls and Procedures | 45 |
| Part II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 47 |
| Item 1A. | Risk Factors | 47 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 47 |
| Item 3. | Defaults upon Senior Securities | 47 |
| Item 4. | Mine Safety Disclosures | 47 |
| Item 5. | Other Information | 47 |
| Item 6. | Exhibits | 48 |
| 2 |
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current assumptions, expectations, and beliefs concerning future developments and their potential effect on our business. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” or the negative of these terms or other comparable terminology, although the absence of these words does not necessarily mean that a statement is not forward-looking. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements.
Factors that may cause or contribute actual results to differ from these forward-looking statements include, but are not limited to:
| · | adverse economic conditions; |
| · | the Company’s ability to raise capital to fund its operations |
| · | the Company’s ability to monetize its gromsocial.com database of users |
| · | industry competition |
| · | the Company’s ability to integrate its acquisitions |
| · | the Company’s ability to attract and retain qualified senior management and technical personnel; |
| · | the continued effect of the Covid-19 pandemic on the Company’s operations; and |
| · | other risks and uncertainties related to the social media, animation services, nutritional products, and web filtering services marketplace and our business strategy. |
These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties and other factors. Considering these risks, uncertainties, and assumptions, the events described in the forward-looking statements may not occur or may occur to a different extent or at a different time than we have described.
All forward-looking statements speak only as of the date of this Report. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, or other information contained herein, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance.
| 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Operating lease right of use assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Dividend payable | ||||||||
| Advanced payments and deferred revenues | ||||||||
| Convertible notes, net -- current | ||||||||
| Loans payable -- current | ||||||||
| Related party payables | ||||||||
| Derivative liabilities | ||||||||
| Lease liabilities -- current | ||||||||
| Total current liabilities | ||||||||
| Convertible notes, net of loan discounts | ||||||||
| Lease liabilities | ||||||||
| Contingent purchase consideration | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 17) | ||||||||
| Stockholders' Equity: | ||||||||
| Series A preferred stock, $ par value. shares authorized; zero shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Series B preferred stock, $ par value. shares authorized; zero shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Series C preferred stock, $ par value. shares authorized; and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock, $ par value. shares authorized; and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Grom Social Enterprises, Inc. stockholders' equity | ||||||||
| Noncontrolling interests | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 4 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on settlement of debt | ( | ) | ||||||||||||||
| Loss on settlement of derivative transaction | ( | ) | ( | ) | ||||||||||||
| Unrealized gain (loss) on change in fair value of derivative liabilities | ( | ) | ||||||||||||||
| Other gains | ||||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes (benefit) | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Grom Social Enterprises, Inc. stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred stock dividend payable on Series C convertible preferred stock | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to Grom Social Enterprises, Inc. common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted loss per common share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
| Comprehensive loss: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to Grom Social Enterprises, Inc. common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 5 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | |||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | ||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ||||||||||||||||||
| Net loss | – | – | – | ||||||||||||||||||
| Change in foreign currency translation | – | – | – | ||||||||||||||||||
| Exchange of convertible notes and accrued interest for Series C preferred stock | – | – | |||||||||||||||||||
| Issuance of common stock in connection with sales made under public offerings | – | – | – | ||||||||||||||||||
| Issuance of common stock as compensation to employees, officers and/or directors | – | – | – | ||||||||||||||||||
| Issuance of common stock in exchange of consulting, professional and other services | – | – | – | ||||||||||||||||||
| Issuance of common stock in connection with the issuance of convertible notes | – | – | – | ||||||||||||||||||
| Issuance of common stock warrants in connection with the issuance of convertible notes | – | – | – | ||||||||||||||||||
| Issuance of common stock in connection with the acquisition of a business | – | – | – | ||||||||||||||||||
| Conversion of convertible notes and accrued interest into common stock | – | – | – | ||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | ||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | |||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | ||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ||||||||||||||||||
| Net loss | – | – | – | ||||||||||||||||||
| Change in foreign currency translation | – | – | – | ||||||||||||||||||
| Preferred stock dividend payable on Series C preferred stock | – | – | – | ||||||||||||||||||
| Issuance of common stock in connection with Series C preferred stock dividend | – | – | – | ||||||||||||||||||
| Conversion of Series C preferred stock into common stock | – | – | ( | ) | ( | ) | |||||||||||||||
| Issuance of common stock in exchange of consulting, professional and other services | – | – | – | ||||||||||||||||||
| Conversion of convertible notes and accrued interest into common stock | – | – | – | ||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | ||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ||||||||||||||||||
| 6 |
| Additional | Accumulated Other | Total | |||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | ||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Loss | Interest | Equity | |||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net loss | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Change in foreign currency translation | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Exchange of convertible notes and accrued interest for Series C preferred stock | – | ||||||||||||||||||||||||||
| Issuance of common stock in connection with sales made under public offerings | |||||||||||||||||||||||||||
| Issuance of common stock as compensation to employees, officers and/or directors | |||||||||||||||||||||||||||
| Issuance of common stock in exchange of consulting, professional and other services | |||||||||||||||||||||||||||
| Issuance of common stock in connection with the issuance of convertible notes | |||||||||||||||||||||||||||
| Issuance of common stock warrants in connection with the issuance of convertible notes | – | ||||||||||||||||||||||||||
| Issuance of common stock in connection with the acquisition of a business | |||||||||||||||||||||||||||
| Conversion of convertible notes and accrued interest into common stock | |||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | ||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Accumulated | |||||||||||||||||||||||||||
| Additional | Other | Total | |||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | ||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Loss | Interest | Equity | |||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net loss | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Change in foreign currency translation | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Preferred stock dividend payable on Series C preferred stock | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of common stock in connection with Series C preferred stock dividend | |||||||||||||||||||||||||||
| Conversion of Series C preferred stock into common stock | |||||||||||||||||||||||||||
| Issuance of common stock in exchange of consulting, professional and other services | |||||||||||||||||||||||||||
| Conversion of convertible notes and accrued interest into common stock | |||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | ||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 7 |
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | |||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | ||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ||||||||||||||||||
| Net loss | – | – | – | ||||||||||||||||||
| Change in foreign currency translation | – | – | – | ||||||||||||||||||
| Issuance of Series B preferred stock with common stock in connection with sales made under private offerings | – | – | |||||||||||||||||||
| Issuance of Series B preferred stock in exchange for consulting, professional and other services | – | – | |||||||||||||||||||
| Exchange of convertible notes and accrued interest for Series B preferred stock | – | – | |||||||||||||||||||
| Exchange of Series B preferred stock for Series C preferred stock | – | ( | ) | ( | ) | ||||||||||||||||
| Exchange of convertible notes and accrued interest for Series C preferred stock | – | – | |||||||||||||||||||
| Issuance of Series C preferred stock with common stock in connection with sales made under private offerings | – | – | |||||||||||||||||||
| Issuance of common stock in connection with sales made under public offerings | – | – | – | ||||||||||||||||||
| Issuance of common stock in connection with the exercise of common stock purchase warrants | – | – | – | ||||||||||||||||||
| Issuance of common stock as compensation to employees, officers and/or directors | – | – | – | ||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | – | – | – | ||||||||||||||||||
| Issuance of common stock in connection with the issuance of convertible notes | – | – | – | ||||||||||||||||||
| Issuance of common stock warrants in connection with the issuance of convertible notes | – | – | – | ||||||||||||||||||
| Issuance of common stock in connection with the acquisition of a business | – | – | – | ||||||||||||||||||
| Conversion of convertible notes and accrued interest into common stock | – | – | – | ||||||||||||||||||
| Recognition of beneficial conversion features related to convertible notes | – | – | – | ||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | ||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | |||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | ||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ||||||||||||||||||
| Net loss | – | – | – | ||||||||||||||||||
| Change in foreign currency translation | – | – | – | ||||||||||||||||||
| Preferred stock dividend payable on Series C preferred stock | – | – | – | ||||||||||||||||||
| Issuance of common stock in connection with Series C preferred stock dividend | – | – | – | ||||||||||||||||||
| Conversion of Series C preferred stock into common stock | – | – | ( | ) | ( | ) | |||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | – | – | – | ||||||||||||||||||
| Conversion of convertible notes and accrued interest into common stock | – | – | – | ||||||||||||||||||
| Recognition of beneficial conversion features related to convertible notes | – | – | – | ||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | ||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ||||||||||||||||||
| 8 |
| Accumulated | |||||||||||||||||||||||||||
| Additional | Other | Total | |||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | ||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Loss | Interest | Equity | |||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net loss | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Change in foreign currency translation | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of Series B preferred stock with common stock in connection with sales made under private offerings | – | ||||||||||||||||||||||||||
| Issuance of Series B preferred stock in exchange for consulting, professional and other services | – | ||||||||||||||||||||||||||
| Exchange of convertible notes and accrued interest for Series B preferred stock | – | ||||||||||||||||||||||||||
| Exchange of Series B preferred stock for Series C preferred stock | – | ||||||||||||||||||||||||||
Exchange of convertible notes and accrued interest for Series C preferred stock | – | ||||||||||||||||||||||||||
| Issuance of Series C preferred stock with common stock in connection with sales made under private offerings | – | ||||||||||||||||||||||||||
| Issuance of common stock in connection with sales made under public offerings | |||||||||||||||||||||||||||
| Issuance of common stock in connection with the exercise of common stock purchase warrants | ( | ) | |||||||||||||||||||||||||
| Issuance of common stock as compensation to employees, officers and/or directors | |||||||||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | |||||||||||||||||||||||||||
| Issuance of common stock in connection with the issuance of convertible notes | |||||||||||||||||||||||||||
| Issuance of common stock warrants in connection with the issuance of convertible notes | – | ||||||||||||||||||||||||||
| Issuance of common stock in connection with the acquisition of a business | |||||||||||||||||||||||||||
| Conversion of convertible notes and accrued interest into common stock | |||||||||||||||||||||||||||
| Recognition of beneficial conversion features related to convertible notes | – | ||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | ||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Accumulated | |||||||||||||||||||||||||||
| Additional | Other | Total | |||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | ||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Loss | Interest | Equity | |||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net loss | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Change in foreign currency translation | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Preferred stock dividend payable on Series C preferred stock | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of common stock in connection with Series C preferred stock dividend | |||||||||||||||||||||||||||
| Conversion of Series C preferred stock into common stock | |||||||||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | |||||||||||||||||||||||||||
| Conversion of convertible notes and accrued interest into common stock | |||||||||||||||||||||||||||
| Recognition of beneficial conversion features related to convertible notes | – | ||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | ||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| 9 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities of continuing operations: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Common stock issued for financing costs | ||||||||
| Common stock issued in exchange for fees and services | ||||||||
| Convertible notes issued for financing costs | ||||||||
| Deferred taxes | ||||||||
| Derivative expense | ||||||||
| Stock based compensation | ||||||||
| Amortization of rights-of-use assets | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss on settlement of derivative transaction | ||||||||
| Unrealized gain on change in fair value of derivative liabilities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Operating lease right of use assets | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities | ( | ) | ||||||
| Advanced payments and deferred revenues | ( | ) | ||||||
| Income taxes payable and other noncurrent liabilities | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Related party payables | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash consideration for acquisition of business | ( | ) | ||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Proceeds from sale of property and equipment | ||||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of preferred stock, net of issuance costs | ||||||||
| Proceeds from issuance of common stock, net of issuance costs | ||||||||
| Proceeds from issuance of convertible notes | ||||||||
| Repayments of convertible notes | ( | ) | ( | ) | ||||
| Repayments of loans payable | ( | ) | ( | ) | ||||
| Payment for settlement of derivative liability upon note conversion | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| 10 |
| Effect of exchange rates on cash and cash equivalents | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Common stock issued related to acquisition of business | $ | $ | ||||||
| Common stock issued related to Series C preferred stock dividend | $ | $ | ||||||
| Common stock issued for financing costs incurred in connection with convertible and promissory notes | $ | $ | ||||||
| Common stock warrants issued in connection with convertible promissory notes | $ | $ | ||||||
| Conversion of convertible notes and accrued interest into common stock | $ | $ | ||||||
| Conversion of convertible notes and accrued interest into preferred stock | $ | $ | ||||||
| Debt issued related to acquisition of a business | $ | $ | ||||||
| Discount for beneficial conversion features on convertible notes | $ | $ | ||||||
| Operating leases rights-of-use assets obtained in exchange for lease liabilities | $ | $ | ||||||
| Preferred stock dividend payable on convertible preferred stock | $ | $ |
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 11 |
GROM SOCIAL ENTERPRISES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
| 1. | NATURE OF OPERATIONS |
Grom Social Enterprises, Inc. (the “Company”, “Grom” “we”, “us” or “our”), a Florida corporation f/k/a Illumination America, Inc. (“Illumination”), is a media, technology and entertainment company. The Company is focused on (i) delivering content to children under the age of 13 years in a safe secure platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of kids & family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content.
The Company operates its business through the following subsidiaries:
| · | Grom Social, Inc. (“Grom Social”) was incorporated in the State of Florida on March 5, 2012. Grom Social operates the Company’s social media network designed for children under the age of 13 years. |
| · | TD Holdings Limited (“TD Holdings”) was incorporated in Hong Kong on September 15, 2005. TD Holdings operates through its two subsidiary companies: (i) Top Draw Animation Hong Kong Limited (“TDAHK”), a Hong Kong corporation, and (ii) Top Draw Animation, Inc. (“Top Draw” or “TDA”), a Philippines corporation. The group’s principal service-based activities are the production of animated films and televisions series. |
| · | Grom Educational Services, Inc. (“GES”) was incorporated in the State of Florida on January 17, 2017. GES operates the Company’s web filtering services provided to schools and government agencies. |
| · | Grom Nutritional Services, Inc. (“GNS”) was incorporated in the State of Florida on April 19, 2017. GNS intends to market and distribute nutritional supplements to children. GNS has been nonoperational since its inception. |
| · | Curiosity Ink Media, LLC (“Curiosity”) was incorporated in the State of Delaware on January 9, 2017. Curiosity creates, acquires and develops the commercial potential of kids & family entertainment properties and associated business opportunities. |
The Company owns 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity. The Company is headquartered in Boca Raton, Florida with offices in Los Angeles, California; Salt Lake City, Utah; Norcross, Georgia; and Manila, Philippines.
|
2. |
GOING CONCERN |
The condensed consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Based on current operating levels, the Company will need to raise additional funds by selling additional equity or incurring debt. To date, the Company has funded its operations primarily through sales of its common stock in public markets and proceeds from the exercise of warrants to purchase common stock and the sale of convertible notes. Additionally, future capital requirements will depend on many factors, including the rate of revenue growth, the selling price of the Company’s products and services, the expansion of sales and marketing activities, the timing and extent of spending on content development efforts and the continuing market acceptance of the Company’s products and services. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months from the date of this report.
| 12 |
Management of the Company intends to raise additional funds through the issuance of equity securities or debt. It is probable that management will continue to obtain new sources of financing that will enable the Company to meet its obligations for the twelve-month period. There can be no assurance that, in the event the Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. As a result, the substantial doubt about the Company’s ability to continue as a going concern has not been alleviated. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
|
3. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Impact of COVID-19
On January 30, 2020, the World Health Organization announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 has and continues to significantly affect the United States and global economies.
The Company has experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings and travel restrictions, which affect both the Company’s and its service providers. The Company has significant operations in Manila, Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result of the Philippines government’s call to contain COVID-19, the Company’s animation studio, located in Manila, Philippines, which accounts for approximately 88% of the Company’s total revenues on a consolidated basis, was forced to close its offices for significant periods of time from March 2020 through December 2021.
In response to the outbreak and business disruption, the Company has instituted employee safety protocols to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices and production studio. The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, the Company started to recall artist and employees to return to the studio which is currently operating at 50% seat capacity.
While restrictions have eased, the risk continues as new variants are being discovered. The full extent of potential impacts on the Company’s business, financing activities and the global economy will depend on future developments, which cannot be predicted due to the uncertain nature of the continued COVID-19 pandemic, government mandated shut downs, and its adverse effects, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. These effects could have a material adverse impact on the Company’s business, operations, financial condition and results of operations.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conjunction with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted. For the three and nine months ended September 30, 2022, the condensed consolidated financial statements include the accounts of the Company and its operating subsidiaries Grom Social, TD Holdings, GES, GNS, and Curiosity. The Company recognizes noncontrolling interest related to its less-than-wholly-owned subsidiary, Curiosity, as equity in the consolidated financial statements separate from the parent entity’s equity. The net income (loss) attributable to noncontrolling interest is included in net income (loss) in the condensed consolidated statements of operations and comprehensive loss.
| 13 |
These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments, which includes intercompany balances and transactions are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto at December 31, 2021, as presented in the Company’s Annual Report on Form 10-K filed on April 15, 2022 with the SEC.
Certain prior period statement of operations and statement of cash flows captions and balances have been reclassified to conform with the current year presentation, including the allocation of $79,810 and $252,343, respectively from depreciation and amortization and $95,899 and $303,214, respectively in certain fixed overhead costs from selling, general, and administrative expenses previously presented under operating expenses to cost of goods sold during the three and nine months ended September 30, 2021. In the statement of cash flow, the amortization of rights-of-use assets is presented as an adjustment to reconcile net loss to cash used in operating activities and changes to operating lease liabilities are presented as a change in operating assets and liabilities. These two reclassifications were previously presented as a net movement titled operating lease right-of-use assets under changes in operating assets and liabilities. The changes do not have any financial impact on the Company’s reported revenue, reported net loss, or cash flows from operations.
Use of Estimates
The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. The results of operations for the three months and nine months ended September 30, 2022, are not necessarily indicative of the operating results for the full year.
Update to Significant Accounting Policies
The Company has changed its accounting policy related to Publishing Revenue, refer to Revenues – Publishing Revenue note (Note 3) for the new significant accounting policy. This change did not have a significant impact on our operations for the three and nine months ended September 30, 2022 and 2021.
Other than noted above, there have been no other new or material changes to the significant accounting policies discussed in the Company’s audited financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC on April 15, 2022, that are of significance, or potential significance, to the Company.
Recent Accounting Pronouncements – Issued, not yet Adopted
There were no new accounting pronouncements issued in the three and nine months ended September 30, 2022, which could impact the Company.
Recently Issued Accounting Pronouncements Adopted
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. ASU 2021-04 provides guidance on modifications or exchanges of freestanding equity-classified written call options that are not within the scope of another Topic. Entities should treat a modification of the terms or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after modification or exchange, as an exchange of the original instrument for a new instrument. ASU 2021-04 provides further guidance on measuring the effect of such modifications or exchanges, and also provides guidance on the recognition of such modifications or exchanges on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company adopted this ASU on January 1, 2022, which did not result in a material impact to the condensed consolidated financial statements and disclosures.
| 14 |
| 3. | REVENUES |
The Company’s main types of revenue contracts consist of the following categories, which are disaggregated from the condensed consolidated statements of operations.
Animation Revenue
Animation revenue is primarily generated from contracts with customers for preproduction and production services related to the development of animated movies and television series. Preproduction activities include producing storyboards, location design, model and props design, background color and color styling. Production focuses on library creation, digital asset management, background layout scene assembly, posing, animation and after effects. The Company provides services under fixed-price contracts. Under these fixed-price contracts, the Company agrees to perform a specified scope of work for a pre-determined price. To the extent actual costs vary from estimated costs, the Company’s profit may increase, decrease, or result in a loss.
Web Filtering Revenue
Web filtering revenue is subscription based and recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases computer hardware and a software and support service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale. The Company immediately recognizes revenue attributable to the computer hardware as it is non-refundable and control passes to the customer. The advanced billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue on a straight-line basis over the subscription period.
Produced and Licensed Content Revenue
Produced and licensed content revenue is generated from the licensing of internally-produced films and episodic television programs.
Each individual film or television series episode delivered represents a separate performance obligation, and revenues are recognized when the film or episode is made available to the licensee for exhibition. For license agreements containing multiple deliverables, revenues are allocated based on the relative standalone selling price of each film or episode of a television series, which is based on licenses for comparable films or series within the marketplace. Agreements to license programming are often long term, with collection terms ranging from one to five years.
The advanced billing component for licensed content is initially recorded as deferred revenue and subsequently recognized as revenue upon completion of the performance obligation in accordance with the terms of licensing agreement.
Publishing Revenue
The Company has engaged the services of a third-party entity to manage the printing, publishing and distribution of the Company’s publishing content. In accordance with the terms agreed with the third party, the Company’s revenue is recognized as 50% of revenue from sales per title after the third-party vendor earns back the costs to develop, author, publish, market, promote and distribute each title, inclusive of any royalties owed to rights holders, following a six months period in market to allow for returns.
Publishing revenues are eligible for recognition upon the completion of a six-month sales period to provide for any potential returns and notification from the third-party entity that it has earned back all of its related publishing costs.
| 15 |
Other Revenue
Other revenue corresponds to subscription and advertising revenue from the Grom Social mobile application.
All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregated revenue listed above within the Sales caption in the condensed consolidated statements of operations:
Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | |||||||||||||
| Animation | $ | $ | $ | $ | ||||||||||||
| Web Filtering | ||||||||||||||||
| Produced and Licensed Content | ||||||||||||||||
| Publishing | ||||||||||||||||
| Other | ||||||||||||||||
| Total Sales | $ | $ | $ | $ | ||||||||||||
The following table sets forth the components of the Company’s accounts receivable and advanced payments and deferred revenues at September 30, 2022, and December 31, 2021:
September 30, 2022 | December 31, 2021 | |||||||
| Billed accounts receivable | $ | $ | ||||||
| Unbilled accounts receivable | ||||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total accounts receivable, net | $ | $ | ||||||
| Total advanced payments and deferred revenues | $ | $ | ||||||
During the three and nine months ended September
30, 2022, the Company had four customers that accounted for
As of September 30, 2022 and December 31,
2021, the Company had one and two customers, respectively that accounted for
Animation revenue contracts vary with movie contracts typically allowing for progress billings over the contract term while other episodic development activities are typically billable upon delivery of the performance obligation for an episode. These episodic activities typically create unbilled contract assets between episode delivery dates while movies can create contract assets or liabilities based on the progress of activities versus the arranged billing schedule. Revenues from web filtering contracts are all billed in advance and therefore represent contract liabilities until fully recognized on a ratable basis over the contract life.
| 16 |
| 4. | INVENTORY |
Inventory consists of costs incurred to produce animated content for third party customers. Costs incurred to produce the animated content to customers, which include direct production costs, production overhead and supplies are recognized as work-in-progress inventory. As animated content is completed in accordance with the terms stated by the customer, inventory is classified as finished products and subsequently recognized as cost of services as animated content is accepted by and available to the customer. Carrying amounts of animated content are recorded at the lower of cost or net realizable value. Cost is determined using a weighted average cost method for direct production costs, productions overhead and supplies used for completing animation projects.
As of September 30, 2022 and December 31, 2021,
the Company’s inventory totaled $
| 5. | PROPERTY AND EQUIPMENT |
The following table sets forth the components of the Company’s property and equipment at September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Cost | Accumulated Depreciation | Net Book Value | Cost | Accumulated Depreciation | Net Book Value | |||||||||||||||||||
| Capital assets subject to depreciation: | ||||||||||||||||||||||||
| Computers, software and office equipment | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Machinery and equipment | ( |
) | ( |
) | ||||||||||||||||||||
| Vehicles | ( |
) | ( |
) | ||||||||||||||||||||
| Furniture and fixtures | ( |
) | ( |
) | ||||||||||||||||||||
| Leasehold improvements | ( |
) | ( |
) | ||||||||||||||||||||
| Total fixed assets | 3,929,386 | (3,638,728 | ) | 290,658 | 4,471,844 | (3,959,744 | ) | 512,100 | ||||||||||||||||
| Capital assets not subject to depreciation: | ||||||||||||||||||||||||
| Construction in progress | ||||||||||||||||||||||||
| Total fixed assets | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
For the three months ended September 30, 2022
and 2021, the Company recorded depreciation expense of $
| 17 |
| 6. | OTHER ASSETS |
The following table sets forth the components of the Company’s other assets at September 30, 2022 and December 31, 2021:
September 30, 2022 |
December 31, 2021 |
|||||||
| Capitalized website development costs | ||||||||
| Prepublication costs | ||||||||
| Produced and licensed content costs | ||||||||
| Deposits | ||||||||
| Other noncurrent assets | ||||||||
| Total other assets | ||||||||
For the three and nine months ended September
30, 2022, the Company recorded amortization expense of $
| 7. | LEASES |
The Company has entered into operating leases primarily for office space. These leases have terms which range from two years to six years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment.
In January 2022, the Company signed a new lease
agreement to extend the term until March 2024 of the Company’s office space in Boca Raton, Florida. The total legally binding minimum
lease payments for this agreement is approximately $
Based on the present value of the lease payments
for the remaining lease term of the Company's existing leases, the Company recognized $
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating ROU assets and related lease liabilities are as follows:
| Nine Months Ended September 30, 2022 |
||||
| Cash paid for operating lease liabilities | $ | |||
| Weighted-average remaining lease term | ||||
| Weighted-average discount rate | ||||
| 18 |
For the three months ended September 30, 2022
and 2021, the Company recorded rent expenses related to lease obligations of $
The following table presents the future minimum payment obligations and aggregate present value of lease liabilities for operating leases as of September 30, 2022:
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total future lease payments | ||||
| Less: Imputed interest | ( |
) | ||
| Present value of lease liabilities | $ | |||
| 8. | BUSINESS COMBINATIONS |
Acquisition of Curiosity Ink Media, LLC
On July 29, 2021, the Company entered into a
membership interest purchase agreement (the “Purchase Agreement”) with Curiosity Ink Media LLC, a Delaware limited
liability company (“Curiosity”) and the holders of all of Curiosity’s outstanding membership interests (the
“Sellers”), for the purchase of
On August 19, 2021, pursuant to the terms of the Purchase Agreement, the Company consummated the Acquisition and acquired the Purchased Interests in consideration for the issuance to the Sellers of an aggregate of shares of the Company’s common stock to the Sellers, pro rata to their membership interests immediately prior to the closing of the Acquisition. The shares were valued at $ per share which represents to the 20-day volume-weighted average price of the Company’s common stock on August 19, 2021.
Pursuant to the Purchase Agreement, the Company
also paid $
The Note is convertible into shares of common stock of the Company at a conversion price of $3.28 per share but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The Note may be prepaid at any time, in whole or in part. The Note is subordinate to the Company’s senior indebtedness.
The Sellers also have the ability to earn up to $17,500,000 (payable 50% in cash and 50% in stock) upon the achievement of certain performance milestones as of December 31, 2025.
In addition to the tangible assets, goodwill
totaling $
| 19 |
| Consideration Paid: | ||||
| Cash consideration | $ | |||
| Common stock issued | ||||
| Convertible notes | ||||
| Contingent purchase consideration | ||||
| Total consideration | $ | |||
The amounts in the table below represent the allocation of the purchase price. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
| Cash and cash equivalents | $ | |||
| Inventory | ||||
| Produced and licensed content cost | ||||
| Goodwill and intangible assets | ||||
| Accounts payable | ( |
) | ||
| Noncontrolling interest | ( |
) | ||
| Total identifiable assets acquired, and liabilities assumed | $ | |||
During the quarter ended June 30, 2022, the Company
finalized the purchase price allocation, during the permissible measurement period, and obtained new fair value information for certain
identifiable intangible assets related to its acquisition of Curiosity. The revised purchase price allocation decreased goodwill by $
| Licensing agreements | $ | |||
| Books and stories content | ||||
| Total identifiable intangible assets | $ | |||
The Company’s results of operations include results of operations for Curiosity for the three and nine months ended September 30, 2022. No pro forma information is presented for the Company’s results of operations as if the acquisition of Curiosity had occurred on January 1, 2021 as results of its operations are not considered material to the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021.
| 20 |
| 9. | GOODWILL AND INTANGIBLE ASSETS |
Goodwill represents the future economic benefit
arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the
Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers. At September
30, 2022 and December 31, 2021, the carrying amount of the Company’s goodwill was $
The following table sets forth the components of the Company’s intangible assets at September 30, 2022 and December 31, 2021:
| Current Year Period | Prior Year End | |||||||||||||||||||||||||||||||
| Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Accumulated Impairment | Net Book Value | |||||||||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| Mobile software applications | ( | ) | ||||||||||||||||||||||||||||||
| NetSpective web-filtering software | ( | ) | ||||||||||||||||||||||||||||||
| Noncompete agreements | ( | ) | ||||||||||||||||||||||||||||||
| Licensing agreement | ( | ) | ||||||||||||||||||||||||||||||
| Subtotal | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||||||||||||||||||
| Trade names | – | – | – | ( | ) | |||||||||||||||||||||||||||
| Books and stories content | – | 126,698 | – | 126,698 | – | – | – | – | ||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
For the three months ended September 30, 2022
and 2021, the Company recorded amortization expense of $
The following table provides information regarding estimated remaining amortization expense for intangible assets subject to amortization for the remainder of 2022 and each of the following years ending December 31:
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total remaining intangible assets subject to amortization | $ | |||
| 21 |
| 10. | ACCRUED LIABILITIES |
The following table sets forth the components of the Company’s accrued liabilities at September 30, 2022 and December 31, 2021:
September 30, 2022 | December 31, 2021 | |||||||
| Executive and employee compensation | $ | $ | ||||||
| Interest on convertible notes and promissory notes | ||||||||
| Other accrued expenses and liabilities | ||||||||
| Total accrued liabilities | $ | $ | ||||||
| 11. | RELATED PARTY TRANSACTIONS AND PAYABLES |
Darren Marks’s Family
The Company has engaged the family of Darren Marks, its Chief Executive Officer, to assist in the development of the Grom Social mobile application. These individuals create and produce original short form content focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special events. Sarah Marks, the wife of Mr. Marks, and Zach Marks, Luke Marks, Jack Marks, Dawson Marks, Caroline Marks and Victoria Marks, each Mr. Marks’s children, are, or have been, employed by or independently contracted with the Company.
For the three months ended September 30, 2022
and 2021, the Marks family was paid a total of $
Effective January 1, 2021, the Company entered
into a marketing agreement with Caroline Marks, daughter of Mr. Marks, for a period of 60 months in exchange for 52,084 shares of the
Company’s common stock. On March 2, 2022, the Board of Directors of the Company approved the issuance the shares of common stock
at a fair market value of $
Compensation for services provided by the Marks family is expected to continue for the foreseeable future.
Liabilities Due to Executive Officers and Directors
On July 11, 2018, our director Dr. Thomas Rutherford
loaned the Company $
As of September 30, 2022 and December 31, 2021,
the aggregate related party payables balance was $
| 22 |
| 12. | CONVERTIBLE NOTES |
The following tables set forth the components of the Company’s convertible notes as of September 30, 2022 and December 31, 2021:
September 30, 2022 | December 31, 2021 | |||||||
| 8% Unsecured Convertible Note (Curiosity) | $ | $ | ||||||
| 10% Senior Secured Convertible Note with Original Issuance Discount (L1 Capital Global Master Fund or “L1”) | ||||||||
| 10% Senior Secured Convertible Note with Original Issuance Discount (L1 – Second Tranche) | ||||||||
| 12% Senior Convertible Notes with Original Issuance Discounts (OID Notes) | ||||||||
| 12% Senior Secured Convertible Notes (TDH Secured Notes) | ||||||||
| 12% Senior Secured Convertible Notes (Additional Secured Notes) | ||||||||
| Loan discounts | ( | ) | ( | ) | ||||
| Total convertible notes, net | ||||||||
| Less: current portion of convertible notes, net | ( | ) | ( | ) | ||||
| Convertible notes, net | $ | $ | ||||||
8% Unsecured Convertible Notes – Curiosity
On July 29, 2021, the Company entered into a membership
interest purchase agreement with Curiosity and the holders of all of Curiosity’s outstanding membership interests, for the purchase
of 80% of Curiosity’s outstanding membership interests from the sellers. Pursuant to the purchase agreement, the Company issued
8% eighteen-month convertible promissory notes in the aggregate principal amount $
As of September 30, 2022, the principal balance
of the Curiosity note was $
10% Senior Secured Convertible Note with Original Issuance Discount (L1)
On September 14, 2021, the Company entered into
a securities purchase agreement (the “Purchase Agreement”) with L1 Capital Global Master Fund (“L1”) pursuant
to which it issued (i) a 10% original issue discount senior secured convertible note in the principal amount of $
The L1 Note is convertible by L1 into common stock
of the Company at a price of $ per share, or approximately 1,047,619 shares. It is repayable in equal monthly installments of
$
| 23 |
The Company estimated the fair value of the warrant
at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $,
(ii) the contractual term of the warrant of
On October 20, 2021, the Company and L1 entered
into an amended and restated purchase agreement which increased the amount of the Second Tranche Financing from $
In the event the principal amount of the L1 Note issued in the First Tranche Financing, when aggregated with the L1 Note to be issued in the Second Tranche Financing, exceeds 25% of the market capitalization of the Company’s common stock as reported by Bloomberg L.P, then the principal amount to be issued in the Second Tranche Financing will be limited to 25%, in the aggregate of both L1 Notes, unless waived in the sole discretion of the Purchaser.
During the three months ended March 31, 2022,
the Company issued an aggregate shares of common stock to L1 upon the conversion of $
10% Senior Secured Convertible Note with Original Issuance Discount (L1– Second Tranche)
On January 20, 2022 (the “Second Tranche
Closing”), the Company and L1 Capital closed on the Second Tranche of the offering, resulting in the issuance of (i) a $
In connection with the Second Tranche Closing,
the Company paid to EF Hutton a fee of $
The Second Tranche Note is convertible into common stock of the Company at a rate of $4.20 per share (the “Conversion Price”) into 416,667 shares of common stock (the “Second Tranche Conversion Shares”) and, is repayable in equal monthly installments of $111,563 commencing on the date that the SEC declares a registration statement with respect to the resale of such shares effective, with all remaining amounts due on July 20, 2023. The Second Tranche Note is repayable by payment of cash, or, at the discretion of the Company and if the below listed “Equity Conditions” are met, by issuance of shares of the common stock at a price of 95% of the lowest daily VWAP during the ten-trading day period prior to the respective monthly redemption dates (with a floor of $1.92) multiplied by 102% of the amount due on such date. In the event that the ten-trading day VWAP drops below $1.92 the Company will have the right to pay in stock at such ten-trading day VWAP with any shortfall paid in cash. The Conversion Price may be adjusted in the event of dilutive issuances but in no event to less than $0.54 (the “Monthly Conversion Price”).
The Company’s right to make monthly payments
in stock in lieu of cash for the Second Tranche Note is conditioned on certain conditions (the “Equity Conditions”). The Equity
Conditions required to be met each month in order to redeem the Second Tranche Note with stock in lieu of a monthly cash payment, among
other conditions set forth therein, include without limitation, that a registration statement be in effect with respect to the resale
of the shares issuable upon conversion or redemption of the Second Tranche Note (or, that an exemption under Rule 144 is available), that
no default be in effect, that the average daily trading volume of the Company’s common stock would have to be at least $
Other provisions of the Second Tranche Note, which
is similar in terms to the First Tranche Note, include that the Second Tranche Note Conversion Price is subject to full anti-dilution
price protections in the event of financings that are below the Conversion Price with a floor of $
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In the event of an Event of Default as defined in the notes, if the stock price is below the Conversion Price at the time of default and only for so long as a default is continuing, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the default is cured the default conversion rate elevates back to the normal Conversion Price
As part of the Second Tranche Closing, the Company
issued Second Tranche Warrants exercisable for five years from the date of issuance, at $
The Second Tranche Note continues to be subject to (i) the repayment and performance guarantees by the subsidiaries of the Company pursuant to a subsidiary guaranty and, (ii) the Security Agreement pursuant to which the L1 Capital was granted a security interest in all of the assets of the Company and certain of its subsidiaries, each as entered into in connection with the First Tranche closing on September 14, 2021.
During the nine months ended September 30, 2022, the Company issued an aggregate 3,055,556 shares of common stock and repaid $1,074,069 in cash to L1 upon the conversion of $1,650,000 of outstanding principal. As of September 30, 2022, the principal balance of these notes was $100,000 and remaining balance on the associated loan discounts was $7,685.
10% Secured Convertible Notes with Original Issuance Discounts (“OID Notes”)
On August 6, 2020, the Company entered into debt
exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of shares of the Company’s
Series B preferred stock (“Series B Stock”) were issued to noteholders for an aggregate of $
On November 30, 2020, the Company entered into
a debt exchange agreement with the remaining holder of these 10% convertible notes pursuant to which an aggregate of shares of
Series B Stock were issued to the noteholder for an aggregate of $
On July 19, 2021, the Company repaid $
As of September 30, 2022, the principal balance
of these notes was $
12% Senior Secured Convertible Notes (“TDH Secured Notes”)
On March 16, 2020, the Company sold (the “TDH
Secured Notes Offering”) an aggregate $
The TDH Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $3.20 per share.
The Company’s obligations under the TDH Secured Notes, are secured by Grom Holdings’ shares of stock of TDH, and of its wholly owned subsidiary, TDAHK. The TDH Secured Notes rank equally and ratably on a pari passu basis with (i) the other TDH Secured Notes and (ii) the Original TDH Notes issued by the Company pursuant to TDH Share Sale Agreement.
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If the Company sells the animation studio located in Manila, Philippines, which is currently owned by TDH through TDAHK (the “Animation Studio”), for more than $12,000,000, and so long as any amount of principal is outstanding under the TDH Secured Notes, the Company will pay the TDH Secured Notes holders from the proceeds of the sale (i) all amounts of principal outstanding under the TDH Secured Notes, (ii) such amount of interest which would be due and payable assuming the TDH Secured Notes were held to maturity (minus any amounts of interest previously paid hereunder), and (iii) an additional 10% of the amount of principal outstanding under the TDH Secured Notes within five days of the closing of such sale.
In connection with the issuance of the TDH Secured
Notes, the Company issued to each TDH Secured Note holder shares of common stock equal to 20% of the principal amount of such holder’s
TDH Secured Note, divided by $3.20. Accordingly, an aggregate of shares of common stock were issued to the TDH Secured Note holders
on March 16, 2020. These shares were valued at $
On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $1,101,000 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $598,042 as a result of the exchange.
On November 30, 2020, the Company entered into a debt exchange agreement with another holder of these 12% TDH Secured Notes pursuant to which an aggregate of 158,000 shares of Series B Stock were issued to the noteholder for an aggregate of $99,633 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $58,367 as a result of the exchange.
On February 17, 2021, the Company entered into
debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of shares of the
Company’s Series B Stock were issued to noteholders for an aggregate of $
As of September 30, 2022, the principal balance
of these notes was $
12% Senior Secured Convertible Notes (Additional Secured Notes)
On March 16, 2020, the Company issued to seven
accredited investors (the “Additional Secured Note Lenders”) an aggregate of $
Interest on the Additional Secured Notes accrues
on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the Additional Secured Notes are payable monthly,
on an amortized basis over 48 months, with the last payment due on
The Additional Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $3.20 per share.
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In connection with the issuance of the Additional
Secured Notes, the Company issued to each Additional Secured Note Lender shares of common stock equal to 20% of the principal amount of
such holder’s Additional Secured Note, divided by $3.20. Accordingly, an aggregate of shares of common stock were issued.
These shares were valued at $
On August 6, 2020, the Company entered into debt
exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of shares of the
Company’s Series B Stock were issued to noteholders for an aggregate of $
On February 17, 2021, the Company entered into
debt exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of shares of
the Company’s Series B Stock were issued to noteholders for an aggregate of $
As of September 30, 2022, the principal balance
of these notes was $
Future Minimum Principal Payments
The remaining future principal repayments based upon the maturity dates of the Company’s borrowings for each of the next five years are as follows:
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 and thereafter | ||||
| Total | $ | |||
| 13. | DERIVATIVE LIABILITY |
On January 20, 2022, the Company closed a Second Tranche transaction with L1 Capital, as described within Note 12 (“Convertible Notes”). The terms of the transaction included a provision that in the event the stock price is below $0.54 (the “Conversion Price”) at the time for so long as stock price continues below the Conversion Price, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the stock prices elevate back to the normal Conversion Price. On May 9, 2022, stock price fell below $0.54 and the default provision was triggered.
As a result of the May 9, 2022 triggering event,
the Company recorded a derivative liability for $
On June 28, 2022, L1 Capital converted $
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On July 11, 2022, L1 Capital converted $
On July 25, 2022, L1 Capital converted $
On August 11, 2022, L1 Capital converted $
At September 30, 2022, the fair value of the derivative
was remeasured using the remaining maximum shares to be delivered resulting in an unrealized gain on change of derivative transaction
of $
The fair value of derivative liability as of May 9, 2022 and September 30, 2022 was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:
May 9, 2022 | September 30, 2022 | |||||||
| Stock price | $ | $ | ||||||
| Strike price | ||||||||
| Risk-free rate | ||||||||
| Annualized volatility | ||||||||
| Forecast horizon in years | ||||||||
| Alternative Conversion Discount | ||||||||
| Maximum Shares to be Delivered | ||||||||
Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood or in the volatility assumptions would result in a higher (lower) fair value measurement.
| 14. | FAIR VALUE MEASUREMENTS |
Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, non on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, include the Company’s own credit risk.
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The Company applied FASB Accounting Standards Codification (“ASC”) 820 – Fair Value Measurement, which provides guidance for using fair value to measure assets and liabilities by defining fair value and establishing the framework for measuring fair value. ASC 820 applies to financial and nonfinancial instruments that are measured and reported on a fair value basis. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair value hierarchy requires the use of observable market data when available and consists of the following levels:
| · | Level 1 – Unadjusted inputs based on quoted markets for identical assets or liabilities. |
| · | Level 2 – Observable inputs, either direct or indirect, not including Level 1 measurements, corroborated by market data or based upon quoted prices in non-active markets |
| · | Level 3 – Unobservable inputs that reflect management’s best assumptions of what market participants would use in valuing the asset or liability. |
Contingent Consideration
The fair value of the Company’s contingent consideration payable was based on the Company’s evaluation as to the probability and amount of any earn-out that could have ultimately been payable. The Company utilizes a third-party valuation firm to assist in the calculation of the contingent consideration at the acquisition date. The Company evaluates the forecast of the acquired entity and the probability of earn-out provisions being achieved when it evaluates the contingent consideration recorded at initial acquisition date and at each subsequent reporting period. The fair value of contingent consideration is measured at each reporting period and adjusted as necessary. The Company evaluates the terms in contingent consideration arrangements provided to former owners of acquired companies who become employees of the Company to determine if such amounts are part of the purchase price of the acquired entity or compensation. Because the fair value measurements relating to the contingent consideration liabilities are subject to management judgment, measurement uncertainty is inherent in the valuation of the contingent consideration liabilities as of the reporting date.
Derivative Liability
The fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer to Note 13 (“Derivative Liability”), for a further discussion of the measurement of fair value of the derivatives and their underlying assumptions.
The fair value of the Company’s financial instruments carried at fair value at September 30, 2022 and December 31, 2021 are as follows:
| September 30, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative Liabilities | $ | $ | $ | $ | ||||||||||||
| Contingent Purchase Consideration | ||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||||
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| December 31, 2021 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative Liabilities | $ | $ | $ | $ | ||||||||||||
| Contingent Purchase Consideration | ||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||||
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities during the three and nine months ended September 30, 2022:
| Level 3 Financial Liabilities for the Three Months Ended September 30, 2022 | ||||||||||||||||||||||||
| Balance as of June 30, 2022 | Realized (Gains) Losses | Additions | Settlements | Unrealized (Gains) Losses | Balance as of September 30, 2022 | |||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| Derivative Liabilities | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Contingent Purchase Consideration | ||||||||||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Level 3 Financial Liabilities for the Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||
| Balance as of December 31, 2021 | Realized (Gains) Losses | Additions | Settlements | Unrealized (Gains) Losses | Balance as of September 30, 2022 | |||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| Derivative Liabilities | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Contingent Purchase Consideration | ||||||||||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| 15. | INCOME TAXES |
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon currently known facts and circumstances and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
The Company’s interim effective tax rate,
inclusive of discrete items, for the three and nine months ended September 30, 2022 and 2021 was
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| 16. | STOCKHOLDERS’ EQUITY |
Preferred Stock
The Company is authorized to issue shares of preferred stock, par value of $ per share.
Series A Preferred Stock
As of September 30, 2022 and December 31, 2021, the Company had shares of Series A Stock issued and outstanding.
Series B Preferred Stock
On February 17, 2021, the Company entered into
debt exchange agreements with holders of three of the Company’s convertible promissory notes in the aggregate amount of $
On February 17, 2021, the Company entered into
subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of shares
of Series B Stock for aggregate gross proceeds of $
On March 31, 2021, the Company entered into subscription
agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of shares of Series B
Stock for aggregate gross proceeds of $
On May 20, 2021, the Company entered into exchange agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed to exchange all of the issued and outstanding shares of Series B Stock for shares of the Company’s newly designated Series C Stock, on a one for one basis. As a result of the exchange, all issued and outstanding shares of Series B Stock was exchanged for shares of Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
As of September 30, 2022 and December 31, 2021, the Company had shares of Series B Stock issued and outstanding, respectively.
Series C Preferred Stock
On May 20, 2021, the Company filed with the Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series C Stock designating 10,000,000 shares as Series C Preferred Stock (the “Series C Stock”). The Series C Stock ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.
The holder may, at any time after the 6-month anniversary of the issuance of the shares of Series C Preferred Stock, convert such shares into common stock at a conversion rate of $1.92 per share. In addition, the Company may, at any time after the issuance of the shares, convert any or all of the outstanding shares of Series C Preferred Stock at a conversion rate of $1.92 per share.
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Each share of Series C Stock entitles the holder to 1.5625 votes for each share of Series C Stock. The consent of the holders of at least two-thirds of the shares of Series C Stock is required for the amendment to any of the terms of the Series C Stock, to create any additional class of stock unless the stock ranks junior to the Series C Stock, to make any distribution or dividend on any securities ranking junior to the Series C Stock, to merge or sell all or substantially all of the assets of the Company or acquire another business or effectuate any liquidation of the Company.
Cumulative dividends accrue on each share of Series C Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in arrears quarterly commencing 90 days from issuance. The dividend shall be payable in shares of common stock (a “PIK Dividend”) and are be due and payable on the date on which such PIK Dividend was declared.
Upon a liquidation, dissolution or winding up of the Company, the holders of the Series C Stock are entitled to $1.00 per share plus all accrued and unpaid dividends. No distribution may be made to holders of shares of capital stock ranking junior to the Series C Stock upon a liquidation until Series C stockholders receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series C Stock, may elect to deem a merger, reorganization or consolidation of the Company into or with another corporation, not affiliated with said majority, or other similar transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of in exchange for property, rights or securities distributed to holders thereof by the acquiring person, firm or other entity, or the sale of all or substantially all of the assets of the Company.
On May 20, 2021, the Company entered into exchange agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed to exchange all of the issued and outstanding shares of Series B Stock for shares of Series C Stock, on a one for one basis. As a result of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059 shares of the Company’s Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
On June 11, 2021, the Company entered into subscription
agreements with an accredited investor, pursuant to which the Company sold the investor an aggregate of shares of Series C Stock
for aggregate gross proceeds of $
On September 10, 2021, the Company entered into
a debt exchange agreement with a holder of a 10% convertible note pursuant to which shares of the Company’s Series C Stock
was issued for $
On January 24, 2022, the Company issued shares of common stock to a stockholder upon the conversion of shares of Series C preferred stock.
On July 29, 2022, the Company issued shares of common stock to a stockholder upon the conversion of shares of Series C preferred stock.
As of September 30, 2022 and December 31, 2021, the Company had and shares of Series C Stock issued and outstanding, respectively.
For the three months and nine ended September
30, 2022, the Company declared cumulative dividends totaling $
Common Stock
The Company is authorized to issue shares of common stock, par value of $ per share and had and shares of common stock issued and outstanding as of September 30, 2022 and December 31, 2021, respectively.
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Reverse Stock Split
On April 7, 2021, the board of directors of the
Company approved, and on April 8, 2021, the Company’s shareholders approved, an increase to the range of the ratio for a reverse
stock split to a ratio of no less than 1-for-2 and no more than 1-for-50. On May 6, 2021, the board fixed the ratio for a reverse stock
split at
Registered Offering
On June 21, 2021, the Company sold an aggregate of 2,409.639 units (“Units”), at a price to the public of $4.15 per Unit (the “Offering”), each Unit consisting of one share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price of $4.565 per share (the “Warrants”), pursuant to an underwriting agreement, dated as of June 16, 2021 (the “Underwriting Agreement”), between the Company and EF Hutton, division of Benchmark Investments, LLC, as representative (“EF Hutton”) of the several underwriters named in the Underwriting Agreement. In addition, pursuant to the Underwriting Agreement, the Company granted EF Hutton a 45-day option (the “Over-Allotment Option”) to purchase up to 361,445 additional Units, to cover over-allotments in connection with the Offering, which EF Hutton exercised with respect to Warrants exercisable for up to an additional 361,445 shares of common stock. The Company received gross proceeds of approximately $10,000,000 in the Offering, before deducting underwriting discounts and commissions and other offering expenses.
On July 15, 2021, EF Hutton exercised in full
the Over-Allotment Option with respect to all additional shares of the Company’s common stock for total gross proceeds to
the Company of approximately $
Common Stock Issued as Compensation Employees, Officers and/or Directors
During the three and nine months ended September 30, 2021, the Company issued shares of common stock with a fair market value of $ to an officer as compensation.
Common Stock Issued in Exchange for Consulting, Professional and Other Services
During the three and nine months ended September
30, 2022, the Company issued and shares of common stock, respectively, with a fair market value of $
During the three and nine months ended September
30, 2021, the Company issued and shares of common stock, respectively, with a fair market value of $
Common Stock Issued in Connection with the Conversion of Convertible Note Principal and Accrued Interest
During the three and nine months ended September
30, 2022, the Company issued and shares of common stock, respectively, upon the conversion of $
During the three and nine months ended September
30, 2021, the Company issued shares of common stock, upon the conversion of $
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Common Stock Issued in Connection with Series C Stock Dividends
During the three and nine months ended September
30, 2022, the Company issued and shares of common stock, respectively, valued at $
Common Stock Issued in Connection with the Issuance of Convertible Promissory Notes
During the three and nine months ended September
30, 2021, the Company issued and shares of common stock, respectively, valued at $
Common Stock Issued in the Acquisition of a Business
During the three and nine months ended September
30, 2021, the Company issued shares of common stock valued at $
Stock Purchase Warrants
Stock purchase warrants are accounted for as equity in accordance with ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
The following table reflects all outstanding and exercisable warrants at September 30, 2022 and December 31, 2021. All warrants are exercisable for a period of three to five years from the date of issuance:
| Number of Warrants Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Yrs.) | ||||||||||
| Balance January 1, 2021 | $ | |||||||||||
| Warrants issued | ||||||||||||
| Warrants exercised | ( | ) | ||||||||||
| Warrants forfeited | ( | ) | ||||||||||
| December 31, 2021 | $ | |||||||||||
| Warrants issued | $ | |||||||||||
| Warrants exercised | ||||||||||||
| Warrants forfeited | ( | ) | ||||||||||
| Balance September 30, 2022 | $ | |||||||||||
As of September 30, 2022, the outstanding stock purchase warrants had an aggregate intrinsic value of $.
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Stock Options
The following table represents all outstanding and exercisable stock options as of September 30, 2022.
| Year Issued | Options Issued |
Options Forfeited |
Options Outstanding |
Vested Options |
Weighted Average Exercise Price | Weighted Average Remaining Life (Yrs.) | ||||||||||||||||||
| 2013 | ( |
) | $ | |||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||
| Total | ( |
) | $ | |||||||||||||||||||||
During the three and nine months ended September 30, 2022, the Company recorded $ and $, respectively, in stock-based compensation costs related to stock options.
During the three and nine months ended September 30, 2021, the Company recorded $ in stock-based compensation costs related to stock options.
Stock-based compensation expense is reported in selling, general and administrative on the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss. As of September 30, 2022, there were $ in total unrecognized stock-based compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of years.
As of September 30, 2022, the outstanding stock options had an aggregate intrinsic value of $.
| 17. | COMMITMENTS AND CONTINGENCIES |
In the ordinary course of business, the Company and its subsidiaries are subject to various pending and potential legal actions, arbitration proceedings, claims, investigations, examinations, regulatory proceedings, information gathering requests, subpoenas, inquiries and matters relating to compliance with laws and regulations (collectively, legal proceedings).
Based on the Company’s current knowledge, and taking into consideration its legal expenses, the Company does not believe it is a party to, nor are any of its subsidiaries the subject of, any legal proceeding that would have a material adverse effect on the Company’s consolidated financial condition or liquidity.
See also Note 7 (“Leases”).
See also Note 8 (“Business Combination”)
See also Note 15 (“Income Taxes”).
| 18. | SUBSEQUENT EVENTS |
In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to September 30, 2022 to the date these condensed consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these condensed consolidated financial statements, except as follows:
On October 6, 2022, L1 Capital converted $100,000 from its Second Tranche convertible notes for 185,186 shares and a cash settlement of $72,832.
| 35 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto. The management's discussion and analysis contain forward-looking statements, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect" and the like, and/or future tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under "Risk Factors," which appear in our Form S-1/A which we filed with the Securities and Exchange Commission on June 13, 2022, that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.
Overview
We are a media, technology and entertainment company that focuses on (i) delivering content to children under the age of 13 years in a safe secure platform that is compliant with Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of kids & family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content. We operate our business through the following subsidiaries:
| · | Grom Social, Inc. was incorporated in the State of Florida on March 5, 2012. Grom Social operates our social media network designed for children under the age of 13 years. |
| · | TD Holdings Limited (“TD Holdings”) was incorporated in Hong Kong on September 15, 2005. TD Holdings operates through its two subsidiary companies: (i) Top Draw Animation Hong Kong Limited, a Hong Kong corporation, and (ii) Top Draw Animation, Inc., a Philippines corporation. The group’s principal activities are the production of animated films and televisions series. |
| · | Grom Educational Services, Inc. (“GES”) was incorporated in the State of Florida on January 17, 2017. GES operates our web filtering services provided to schools and government agencies. |
| · | Grom Nutritional Services, Inc. (“GNS”) was incorporated in the State of Florida on April 19, 2017. GNS intends to market and distribute nutritional supplements to children. GNS has been nonoperational since its inception. |
| · | Curiosity Ink Media, LLC (“Curiosity”) was incorporated in the State of Delaware on January 9, 2017. Curiosity creates, acquires, and develops the commercial potential of kids & family entertainment properties and associated business opportunities. |
We own 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity. We are headquartered in Boca Raton, Florida with offices in Los Angeles, California; Salt Lake City, Utah; Norcross, Georgia; and Manila, Philippines.
Business Description
Grom Social
Grom Social is a growing social media platform and original content provider of entertainment for children under 13 years of age, which provides safe and secure digital environments for kids that can be monitored by their parents or guardians. We initially launched our mobile app in 2019. We continue to invest in research, development, and technology to enhance the user experience. We remain committed to increasing user growth and expanding our reach in an effort to monetize the app.
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Top Draw Animation
Top Draw Animation is an award-winning, full-service production and pre-production animation studio that specializes in providing two-dimensional digital production services for animated television series and movies on a contract basis or under co-production arrangements. Top Draw’s pre-production services include planning and creating storyboards, location design, model and props design, background color and color styling. Its production services focus on library creation, digital asset management, background layout scene assembly, posing, animation and after-effects.
As part of its COVID-19 protocols, Top Draw continues to operate at approximately 50% seat capacity at its studio. However, it supplements its reduced studio capacity through its work-from-home program. For the three and nine months ended September 30, 2022, our animation services revenues trailed the levels that we recognized during the corresponding periods of 2021. This is largely attributable to changes in our production schedule resulting from customer delays in providing us with necessary materials and content, changes to project start dates, or cancellation of an anticipated project. As a byproduct, we realized higher production costs by deploying the resources necessary to service our customers’ needs efficiently and effectively prior to these changes to our schedule.
During the nine months ended September 30, 2022, we announced approximately $5.8 million in new contracts for Top Draw. These projects are all expected to commence during the remaining year and have service periods up to twelve months in length. Based upon our current production schedule, we believe that our efficiency and productivity will increase through December 31, 2022.
Grom Educational Services
Grom Educational Services provides scalable network monitoring and security solutions that are compliant with Children Internet Protection Act (CIPA) guidelines. Our goal is to enhance safety, good digital citizenship, education, and social responsibility by giving schools and parents the ability to monitor and filter their students’ and children’s access to technology while simultaneously educating them.
Our products include web filtering appliances and software, reporting and event management solutions, and our Digital Citizenship License (DCL) Program. The proprietary DCL program is a series of videos design to teach minors about appropriate online behavior.
On January 28, 2022, we announced the early release of enhancements to our DCL Program as part of strengthening the security features of our web filtering solutions.
On November 2, 2022, we announced that we expanded our educational services product offering by teaming up with tech management company, Radix, to offer its cloud-based classroom management solution, TeacherView. Radix’s TeacherView is equipped with a built-in video conference system to enable remote (at home), local or hybrid learning. The program gives educators an "over the shoulder" teaching experience to help oversee an enhanced learning experience.
Curiosity Ink Media
Curiosity Ink Media is a global media company that develops, acquires, builds, grows and maximizes the short, mid, and long-term commercial potential of kids & family entertainment properties and associated business opportunities. Driven by a best-in-class leadership team, Curiosity’s multi-faceted intellectual property library is designed to amass ongoing value through strategic stewardship, partnerships, and highly targeted market entry.
Depending upon the nature, Curiosity’s original properties can require a substantial amount of time to develop and produce. The Company continuously evaluates the viability of its entertainment properties, and works with its strategic partners and advisors to determine the appropriate form of media and channels of distribution for each property to ensure their greatest potential for success.
On October 27, 2022, we relaunched our Santa.com website. The enhanced digital holiday entertainment hub includes a bold new look, featuring a marketplace where consumers can fulfill all of their holiday needs, and an improved user experience immersed in a virtual North Pole with curated gifting ideas, decor and entertainment tips, alongside other immersive content for kids and adults. Furthermore, we continue to develop Santa.com into an original animated musical holiday special for future release.
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Curiosity’s publishing arm released two graphic novels, Thunderous and The Legion of Forgettable Supervillains, in 2022. We continue to develop concepts and seek partnerships for additional and subsequent series publications. On May 17, 2022, Curiosity and Dynamite Entertainment announced a project with the United States Postal Service to introduce a new children’s book series based on a modern-day adaptation of Mr. Zip, the iconic 1960’s cartoon figure initially used by the U.S. Post Office Department to help introduce and promote ZIP Code use. On August 19, 2022, we announced that that Baldwin’s Big Adventure, the debut book in one of our preschool intellectual property franchises, would commence selling in October 2022. On August 25, 2022, we announced that Santa’s Secret Society, the first title of our book franchise The Adventures of Herbert Henry, would also commence selling in October 2022.
In addition, Curiosity’s animated series and feature films efforts continue to advance. On June 30, 2022, we announced an expanded relationship with creator Dustin Ellis (also working with us on Laugh on Lorp and Aloha Hoku) to develop an original animated comedy feature, Heston of the Apes, that Curiosity is preparing for theatrical distribution. On September 1, 2022, Curiosity announced that celebrated kids’ TV writer, McPaul Smith, was engaged to develop its animated preschool series, Baldwin, based on its intellectual property of the same name. On September 26, 2022, we announced that we secured the husband-wife writing team and best-selling authors, Chelsea and Matt Giegerich, to script the storyline for The Pirate Princess, an original, heartwarming coming-of-age tale about a fearless teenager raised by a notorious, but loving band of pirates.
Furthermore, Curiosity has started to broaden its business opportunities and relationships by offering licensing agent services. On May 23, 2022, Curiosity announced that it will partner with Cepia LLC to serve as a licensing agent for the Cats vs Pickles franchise.
Impact of COVID-19
On January 30, 2020, the World Health Organization announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 has and continues to significantly affect the United States and global economies.
We have experienced significant disruptions to our business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings and travel restrictions, which affect both us and our service providers. We have significant operations in Manila, Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result of the Philippines government’s call to contain COVID-19, our Manila-based animation studio, which accounts for approximately 88% of our total revenues on a consolidated basis, was forced to close its offices for significant periods of time from March 2020 through December 2021.
In response to the outbreak and business disruption, we have instituted employee safety protocols to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices and production studio. We have implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, we started to recall artist and employees to return to the studio which is currently operating at 50% seat capacity.
While restrictions have eased, the risk continues as new variants are being discovered. The full extent of potential impacts on our business, financing activities and the global economy will depend on future developments, which cannot be predicted due to the uncertain nature of the continued COVID-19 pandemic, government mandated shut downs, and its adverse effects, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. These effects could have a material adverse impact on our business, operations, financial condition and results of operations.
Recent Events
L1 Capital Financing
The Purchase Agreement, as amended on October 20, 2021, with L1 Capital contemplated a closing of a second tranche of the offering (the “Second Tranche”) of up to an additional $6,000,000 principal amount of Notes identical to the First Tranche Note, and warrants exercisable for five years to purchase up to 1,041,194 shares at an exercise price of $4.20 per share.
On January 20, 2022 (the “Second Tranche Closing”), we closed on the Second Tranche of the offering with L1 Capital, resulting in the issuance of (i) a $1,750,000 10% original issue discount senior secured convertible note, due July 20, 2023, (the “Second Tranche Note”); and (ii) a five year warrant to purchase 303,682 shares of our common stock at an exercise price of $4.20 per share (the “Second Tranche Warrants”), in exchange for consideration of $1,575,000 (i.e. the face amount less the 10% original issue discount of $175,000).
In connection with the Second Tranche Closing, we paid to EF Hutton a fee of $126,000.
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The Second Tranche Note is convertible into our common stock at a rate of $4.20 per share (the “Conversion Price”) into 416,667 shares of common stock (the “Second Tranche Conversion Shares”) and, is repayable in equal monthly installments of $111,563 commencing on the date that the SEC declares a registration statement with respect to the resale of such shares effective, with all remaining amounts due on July 20, 2023. The Second Tranche Note is repayable by payment of cash, or, at our discretion and if the below listed “Equity Conditions” are met, by issuance of shares of our common stock at a price of 95% of the lowest daily VWAP during the ten-trading day period prior to the respective monthly redemption dates (with a floor of $1.92) multiplied by 102% of the amount due on such date. In the event that the ten-trading day VWAP drops below $1.92 we will have the right to pay in stock at such ten-trading day VWAP with any shortfall paid in cash. The Conversion Price may be adjusted in the event of dilutive issuances but in no event to less than $0.54 (the “Monthly Conversion Price”).
Our right to make monthly payments in stock in lieu of cash for the Second Tranche Note is conditioned on certain conditions (the “Equity Conditions”). The Equity Conditions required to be met each month in order to redeem the Second Tranche Note with stock in lieu of a monthly cash payment, among other conditions set forth therein, include without limitation, that a registration statement be in effect with respect to the resale of the shares issuable upon conversion or redemption of the Second Tranche Note (or, that an exemption under Rule 144 is available), that no default be in effect, that the average daily trading volume of our common stock would have to be at least $550,000 during the five trading days prior to the respective monthly redemption and that the outstanding principal amounts of the First Tranche Note and Second Tranche Note combined, shall not exceed 30% of the market capitalization of our common stock as reported on Bloomberg L.P., which percentage is subject to increase by the investor at its sole discretion.
Other provisions of the Second Tranche Note, which is similar in terms to the First Tranche Note, include that the Second Tranche Note Conversion Price is subject to full anti-dilution price protections in the event of financings that are below the Conversion Price with a floor of $0.54.
In the event of an Event of Default as defined in the notes, if the stock price is below the Conversion Price at the time of default and only for so long as a default is continuing, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the default is cured the default conversion rate elevates back to the normal Conversion Price.
As part of the Second Tranche Closing, we issued Second Tranche Warrants exercisable for five years from the date of issuance, at $4.20 per share which carry the same anti-dilution protection as the Second Tranche Notes, subject to the same adjustment floor. The Second Tranche Warrants are exercisable via cashless exercise only for so long as no registration statement covering resale of the shares is in effect.
The Second Tranche Note continues to be subject to (i) the repayment and performance guarantees by our subsidiaries pursuant to a subsidiary guaranty and, (ii) the security agreement pursuant to which the LI Capital was granted a security interest in all of our assets and certain of our subsidiaries, each as entered into in connection with the First Tranche closing on September 14, 2021.
Executive Separation Agreement and Departure of Director
On April 22, 2022, we entered into an Executive Separation Agreement with Melvin Leiner (the “Separation Agreement”), pursuant to which Mr. Leiner retired from his positions as our Executive Vice President and Chief Operating Officer. Pursuant to the Separation Agreement, Mr. Leiner’s employment with us ended on April 22, 2022 and he is to receive separation payments over a nine (9) month period equal to his base salary, as well as certain limited health benefits.
In accordance with the Separation Agreement, we will pay to Mr. Leiner the sum of $236,250 in biweekly installments over the nine (9) month period beginning on our first regular pay period after April 22, 2022 and ending on January 13, 2023. The Separation Agreement also contains non-disparagement covenants and a mutual release of claims by the parties thereto.
On the same day, Mr. Leiner resigned from our Board of Directors, effectively immediately. Mr. Leiner did not resign as a result of any disagreement with us on any matter relating to our operations, policies or practices.
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Notice of Delisting of Failure to Satisfy a Continued Listing Rule or Standard
On May 24, 2022, we received a deficiency letter (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, based upon the closing bid price of the Company’s common stock, par value $0.001 per share (“Common Stock”), for the last 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”).
The Notice has no immediate effect on the continued listing status of the Company's common stock on The Nasdaq Capital Market, and, therefore, the Company's listing remains fully effective.
The Company is provided a compliance period of 180 calendar days from the date of the Notice, or until November 21, 2022, to regain compliance with Nasdaq Listing Rule 5550(a)(2). If at any time before November 21, 2022, the closing bid price of the Company’s common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, subject to Nasdaq’s discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(G), Nasdaq will provide written notification that the Company has achieved compliance with the Minimum Bid Requirement, and the matter would be resolved.
If the Company does not regain compliance with the Minimum Bid Requirement during the initial 180 calendar day period, the Company may be eligible for an additional 180 calendar day compliance period. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Requirement, and would need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary.
The Company will continue to monitor the closing bid price of its Common Stock and seek to regain compliance with all applicable Nasdaq requirements within the allotted compliance periods. If the Company does not regain compliance within the allotted compliance periods, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company's common stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel.
The Company intends to actively monitor the closing bid price of the common stock and will evaluate available options to regain compliance with the Minimum Bid Requirement. However, there can be no assurance that the Company will regain compliance with the Minimum Bid Requirement during the 180-day compliance period, secure a second period of 180 days to regain compliance or maintain compliance with the other Nasdaq listing requirements.
If the common stock ceases to be listed for trading on the Nasdaq Capital Market, the Company would expect that the common stock would be traded on one of the three tiered marketplaces of the OTC Markets Group.
Reverse Stock Split
On October 4, 2022, the Board of Directors (“Board”) and majority shareholders of the Company’s approved a reverse stock split of the issued and outstanding shares of Common Stock, by a ratio of no less than 1-for-2 and no more than 1-for-30, with the exact ratio to be determined by the Board in its sole discretion (the “Reverse Split”) and with such Reverse Split to be effective at such time and date determined by the Board in its sole discretion.
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Results of Operations
Comparison of Results of Operations for the Three Months Ended September 30, 2022 and 2021
Revenue
Revenue for the three months ended September 30, 2022 was $1,484,958, compared to revenue of $1,514,692 during the three months ended September 30, 2021, representing a decrease of $29,734 or 2.0%.
Animation revenue for the three months ended September 30, 2022 was $1,419,153, compared to animation revenue of $1,383,196 during the three months ended September 30, 2021, representing an increase of $35,957 or 2.6%. The increase in animation revenue is primarily attributable to commencement of previously negotiated contracts and clients providing necessary materials for projects previously delayed.
Web filtering revenue for the three months ended September 30, 2022 was $63,234, compared to web filtering revenue of $130,928 during the three months ended September 30, 2021, representing a decrease of $67,694 or 51.7%. The decrease is primarily due to a decline in organic sales growth, and the timing or loss of multi-year contract renewals.
Publishing revenue and other revenue have been nominal. Publication revenue for the three months ended September 30, 2022 was $2,321, compared to $0 for the three months ended September 30, 2021. Publishing revenues were generated from the sales of newly released graphic novels and other published content. Subscriptions and advertisement from our Grom Social app for the three months ended September 30, 2022 was $250, compared to subscription and advertising revenue of $568 during the three months ended September 30, 2021, representing a decrease of $318 or 56.0%, primarily attributable to a decrease in marketing and promotion activities.
Gross Profit
Our gross profits vary significantly by subsidiary. In recent years, our animation business has realized gross profits between 35% and 40%, while our web filtering business has realized gross profits between 91% and 94%. Our gross profits may vary from period to period due to the nature of the business of each subsidiary, and the timing and volume of customer contracts and projects. Current gross margins percentages may not be indicative of future gross margin performance.
Gross profit for the three months ended September 30, 2022 and 2021 were $572,948, or 38.6%, and $597,568, or 39.5%, respectively. The decrease in gross profit is primarily attributable change in the mix of revenue streams as compared to the prior quarter as revenue web filtering revenue carries a higher gross profit as compared to animation revenue.
Operating Expenses
Operating expenses for the three months ended September 30, 2022 were $2,271,398, compared to operating expenses of $2,750,989 during the three months ended September 30, 2021, representing a decrease of $479,591 or 17.4%. The decrease is primarily attributable to a decrease in selling, general and administrative costs incurred during the three months ended September 30, 2022 resulting from a reduction in stock-based compensation from the grant of stock and stock option awards.
Selling, general and administrative (“SG&A”) are comprised of selling, marketing and promotional expenses, compensation and benefits, insurance, rent and related facility costs, research and development, and other general expenses. SG&A expenses were $1,952,670 for the three months ended September 30, 2022, compared to $2,307,830 for the three months ended September 30, 2021, representing a decrease of $355,160 or 15.4%.
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Professional fees are comprised of accounting and compliance services, legal services, investor relations and other advisory fees. Professional fees were $259,142 for the three months ended September 30, 2022, compared to $326,800 for the three months ended September 30, 2021, representing a decrease of $67,658 or 20.7%. The decrease is largely attributable to reduced legal and accounting fees incurred during the three months ended September 30, 2022. During the three months ended September 30, 2021, we incurred higher fees as the result of our financing efforts and acquisition of Curiosity Ink Media.
Depreciation and amortization included in operating expenses was $59,586 for the three months ended September 30, 2022, compared to $116,359 for the three months ended September 30, 2021, representing a decrease of $56,773 or 48.8%. The decrease is attributable to certain fixed assets that are fully depreciated having reached the end of their estimated useful lives and certain intangible assets that were impaired during the fourth quarter of 2021. These fixed and intangible assets were subject to depreciation and amortization during the three months ended September 30, 2021.
Other Income (Expense)
Net other expense for the three months ended September 30, 2022 was $407,792, compared to a net other expense of $178,996 for the three months ended September 30, 2021, representing an increase of $228,796 or 127.8%. The increase in other expense is primarily attributable to the recognition of certain realized and unrealized losses on settlement of a derivative liability during the three months ended September 30, 2022 and a gain of $228,912 related to the forgiveness of PPP loans recognized during the three months ended September 30, 2021.
Interest expense is comprised of interest accrued and paid on our convertible notes and recorded from the amortization of note discounts. Interest expense was $366,840 for the three months ended September 30, 2022, compared to $492,783 during the three months ended September 30, 2021, representing a decrease of $125,943 or 25.6%. The decrease is primarily attributable to the recognition of less amortization of debt discounts and less interest expense resulting from lower principal balances on convertible notes principal during the three months ended September 30, 2022.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $2,196,958, or $0.10 per share, for the three months ended September 30, 2022, compared to a net loss attributable to common stockholders of $2,308,841, or $0.21 per share, during the three months ended September 30, 2021, representing a decrease in net loss attributable to common stockholders of $111,883 or 4.9%.
Comparison of Results of Operations for the Nine Months Ended September 30, 2022 and 2021
Revenue
Revenue for the nine months ended September 30, 2022 was $3,855,665, compared to revenue of $4,778,527 during the nine months ended September 30, 2021, representing a decrease of $922,862 or 19.3%.
Animation revenue for the nine months ended September 30, 2022 was $3,493,732, compared to animation revenue of $4,373,409 during the nine months ended September 30, 2021, representing a decrease of $879,677 or 20.1%. The decrease in animation revenue is primarily attributable to client delays in providing us with necessary productions materials and content and in the execution and commencement of previously negotiated contracts.
Web filtering revenue for the nine months ended September 30, 2022 was $358,950 compared to web filtering revenue of $403,676 during the nine months ended September 30, 2021, representing a decrease of $44,726 or 11.1%. The decrease is primarily due to a decline in organic sales growth, and the timing or loss of multi-year contract renewals.
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Publishing revenue and other revenue have been nominal. Publication revenue for the nine months ended September 30, 2022 was $2,321, compared to $0 for the nine months ended September 30, 2021. Publishing revenues were generated from the sales of newly released graphic novels and other published content. Subscriptions and advertisement from our Grom Social app for the nine months ended September 30, 2022 was $662, compared to subscription and advertising revenue of $1,442 during the nine months ended September 30, 2021, representing a decrease of $780 or 54.1%, primarily attributable to a decrease in marketing and promotion activities.
Gross Profit
Our gross profits vary significantly by subsidiary. In recent years, our animation business has realized gross profits between 35% and 40%, while our web filtering business has realized gross profits between 91% and 94%. Our gross profits may vary from period to period due to the nature of the business of each subsidiary, and the timing and volume of customer contracts and projects. Current gross margins percentages may not be indicative of future gross margin performance.
Gross profit for the nine months ended September 30, 2022 and 2021 were $1,079,247, or 28.0%, and $1,847,439, or 38.7%, respectively. The decrease in gross profit is primarily attributable to lower contract margins in our animation business due to the absorption of fixed overhead expenses against reduced revenue levels and certain projects exceeding budgeted costs.
Operating Expenses
Operating expenses for the nine months ended September 30, 2022 were $6,577,533, compared to operating expenses of $6,178,734 during the nine months ended September 30, 2021, representing an increase of $398,799 or 6.5%. The increase is primarily attributable to an increase in selling, general and administrative costs and fees for professional services rendered during the nine months ended September 30, 2022 due to an increase in research and development, employee headcount, compensation and benefits from the acquisition of Curiosity, and stock-based compensation from the grant of stock option awards.
Selling, general and administrative (“SG&A”) are comprised of selling, marketing and promotional expenses, compensation and benefits, insurance, rent and related facility costs, research and development, and other general expenses. SG&A expenses were $5,426,185 for the nine months ended September 30, 2022, compared to $4,970,580 for the nine months ended September 30, 2021, representing an increase of $455,605 or 9.2%.
Professional fees are comprised of accounting and compliance services, legal services, investor relations and other advisory fees. Professional fees were $963,149 for the nine months ended September 30, 2022, compared to $839,831 for the nine months ended September 30, 2021, representing an increase of $123,318 or 14.7%.
Depreciation and amortization included in operating expenses was $188,199 for the nine months ended September 30, 2022, compared to $368,323 for the nine months ended September 30, 2021, representing a decrease of $180,124 or 48.9%. The decrease is attributable to certain fixed assets that are fully depreciated having reached the end of their estimated useful lives and certain intangible assets that were impaired during the fourth quarter of 2021. These fixed and intangible assets were subject to depreciation and amortization during the nine months ended September 30, 2021.
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Other Income (Expense)
Net other expense for the nine months ended September 30, 2022 was $3,263,780, compared to a net other expense of $2,821,202 for the nine months ended September 30, 2021, representing an increase of $442,578 or 15.7%. The increase in net other expense is primarily attributable recognition of interest expense of $1,052,350 related to the recognition of a derivative liability and a loss of $119,754 on the settlement of a substantial portion of the derivative liability recognized during the nine months ended September 30, 2022.
Interest expense is comprised of interest incurred on our convertible notes and from the amortization of note discounts. Interest expense was $3,312,370 for the nine months ended September 30, 2022, compared to $2,236,545 during the nine months ended September 30, 2021, representing an increase of $1,075,825 or 48.1%. The increase is primarily attributable to the recognition of interest expense of $1,052,350 related to the recognition of a derivative liability and an increase in amortization of debt discounts during the nine months ended September 30, 2022.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $9,045,980, or $0.50 per share, for the nine months ended September 30, 2022, compared to a net loss attributable to common stockholders of $7,128,941, or $0.91 per share, during the nine months ended September 30, 2021, representing an increase in net loss attributable to common stockholders of $1,917,059 or 26.9%.
Liquidity and Capital Resources
At September 30, 2022, we had cash and cash equivalents of $1,311,495
Net cash used in operating activities for the nine months ended September 30, 2022 was $5,432,002, compared to net cash used in operating activities of 5,373,687 during the nine months ended September 30, 2021, representing an increase in cash used of $58,315, primarily due to the increase in our net loss, recognition of a derivative liability, change in our operating assets and liabilities, stock-based compensation and amortization of debt discounts.
Net cash used in investing activities for the nine months ended September 30, 2022 was $71,215, compared to net cash used in investing activities of $425,789 during the nine months ended September 30, 2021 representing a decrease in cash used of $354,574. This decrease is directly attributable to $400,000 of cash consideration paid for the acquisition of Curiosity Ink Media during the nine months ended September 30, 2021, offset in part by an increase of $58,511 in the amount of fixed assets purchased and/or leasehold improvements made by our animation studio in Manilla, Philippines during the nine months ended September 30, 2022.
Net cash provided by financing activities for the nine months ended September 30, 2022 was $223,100, compared to net cash provided by financing activities of $14,768,735 for the nine months ended September 30, 2021, representing a decrease in cash provided of $13,471,566. The primary reason for the decrease is attributable to our public equity offering and issuance of convertible notes completed in 2021.
Our primary sources of cash from financing activities during the nine months ended September 30, 2022 were attributable to $1,444,000 in proceeds from second tranche of convertible notes issued to L1 Capital, as compared to $8,953,616 in proceeds from the sale of our common stock, $950,000 and $100,000 in proceeds from the sale of our Series B Stock and Series C Stock, respectively, and $908,500 in proceeds from the sale of 8% to 12% senior secured convertible notes during the nine months ended September 30, 2021. These sources of cash were offset, in part, by the repayment of convertible notes and loans payable of $146,831 and cash settlement of a derivative liability of $1,074,069 in accordance with note conversions during the nine months ended September 30, 2022, as compared to repayments of convertible notes and loans for $1,058,307 during the nine months ended September 30, 2021.
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We believe that based on our current operating levels that we will need to raise additional funds by selling additional equity or incurring debt. To date, hawse have funded our operations primarily through sales of our common stock in public markets and proceeds from the exercise of warrants to purchase common stock and the sale of convertible notes. We have a substantial doubt about the our ability to continue as a going concern for the twelve months from the date of this report.
Our management intends to raise additional funds through the issuance of equity securities or debt. There can be no assurance that, in the event that we require additional financing, such financing will be available at terms acceptable to us, if at all. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending could have a material adverse effect on our ability to achieve our intended business objectives. As a result, the substantial doubt about our ability to continue as a going concern has not been alleviated. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed consolidated financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position.
During the three and nine months ended September 30, 2022, there were no significant changes to the critical accounting estimates disclosed under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company and are not required to provide this information.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2022, the end of the period covered by this Quarterly Report.
These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial, as appropriate officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2022.
The Company’s assessment identified certain material weaknesses which are set forth below:
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Functional Controls and Segregation of Duties
Because of the Company’s limited resources, there are limited controls over information processing. Additionally, there is inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation, we will need to hire additional staff to provide greater segregation of duties.
Accordingly, as the result of identifying the above material weakness we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements may not be prevented or detected on a timely basis by the Company’s internal controls.
Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management continues to take actions to remedy these weaknesses, including the process of hiring additional staff to create the necessary segregation of duties to improve controls over information processing. Additionally, management has initiated the process of building a risk management framework with plans to embed the principles of this framework across all aspects of the business.
Remediation Plan
Management has implemented remediation steps to address the material weakness and to improve our internal control over financial reporting. Specifically, we (i) expanded and improved our review process for complex transactions and related accounting standards, including the identification of third-party professionals with whom to consult regarding the application of complex accounting matters, (ii) hired qualified personnel to improve the oversight of our accounting operations, and (iii) established new processes and policies. While we believe that these remediation actions will improve the effectiveness of our internal control over financial reporting, the material weakness identified will not be considered remediated until the controls operate for a sufficient period of time, and we cannot assure you that the measures we have taken to date, or any measures we may take in the future will be sufficient to remediate the material weakness we have identified or avoid potential future material weaknesses.
Changes in Internal Control over Financial Reporting
Other than the remediation efforts described above, there were no changes in our internal controls over financial reporting during our first three fiscal quarters, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
There are no pending legal proceedings to which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company's and its subsidiaries’ property is not the subject of any pending legal proceedings.
Item 1A. Risk Factors.
Not applicable as we are a small reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no sales of equity securities sold during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| Exhibit No. | Description | |
| 31.1* | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
| 31.2* | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
| 32** | Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS*** | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH*** | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL*** | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF*** | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB*** | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE*** | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104*** | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). |
_______________________
| * | Filed herewith. |
| ** | Furnished herewith. |
| *** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
| 48 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 7, 2022 | By: | /s/ Darren Marks |
| Darren Marks | ||
|
Chief Executive Officer and President (Principal Executive Officer) | ||
| Date: November 7, 2022 | By: | /s/ Jason Williams |
| Jason Williams | ||
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
| 49 |
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Darren Marks, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Grom Social Enterprises, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedure to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 7, 2022 | /s/ Darren Marks |
|
Darren Marks, Chief Executive Officer and President (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Jason Williams, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Grom Social Enterprises, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedure to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 7, 2022 |
/s/ Jason Williams Jason Williams, Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 32
CERTIFICATION PURSUANT TO
18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report of Grom Social Enterprises, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, the undersigned, in the capacities and on the date indicated below, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
| 1. | The Report fully complies with the requirements of Rule 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: November 7, 2022 |
/s/ Darren Marks Darren Marks, Chief Executive Officer and President (Principal Executive Officer) |
| Dated: November 7, 2022 |
/s/ Jason Williams Jason Williams, Chief Financial Officer (Principal Financial and Accounting Officer) |
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Income Statement [Abstract] | ||||
| Sales | $ 1,484,958 | $ 1,514,692 | $ 3,855,665 | $ 4,778,527 |
| Cost of goods sold | 912,010 | 917,124 | 2,776,418 | 2,931,088 |
| Gross profit | 572,948 | 597,568 | 1,079,247 | 1,847,439 |
| Operating expenses: | ||||
| Depreciation and amortization | 59,586 | 116,359 | 188,199 | 368,323 |
| Selling, general and administrative | 1,952,670 | 2,307,830 | 5,426,185 | 4,970,580 |
| Professional fees | 259,142 | 326,800 | 963,149 | 839,831 |
| Total operating expenses | 2,271,398 | 2,750,989 | 6,577,533 | 6,178,734 |
| Loss from operations | (1,698,450) | (2,153,421) | (5,498,286) | (4,331,295) |
| Other income (expense) | ||||
| Interest expense, net | (366,840) | (492,783) | (3,312,370) | (2,236,545) |
| Loss on settlement of debt | 0 | 0 | 0 | (947,179) |
| Loss on settlement of derivative transaction | (80,130) | 0 | (119,754) | 0 |
| Unrealized gain (loss) on change in fair value of derivative liabilities | (8,077) | 0 | 49,047 | 0 |
| Other gains | 47,255 | 313,787 | 119,297 | 362,522 |
| Total other income (expense) | (407,792) | (178,996) | (3,263,780) | (2,821,202) |
| Loss before income taxes | (2,106,242) | (2,332,417) | (8,762,066) | (7,152,497) |
| Provision for income taxes (benefit) | 0 | 0 | 0 | 0 |
| Net loss | (2,106,242) | (2,332,417) | (8,762,066) | (7,152,497) |
| Loss attributable to noncontrolling interest | (95,447) | (23,576) | (266,309) | (23,576.00) |
| Net loss attributable to Grom Social Enterprises, Inc. stockholders | (2,010,795) | (2,308,841) | (8,495,757) | (7,128,921) |
| Preferred stock dividend payable on Series C convertible preferred stock | (186,163) | 0 | (550,223) | 0 |
| Net loss attributable to Grom Social Enterprises, Inc. common stockholders | (2,196,958) | (2,308,841) | (9,045,980) | (7,128,921) |
| Comprehensive loss: | ||||
| Foreign currency translation adjustment | (72,340) | (67,596) | (129,361) | (45,727) |
| Comprehensive loss | (2,178,582) | (2,400,013) | (8,891,427) | (7,198,224) |
| Comprehensive loss attributable to noncontrolling interests | (95,447) | (23,576) | (266,309) | (23,576) |
| Comprehensive loss attributable to Grom Social Enterprises, Inc. common stockholders | $ (2,083,135) | $ (2,376,437) | $ (8,625,118) | $ (7,174,648) |
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (Parenthetical) - $ / shares |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Income Statement [Abstract] | ||||
| Earnings Per Share, Basic | $ (0.10) | $ (0.21) | $ (0.50) | $ (0.91) |
| Earnings Per Share, Diluted | $ (0.10) | $ (0.21) | $ (0.50) | $ (0.91) |
| Weighted Average Number of Shares Outstanding, Basic | 21,514,289 | 11,118,290 | 18,143,662 | 7,808,344 |
| Weighted Average Number of Shares Outstanding, Diluted | 21,514,289 | 11,118,290 | 18,143,662 | 7,808,344 |
NATURE OF OPERATIONS |
9 Months Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2022 | ||||||||||||||||||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||||||||||
| NATURE OF OPERATIONS |
Grom Social Enterprises, Inc. (the “Company”, “Grom” “we”, “us” or “our”), a Florida corporation f/k/a Illumination America, Inc. (“Illumination”), is a media, technology and entertainment company. The Company is focused on (i) delivering content to children under the age of 13 years in a safe secure platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of kids & family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content.
The Company operates its business through the following subsidiaries:
The Company owns 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity. The Company is headquartered in Boca Raton, Florida with offices in Los Angeles, California; Salt Lake City, Utah; Norcross, Georgia; and Manila, Philippines. |
GOING CONCERN |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2022 | |||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||
| GOING CONCERN |
The condensed consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Based on current operating levels, the Company will need to raise additional funds by selling additional equity or incurring debt. To date, the Company has funded its operations primarily through sales of its common stock in public markets and proceeds from the exercise of warrants to purchase common stock and the sale of convertible notes. Additionally, future capital requirements will depend on many factors, including the rate of revenue growth, the selling price of the Company’s products and services, the expansion of sales and marketing activities, the timing and extent of spending on content development efforts and the continuing market acceptance of the Company’s products and services. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months from the date of this report.
Management of the Company intends to raise additional funds through the issuance of equity securities or debt. It is probable that management will continue to obtain new sources of financing that will enable the Company to meet its obligations for the twelve-month period. There can be no assurance that, in the event the Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. As a result, the substantial doubt about the Company’s ability to continue as a going concern has not been alleviated. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2022 | |||
| Accounting Policies [Abstract] | |||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Impact of COVID-19
On January 30, 2020, the World Health Organization announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 has and continues to significantly affect the United States and global economies.
The Company has experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings and travel restrictions, which affect both the Company’s and its service providers. The Company has significant operations in Manila, Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result of the Philippines government’s call to contain COVID-19, the Company’s animation studio, located in Manila, Philippines, which accounts for approximately 88% of the Company’s total revenues on a consolidated basis, was forced to close its offices for significant periods of time from March 2020 through December 2021.
In response to the outbreak and business disruption, the Company has instituted employee safety protocols to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices and production studio. The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, the Company started to recall artist and employees to return to the studio which is currently operating at 50% seat capacity.
While restrictions have eased, the risk continues as new variants are being discovered. The full extent of potential impacts on the Company’s business, financing activities and the global economy will depend on future developments, which cannot be predicted due to the uncertain nature of the continued COVID-19 pandemic, government mandated shut downs, and its adverse effects, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. These effects could have a material adverse impact on the Company’s business, operations, financial condition and results of operations.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conjunction with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted. For the three and nine months ended September 30, 2022, the condensed consolidated financial statements include the accounts of the Company and its operating subsidiaries Grom Social, TD Holdings, GES, GNS, and Curiosity. The Company recognizes noncontrolling interest related to its less-than-wholly-owned subsidiary, Curiosity, as equity in the consolidated financial statements separate from the parent entity’s equity. The net income (loss) attributable to noncontrolling interest is included in net income (loss) in the condensed consolidated statements of operations and comprehensive loss.
These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments, which includes intercompany balances and transactions are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto at December 31, 2021, as presented in the Company’s Annual Report on Form 10-K filed on April 15, 2022 with the SEC.
Certain prior period statement of operations and statement of cash flows captions and balances have been reclassified to conform with the current year presentation, including the allocation of $79,810 and $252,343, respectively from depreciation and amortization and $95,899 and $303,214, respectively in certain fixed overhead costs from selling, general, and administrative expenses previously presented under operating expenses to cost of goods sold during the three and nine months ended September 30, 2021. In the statement of cash flow, the amortization of rights-of-use assets is presented as an adjustment to reconcile net loss to cash used in operating activities and changes to operating lease liabilities are presented as a change in operating assets and liabilities. These two reclassifications were previously presented as a net movement titled operating lease right-of-use assets under changes in operating assets and liabilities. The changes do not have any financial impact on the Company’s reported revenue, reported net loss, or cash flows from operations.
Use of Estimates
The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. The results of operations for the three months and nine months ended September 30, 2022, are not necessarily indicative of the operating results for the full year.
Update to Significant Accounting Policies
The Company has changed its accounting policy related to Publishing Revenue, refer to Revenues – Publishing Revenue note (Note 3) for the new significant accounting policy. This change did not have a significant impact on our operations for the three and nine months ended September 30, 2022 and 2021.
Other than noted above, there have been no other new or material changes to the significant accounting policies discussed in the Company’s audited financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC on April 15, 2022, that are of significance, or potential significance, to the Company.
Recent Accounting Pronouncements – Issued, not yet Adopted
There were no new accounting pronouncements issued in the three and nine months ended September 30, 2022, which could impact the Company.
Recently Issued Accounting Pronouncements Adopted
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. ASU 2021-04 provides guidance on modifications or exchanges of freestanding equity-classified written call options that are not within the scope of another Topic. Entities should treat a modification of the terms or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after modification or exchange, as an exchange of the original instrument for a new instrument. ASU 2021-04 provides further guidance on measuring the effect of such modifications or exchanges, and also provides guidance on the recognition of such modifications or exchanges on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company adopted this ASU on January 1, 2022, which did not result in a material impact to the condensed consolidated financial statements and disclosures.
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REVENUES |
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| Revenue from Contract with Customer [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| REVENUES |
The Company’s main types of revenue contracts consist of the following categories, which are disaggregated from the condensed consolidated statements of operations.
Animation Revenue
Animation revenue is primarily generated from contracts with customers for preproduction and production services related to the development of animated movies and television series. Preproduction activities include producing storyboards, location design, model and props design, background color and color styling. Production focuses on library creation, digital asset management, background layout scene assembly, posing, animation and after effects. The Company provides services under fixed-price contracts. Under these fixed-price contracts, the Company agrees to perform a specified scope of work for a pre-determined price. To the extent actual costs vary from estimated costs, the Company’s profit may increase, decrease, or result in a loss.
Web Filtering Revenue
Web filtering revenue is subscription based and recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases computer hardware and a software and support service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale. The Company immediately recognizes revenue attributable to the computer hardware as it is non-refundable and control passes to the customer. The advanced billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue on a straight-line basis over the subscription period.
Produced and Licensed Content Revenue
Produced and licensed content revenue is generated from the licensing of internally-produced films and episodic television programs.
Each individual film or television series episode delivered represents a separate performance obligation, and revenues are recognized when the film or episode is made available to the licensee for exhibition. For license agreements containing multiple deliverables, revenues are allocated based on the relative standalone selling price of each film or episode of a television series, which is based on licenses for comparable films or series within the marketplace. Agreements to license programming are often long term, with collection terms ranging from one to five years.
The advanced billing component for licensed content is initially recorded as deferred revenue and subsequently recognized as revenue upon completion of the performance obligation in accordance with the terms of licensing agreement.
Publishing Revenue
The Company has engaged the services of a third-party entity to manage the printing, publishing and distribution of the Company’s publishing content. In accordance with the terms agreed with the third party, the Company’s revenue is recognized as 50% of revenue from sales per title after the third-party vendor earns back the costs to develop, author, publish, market, promote and distribute each title, inclusive of any royalties owed to rights holders, following a six months period in market to allow for returns.
Publishing revenues are eligible for recognition upon the completion of a six-month sales period to provide for any potential returns and notification from the third-party entity that it has earned back all of its related publishing costs.
Other Revenue
Other revenue corresponds to subscription and advertising revenue from the Grom Social mobile application.
All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregated revenue listed above within the Sales caption in the condensed consolidated statements of operations:
The following table sets forth the components of the Company’s accounts receivable and advanced payments and deferred revenues at September 30, 2022, and December 31, 2021:
During the three and nine months ended September 30, 2022, the Company had four customers that accounted for 81.8% and 71.4%, respectively, of total revenues. During the three and nine months ended September 30, 2021, the Company had four customers that account for 81.7% and 76.5%, respectively, of total revenues.
As of September 30, 2022 and December 31, 2021, the Company had one and two customers, respectively that accounted for 18.9% and 61.3%, respectively, of accounts receivable.
Animation revenue contracts vary with movie contracts typically allowing for progress billings over the contract term while other episodic development activities are typically billable upon delivery of the performance obligation for an episode. These episodic activities typically create unbilled contract assets between episode delivery dates while movies can create contract assets or liabilities based on the progress of activities versus the arranged billing schedule. Revenues from web filtering contracts are all billed in advance and therefore represent contract liabilities until fully recognized on a ratable basis over the contract life.
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INVENTORY |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2022 | |||
| Inventory Disclosure [Abstract] | |||
| INVENTORY |
Inventory consists of costs incurred to produce animated content for third party customers. Costs incurred to produce the animated content to customers, which include direct production costs, production overhead and supplies are recognized as work-in-progress inventory. As animated content is completed in accordance with the terms stated by the customer, inventory is classified as finished products and subsequently recognized as cost of services as animated content is accepted by and available to the customer. Carrying amounts of animated content are recorded at the lower of cost or net realizable value. Cost is determined using a weighted average cost method for direct production costs, productions overhead and supplies used for completing animation projects.
As of September 30, 2022 and December 31, 2021, the Company’s inventory totaled $103,594 and $91,361, respectively, and was comprised of work-in-progress of $90,394 and $77,501, respectively, and finished goods of $13,200 and $13,860, respectively. |
PROPERTY AND EQUIPMENT |
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| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY AND EQUIPMENT |
The following table sets forth the components of the Company’s property and equipment at September 30, 2022 and December 31, 2021:
For the three months ended September 30, 2022 and 2021, the Company recorded depreciation expense of $75,337 and $97,139, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded depreciation expense of $248,384 and $330,679, respectively.
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OTHER ASSETS |
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| Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OTHER ASSETS |
The following table sets forth the components of the Company’s other assets at September 30, 2022 and December 31, 2021:
For the three and nine months ended September 30, 2022, the Company recorded amortization expense of $704 and $1,203, respectively. Amortization expense related to the publication of an individual property during the three and nine months ended September 30, 2022. No amortization expense has been recognized for either capitalized website development costs or produced and licensed content costs as these properties were still in development at September 30, 2022. |
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LEASES |
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| Leases [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LEASES |
The Company has entered into operating leases primarily for office space. These leases have terms which range from two years to six years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment.
In January 2022, the Company signed a new lease agreement to extend the term until March 2024 of the Company’s office space in Boca Raton, Florida. The total legally binding minimum lease payments for this agreement is approximately $94,898.
Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized $384,117 in noncurrent right of use (“ROU”) assets, $201,592 in current lease liabilities and $160,828 in noncurrent lease liabilities from operating leases as of September 30, 2022.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating ROU assets and related lease liabilities are as follows:
For the three months ended September 30, 2022 and 2021, the Company recorded rent expenses related to lease obligations of $109,829 and $90,993, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded rent expenses related to lease obligations of $330,462 and $272,980, respectively. Rent expenses related to lease obligations are allocated between cost of goods sold and selling, general and administrative expenses in the Company’s condensed consolidated statement of operations.
The following table presents the future minimum payment obligations and aggregate present value of lease liabilities for operating leases as of September 30, 2022:
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BUSINESS COMBINATIONS |
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| Business Combination and Asset Acquisition [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BUSINESS COMBINATIONS |
Acquisition of Curiosity Ink Media, LLC
On July 29, 2021, the Company entered into a membership interest purchase agreement (the “Purchase Agreement”) with Curiosity Ink Media LLC, a Delaware limited liability company (“Curiosity”) and the holders of all of Curiosity’s outstanding membership interests (the “Sellers”), for the purchase of 80% of Curiosity’s outstanding membership interests (the “Purchased Interests”) from the Sellers (the “Acquisition”).
On August 19, 2021, pursuant to the terms of the Purchase Agreement, the Company consummated the Acquisition and acquired the Purchased Interests in consideration for the issuance to the Sellers of an aggregate of shares of the Company’s common stock to the Sellers, pro rata to their membership interests immediately prior to the closing of the Acquisition. The shares were valued at $ per share which represents to the 20-day volume-weighted average price of the Company’s common stock on August 19, 2021.
Pursuant to the Purchase Agreement, the Company also paid $400,000 and issued an 8% eighteen-month convertible promissory note in the principal amount $278,000 (the “Note”) to pay-down and refinance certain outstanding loans and advances previously made to Curiosity by Russell Hicks and Brett Watts.
The Note is convertible into shares of common stock of the Company at a conversion price of $3.28 per share but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The Note may be prepaid at any time, in whole or in part. The Note is subordinate to the Company’s senior indebtedness.
The Sellers also have the ability to earn up to $17,500,000 (payable 50% in cash and 50% in stock) upon the achievement of certain performance milestones as of December 31, 2025.
In addition to the tangible assets, goodwill totaling $14,271,969 was recorded in connection with the acquisition. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents potential future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is not expected to be deductible for tax purposes.
The amounts in the table below represent the allocation of the purchase price. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
During the quarter ended June 30, 2022, the Company finalized the purchase price allocation, during the permissible measurement period, and obtained new fair value information for certain identifiable intangible assets related to its acquisition of Curiosity. The revised purchase price allocation decreased goodwill by $468,426 and increased intangible assets by $468,426. Additionally, the Company recorded amortization expense of $15,944 related to intangible assets subject to amortization during the quarter ended June 30, 2022 (of which $7,247 corresponded to the year ended December 31, 2021). See Note 9 – Goodwill and Intangible Assets for more detail. These adjustments did not have a significant impact on the Company’s operations for the three and nine months ended September 30, 2022. The following table summarizes the individually identifiable intangible assets recognized:
The Company’s results of operations include results of operations for Curiosity for the three and nine months ended September 30, 2022. No pro forma information is presented for the Company’s results of operations as if the acquisition of Curiosity had occurred on January 1, 2021 as results of its operations are not considered material to the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021.
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GOODWILL AND INTANGIBLE ASSETS |
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| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GOODWILL AND INTANGIBLE ASSETS |
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers. At September 30, 2022 and December 31, 2021, the carrying amount of the Company’s goodwill was $21,907,599 and $22,376,025, respectively.
The following table sets forth the components of the Company’s intangible assets at September 30, 2022 and December 31, 2021:
For the three months ended September 30, 2022 and 2021, the Company recorded amortization expense of $42,505 and $99,729, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded amortization expense of $134,764 and $290,187, respectively.
The following table provides information regarding estimated remaining amortization expense for intangible assets subject to amortization for the remainder of 2022 and each of the following years ending December 31:
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ACCRUED LIABILITIES |
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| Payables and Accruals [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACCRUED LIABILITIES |
The following table sets forth the components of the Company’s accrued liabilities at September 30, 2022 and December 31, 2021:
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RELATED PARTY TRANSACTIONS AND PAYABLES |
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| Related Party Transactions [Abstract] | |||
| RELATED PARTY TRANSACTIONS AND PAYABLES |
Darren Marks’s Family
The Company has engaged the family of Darren Marks, its Chief Executive Officer, to assist in the development of the Grom Social mobile application. These individuals create and produce original short form content focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special events. Sarah Marks, the wife of Mr. Marks, and Zach Marks, Luke Marks, Jack Marks, Dawson Marks, Caroline Marks and Victoria Marks, each Mr. Marks’s children, are, or have been, employed by or independently contracted with the Company.
For the three months ended September 30, 2022 and 2021, the Marks family was paid a total of $7,500, respectively. For the nine months ended September 30, 2022 and 2021, the Marks family was paid a total of $22,500, respectively.
Effective January 1, 2021, the Company entered into a marketing agreement with Caroline Marks, daughter of Mr. Marks, for a period of 60 months in exchange for 52,084 shares of the Company’s common stock. On March 2, 2022, the Board of Directors of the Company approved the issuance the shares of common stock at a fair market value of $53,647. Caroline serves as an ambassador for the Grom Social mobile app with her own profile and Grom TV channel.
Compensation for services provided by the Marks family is expected to continue for the foreseeable future.
Liabilities Due to Executive Officers and Directors
On July 11, 2018, our director Dr. Thomas Rutherford loaned the Company $50,000. The loan bears interest at a rate of 10% per annum and was due on August 11, 2018. No notice of default or demand for payment has been received by the Company.
As of September 30, 2022 and December 31, 2021, the aggregate related party payables balance was $50,000, respectively.
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CONVERTIBLE NOTES |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CONVERTIBLE NOTES |
The following tables set forth the components of the Company’s convertible notes as of September 30, 2022 and December 31, 2021:
8% Unsecured Convertible Notes – Curiosity
On July 29, 2021, the Company entered into a membership interest purchase agreement with Curiosity and the holders of all of Curiosity’s outstanding membership interests, for the purchase of 80% of Curiosity’s outstanding membership interests from the sellers. Pursuant to the purchase agreement, the Company issued 8% eighteen-month convertible promissory notes in the aggregate principal amount $278,000 to pay-down and refinance certain outstanding loans and advances previously made by certain of its principals. The notes are convertible into shares of common stock of the Company at a conversion price of $3.28 per share but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The notes may be prepaid at any time, in whole or in part. The notes are subordinate to the Company’s senior indebtedness.
As of September 30, 2022, the principal balance of the Curiosity note was $278,000.
10% Senior Secured Convertible Note with Original Issuance Discount (L1)
On September 14, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with L1 Capital Global Master Fund (“L1”) pursuant to which it issued (i) a 10% original issue discount senior secured convertible note in the principal amount of $4,400,000 to L1 (the “L1 Note”) and (ii) a 5 five-year warrant to purchase 813,278 shares of the Company’s common stock at an exercise price of $4.20 per share (“Warrant Shares”) in exchange for $ (the “First Tranche Financing”). The Purchase Agreement also provided, subject to shareholder approval, for the issuance, subject to certain conditions, of an additional $1,500,000 of notes and warrants to purchase 277,777 shares of common stock (the “Second Tranche Financing”) on the same terms.
The L1 Note is convertible by L1 into common stock of the Company at a price of $ per share, or approximately 1,047,619 shares. It is repayable in equal monthly installments of $275,000 with certain deferments or an acceleration of up to three months' payments. The Company may repay the L1 Note in cash or shares of common stock at a price equal to the lesser of the then conversion price or 95% of the lowest daily VWAP during the ten consecutive trading days immediately preceding the monthly payment date, but in no event less than $1.92. In the event that VWAP drops below $1.92, the Company will have the right to pay at such VWAP with any shortfall paid in cash. The L1 Note is senior to all other Company indebtedness and the Company’s obligations under the note are secured by all of the assets of the Company’s subsidiaries.
The Company estimated the fair value of the warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of % and (iv) an expected volatility of the price of the underlying common stock of %. As a result, the Company allocated a fair value of $1,200,434 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.
On October 20, 2021, the Company and L1 entered into an amended and restated purchase agreement which increased the amount of the Second Tranche Financing from $1,500,000 to $6,000,000 and provides (i) for an amended and restated 10% original issue discount senior secured convertible note to be issued in exchange for the L1 Note pursuant to the Purchase Agreement and (ii) for the issuance of a five-year warrant to purchase 1,041,194 shares of the Company’s common stock at an exercise price of $4.20 per share.
In the event the principal amount of the L1 Note issued in the First Tranche Financing, when aggregated with the L1 Note to be issued in the Second Tranche Financing, exceeds 25% of the market capitalization of the Company’s common stock as reported by Bloomberg L.P, then the principal amount to be issued in the Second Tranche Financing will be limited to 25%, in the aggregate of both L1 Notes, unless waived in the sole discretion of the Purchaser.
During the three months ended March 31, 2022, the Company issued an aggregate shares of common stock to L1 upon the conversion of $4,125,000 of outstanding principal. As of September 30, 2022, the principal balance was $0 and all associated loan discounts were fully amortized.
10% Senior Secured Convertible Note with Original Issuance Discount (L1– Second Tranche)
On January 20, 2022 (the “Second Tranche Closing”), the Company and L1 Capital closed on the Second Tranche of the offering, resulting in the issuance of (i) a $1,750,000 10% Original Issue Discount Senior Secured Convertible Note, due July 20, 2023, (the “Second Tranche Note”); and (ii) a five year warrant to purchase 303,682 shares of Common Stock of the Company at an exercise price of $4.20 per share (the “Second Tranche Warrants”), in exchange for consideration of $ (i.e. the face amount less the 10% Original Issue Discount of $175,000).
In connection with the Second Tranche Closing, the Company paid to EF Hutton a fee of $126,000.
The Second Tranche Note is convertible into common stock of the Company at a rate of $4.20 per share (the “Conversion Price”) into 416,667 shares of common stock (the “Second Tranche Conversion Shares”) and, is repayable in equal monthly installments of $111,563 commencing on the date that the SEC declares a registration statement with respect to the resale of such shares effective, with all remaining amounts due on July 20, 2023. The Second Tranche Note is repayable by payment of cash, or, at the discretion of the Company and if the below listed “Equity Conditions” are met, by issuance of shares of the common stock at a price of 95% of the lowest daily VWAP during the ten-trading day period prior to the respective monthly redemption dates (with a floor of $1.92) multiplied by 102% of the amount due on such date. In the event that the ten-trading day VWAP drops below $1.92 the Company will have the right to pay in stock at such ten-trading day VWAP with any shortfall paid in cash. The Conversion Price may be adjusted in the event of dilutive issuances but in no event to less than $0.54 (the “Monthly Conversion Price”).
The Company’s right to make monthly payments in stock in lieu of cash for the Second Tranche Note is conditioned on certain conditions (the “Equity Conditions”). The Equity Conditions required to be met each month in order to redeem the Second Tranche Note with stock in lieu of a monthly cash payment, among other conditions set forth therein, include without limitation, that a registration statement be in effect with respect to the resale of the shares issuable upon conversion or redemption of the Second Tranche Note (or, that an exemption under Rule 144 is available), that no default be in effect, that the average daily trading volume of the Company’s common stock would have to be at least $550,000 during the five trading days prior to the respective monthly redemption and that the outstanding principal amounts of the First Tranche Note and Second Tranche Note combined, shall not exceed 30% of the market capitalization of the Company’s common stock as reported on Bloomberg L.P., which percentage is subject to increase by L1 Capital at its sole discretion.
Other provisions of the Second Tranche Note, which is similar in terms to the First Tranche Note, include that the Second Tranche Note Conversion Price is subject to full anti-dilution price protections in the event of financings that are below the Conversion Price with a floor of $0.54.
In the event of an Event of Default as defined in the notes, if the stock price is below the Conversion Price at the time of default and only for so long as a default is continuing, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the default is cured the default conversion rate elevates back to the normal Conversion Price
As part of the Second Tranche Closing, the Company issued Second Tranche Warrants exercisable for five years from the date of issuance, at $4.20 per share which carry the same anti-dilution protection as the Second Tranche Notes, subject to the same adjustment floor. The Second Tranche Warrants are exercisable via cashless exercise only for so long as no registration statement covering resale of the shares is in effect.
The Second Tranche Note continues to be subject to (i) the repayment and performance guarantees by the subsidiaries of the Company pursuant to a subsidiary guaranty and, (ii) the Security Agreement pursuant to which the L1 Capital was granted a security interest in all of the assets of the Company and certain of its subsidiaries, each as entered into in connection with the First Tranche closing on September 14, 2021.
During the nine months ended September 30, 2022, the Company issued an aggregate 3,055,556 shares of common stock and repaid $1,074,069 in cash to L1 upon the conversion of $1,650,000 of outstanding principal. As of September 30, 2022, the principal balance of these notes was $100,000 and remaining balance on the associated loan discounts was $7,685.
10% Secured Convertible Notes with Original Issuance Discounts (“OID Notes”)
On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of shares of the Company’s Series B preferred stock (“Series B Stock”) were issued to noteholders for an aggregate of $411,223 of outstanding principal and accrued and unpaid interest.
On November 30, 2020, the Company entered into a debt exchange agreement with the remaining holder of these 10% convertible notes pursuant to which an aggregate of shares of Series B Stock were issued to the noteholder for an aggregate of $111,250 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $46,750 as a result of the exchange.
On July 19, 2021, the Company repaid $6,329 of outstanding principal and accrued and unpaid interest to a 10% secured convertible noteholder.
As of September 30, 2022, the principal balance of these notes was $75,000 and all associated loan discounts were fully amortized. No notices of default or demands for payment have been received by the Company.
12% Senior Secured Convertible Notes (“TDH Secured Notes”)
On March 16, 2020, the Company sold (the “TDH Secured Notes Offering”) an aggregate $3,000,000 of its 12% senior secured convertible notes (the “TDH Secured Notes”), to eleven accredited investors (the “TDH Secured Note Lenders”), pursuant to a subscription agreement with the TDH Secured Note Lenders. Interest on the TDH Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the TDH Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024. Pursuant to the TDH Secured Notes, TD Holdings will pay amounts due under the TDH Secured Notes. Prepayment of amounts due under TDH Secured Notes is subject to a prepayment penalty in an amount equal to 4% of the amount prepaid.
The TDH Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $3.20 per share.
The Company’s obligations under the TDH Secured Notes, are secured by Grom Holdings’ shares of stock of TDH, and of its wholly owned subsidiary, TDAHK. The TDH Secured Notes rank equally and ratably on a pari passu basis with (i) the other TDH Secured Notes and (ii) the Original TDH Notes issued by the Company pursuant to TDH Share Sale Agreement.
If the Company sells the animation studio located in Manila, Philippines, which is currently owned by TDH through TDAHK (the “Animation Studio”), for more than $12,000,000, and so long as any amount of principal is outstanding under the TDH Secured Notes, the Company will pay the TDH Secured Notes holders from the proceeds of the sale (i) all amounts of principal outstanding under the TDH Secured Notes, (ii) such amount of interest which would be due and payable assuming the TDH Secured Notes were held to maturity (minus any amounts of interest previously paid hereunder), and (iii) an additional 10% of the amount of principal outstanding under the TDH Secured Notes within five days of the closing of such sale.
In connection with the issuance of the TDH Secured Notes, the Company issued to each TDH Secured Note holder shares of common stock equal to 20% of the principal amount of such holder’s TDH Secured Note, divided by $3.20. Accordingly, an aggregate of shares of common stock were issued to the TDH Secured Note holders on March 16, 2020. These shares were valued at $420,000, or $2.24 per share, which represents fair market value. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the notes.
On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $1,101,000 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $598,042 as a result of the exchange.
On November 30, 2020, the Company entered into a debt exchange agreement with another holder of these 12% TDH Secured Notes pursuant to which an aggregate of 158,000 shares of Series B Stock were issued to the noteholder for an aggregate of $99,633 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $58,367 as a result of the exchange.
On February 17, 2021, the Company entered into debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $1,256,722 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $850,103 as a result of the exchange.
As of September 30, 2022, the principal balance of these notes was $237,604 and the remaining balance on the associated loan discounts was $25,521.
12% Senior Secured Convertible Notes (Additional Secured Notes)
On March 16, 2020, the Company issued to seven accredited investors (the “Additional Secured Note Lenders”) an aggregate of $1,060,000 of its 12% senior secured convertible notes (the “Additional Secured Notes”) in a private offering pursuant to a subscription agreement with substantially the same terms as the TDH Secured Notes except that the Additional Secured Notes are secured by all of the assets of the Company other than the shares and other assets of TDH and TDAHK, pursuant to a security agreement by and among the Company and the Additional Secured Note Lenders.
Interest on the Additional Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the Additional Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024. Prepayment of the amounts due under the Additional Secured Notes is subject to a prepayment penalty of 4% of the amount prepaid.
The Additional Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $3.20 per share.
In connection with the issuance of the Additional Secured Notes, the Company issued to each Additional Secured Note Lender shares of common stock equal to 20% of the principal amount of such holder’s Additional Secured Note, divided by $3.20. Accordingly, an aggregate of shares of common stock were issued. These shares were valued at $148,000, or $2.24 per share, which represents fair market value. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.
On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $782,500 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $424,375 as a result of the exchange.
On February 17, 2021, the Company entered into debt exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $182,500 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $97,077 as a result of the exchange.
As of September 30, 2022, the principal balance of these notes was $45,132 and the remaining balance on the associated loan discounts was $4,849.
Future Minimum Principal Payments
The remaining future principal repayments based upon the maturity dates of the Company’s borrowings for each of the next five years are as follows:
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DERIVATIVE LIABILITY |
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| Derivative Liability | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DERIVATIVE LIABILITY |
On January 20, 2022, the Company closed a Second Tranche transaction with L1 Capital, as described within Note 12 (“Convertible Notes”). The terms of the transaction included a provision that in the event the stock price is below $0.54 (the “Conversion Price”) at the time for so long as stock price continues below the Conversion Price, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the stock prices elevate back to the normal Conversion Price. On May 9, 2022, stock price fell below $0.54 and the default provision was triggered.
As a result of the May 9, 2022 triggering event, the Company recorded a derivative liability for $1,052,350 which represents the fair value transferred to the note holder from the down round feature being triggered. The Company calculated the fair value of the derivative using a Monte Carlo simulation.
On June 28, 2022, L1 Capital converted $450,000 of the Second Tranche convertible note for shares and a cash settlement of $295,539, resulting in a $39,624 loss on settlement of derivative.
On July 11, 2022, L1 Capital converted $400,000 of the Second Tranche convertible note for shares and a cash settlement of $245,993, resulting in a $12,436 loss on settlement of derivative.
On July 25, 2022, L1 Capital converted $400,000 of the Second Tranche convertible note for shares and a cash settlement of $242,548, resulting in a $1,420 loss on settlement of derivative.
On August 11, 2022, L1 Capital converted $400,000 of the Second Tranche convertible note for shares and a cash settlement of $289,989, resulting in a $66,274 loss on settlement of derivative.
At September 30, 2022, the fair value of the derivative was remeasured using the remaining maximum shares to be delivered resulting in an unrealized gain on change of derivative transaction of $49,047 and remaining derivative liability of $48,988.
The fair value of derivative liability as of May 9, 2022 and September 30, 2022 was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:
Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood or in the volatility assumptions would result in a higher (lower) fair value measurement. |
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FAIR VALUE MEASUREMENTS |
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| Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FAIR VALUE MEASUREMENTS |
Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, non on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, include the Company’s own credit risk.
The Company applied FASB Accounting Standards Codification (“ASC”) 820 – Fair Value Measurement, which provides guidance for using fair value to measure assets and liabilities by defining fair value and establishing the framework for measuring fair value. ASC 820 applies to financial and nonfinancial instruments that are measured and reported on a fair value basis. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair value hierarchy requires the use of observable market data when available and consists of the following levels:
Contingent Consideration
The fair value of the Company’s contingent consideration payable was based on the Company’s evaluation as to the probability and amount of any earn-out that could have ultimately been payable. The Company utilizes a third-party valuation firm to assist in the calculation of the contingent consideration at the acquisition date. The Company evaluates the forecast of the acquired entity and the probability of earn-out provisions being achieved when it evaluates the contingent consideration recorded at initial acquisition date and at each subsequent reporting period. The fair value of contingent consideration is measured at each reporting period and adjusted as necessary. The Company evaluates the terms in contingent consideration arrangements provided to former owners of acquired companies who become employees of the Company to determine if such amounts are part of the purchase price of the acquired entity or compensation. Because the fair value measurements relating to the contingent consideration liabilities are subject to management judgment, measurement uncertainty is inherent in the valuation of the contingent consideration liabilities as of the reporting date.
Derivative Liability
The fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer to Note 13 (“Derivative Liability”), for a further discussion of the measurement of fair value of the derivatives and their underlying assumptions.
The fair value of the Company’s financial instruments carried at fair value at September 30, 2022 and December 31, 2021 are as follows:
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities during the three and nine months ended September 30, 2022:
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INCOME TAXES |
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| Income Tax Disclosure [Abstract] | |||
| INCOME TAXES |
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon currently known facts and circumstances and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
The Company’s interim effective tax rate, inclusive of discrete items, for the three and nine months ended September 30, 2022 and 2021 was 0%, respectively, due to recurrent net losses for the periods presented.
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STOCKHOLDERS’ EQUITY |
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| STOCKHOLDERS’ EQUITY |
Preferred Stock
The Company is authorized to issue shares of preferred stock, par value of $ per share.
Series A Preferred Stock
As of September 30, 2022 and December 31, 2021, the Company had shares of Series A Stock issued and outstanding.
Series B Preferred Stock
On February 17, 2021, the Company entered into debt exchange agreements with holders of three of the Company’s convertible promissory notes in the aggregate amount of $1,700,905 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders exchanged the outstanding notes, and all amounts owed by the Company thereunder, for an aggregate of shares of the Company’s Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid in full and the notes were cancelled.
On February 17, 2021, the Company entered into subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of shares of Series B Stock for aggregate gross proceeds of $300,000.
On March 31, 2021, the Company entered into subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of shares of Series B Stock for aggregate gross proceeds of $650,000.
On May 20, 2021, the Company entered into exchange agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed to exchange all of the issued and outstanding shares of Series B Stock for shares of the Company’s newly designated Series C Stock, on a one for one basis. As a result of the exchange, all issued and outstanding shares of Series B Stock was exchanged for shares of Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
As of September 30, 2022 and December 31, 2021, the Company had shares of Series B Stock issued and outstanding, respectively.
Series C Preferred Stock
On May 20, 2021, the Company filed with the Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series C Stock designating 10,000,000 shares as Series C Preferred Stock (the “Series C Stock”). The Series C Stock ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.
The holder may, at any time after the 6-month anniversary of the issuance of the shares of Series C Preferred Stock, convert such shares into common stock at a conversion rate of $1.92 per share. In addition, the Company may, at any time after the issuance of the shares, convert any or all of the outstanding shares of Series C Preferred Stock at a conversion rate of $1.92 per share.
Each share of Series C Stock entitles the holder to 1.5625 votes for each share of Series C Stock. The consent of the holders of at least two-thirds of the shares of Series C Stock is required for the amendment to any of the terms of the Series C Stock, to create any additional class of stock unless the stock ranks junior to the Series C Stock, to make any distribution or dividend on any securities ranking junior to the Series C Stock, to merge or sell all or substantially all of the assets of the Company or acquire another business or effectuate any liquidation of the Company.
Cumulative dividends accrue on each share of Series C Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in arrears quarterly commencing 90 days from issuance. The dividend shall be payable in shares of common stock (a “PIK Dividend”) and are be due and payable on the date on which such PIK Dividend was declared.
Upon a liquidation, dissolution or winding up of the Company, the holders of the Series C Stock are entitled to $1.00 per share plus all accrued and unpaid dividends. No distribution may be made to holders of shares of capital stock ranking junior to the Series C Stock upon a liquidation until Series C stockholders receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series C Stock, may elect to deem a merger, reorganization or consolidation of the Company into or with another corporation, not affiliated with said majority, or other similar transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of in exchange for property, rights or securities distributed to holders thereof by the acquiring person, firm or other entity, or the sale of all or substantially all of the assets of the Company.
On May 20, 2021, the Company entered into exchange agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed to exchange all of the issued and outstanding shares of Series B Stock for shares of Series C Stock, on a one for one basis. As a result of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059 shares of the Company’s Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
On June 11, 2021, the Company entered into subscription agreements with an accredited investor, pursuant to which the Company sold the investor an aggregate of shares of Series C Stock for aggregate gross proceeds of $100,000.
On September 10, 2021, the Company entered into a debt exchange agreement with a holder of a 10% convertible note pursuant to which shares of the Company’s Series C Stock was issued for $85,250 of outstanding principal and accrued and unpaid interest.
On January 24, 2022, the Company issued shares of common stock to a stockholder upon the conversion of shares of Series C preferred stock.
On July 29, 2022, the Company issued shares of common stock to a stockholder upon the conversion of shares of Series C preferred stock.
As of September 30, 2022 and December 31, 2021, the Company had and shares of Series C Stock issued and outstanding, respectively.
For the three months and nine ended September 30, 2022, the Company declared cumulative dividends totaling $186,163 and $550,223, respectively, for amounts accrued on its Series C Stock.
Common Stock
The Company is authorized to issue shares of common stock, par value of $ per share and had and shares of common stock issued and outstanding as of September 30, 2022 and December 31, 2021, respectively.
Reverse Stock Split
On April 7, 2021, the board of directors of the Company approved, and on April 8, 2021, the Company’s shareholders approved, an increase to the range of the ratio for a reverse stock split to a ratio of no less than 1-for-2 and no more than 1-for-50. On May 6, 2021, the board fixed the ratio for a reverse stock split at 1-for-32 and, on May 7, 2021, the Company filed a certificate of amendment to its articles of incorporation with the Secretary of State of the State of Florida to effect the reverse stock split which became effective as of May 13, 2021. The Company’s common stock began being quoted on the OTCQB on a post-reverse split basis beginning on May 19, 2021.
Registered Offering
On June 21, 2021, the Company sold an aggregate of 2,409.639 units (“Units”), at a price to the public of $4.15 per Unit (the “Offering”), each Unit consisting of one share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price of $4.565 per share (the “Warrants”), pursuant to an underwriting agreement, dated as of June 16, 2021 (the “Underwriting Agreement”), between the Company and EF Hutton, division of Benchmark Investments, LLC, as representative (“EF Hutton”) of the several underwriters named in the Underwriting Agreement. In addition, pursuant to the Underwriting Agreement, the Company granted EF Hutton a 45-day option (the “Over-Allotment Option”) to purchase up to 361,445 additional Units, to cover over-allotments in connection with the Offering, which EF Hutton exercised with respect to Warrants exercisable for up to an additional 361,445 shares of common stock. The Company received gross proceeds of approximately $10,000,000 in the Offering, before deducting underwriting discounts and commissions and other offering expenses.
On July 15, 2021, EF Hutton exercised in full the Over-Allotment Option with respect to all additional shares of the Company’s common stock for total gross proceeds to the Company of approximately $1,500,000 before deducting underwriting discounts and commissions and other offering expenses.
Common Stock Issued as Compensation Employees, Officers and/or Directors
During the three and nine months ended September 30, 2021, the Company issued shares of common stock with a fair market value of $ to an officer as compensation.
Common Stock Issued in Exchange for Consulting, Professional and Other Services
During the three and nine months ended September 30, 2022, the Company issued and shares of common stock, respectively, with a fair market value of $21,254 and $116,736, respectively, to contractors for services rendered.
During the three and nine months ended September 30, 2021, the Company issued and shares of common stock, respectively, with a fair market value of $255,097 and $511,458, respectively, to contractors for services rendered.
Common Stock Issued in Connection with the Conversion of Convertible Note Principal and Accrued Interest
During the three and nine months ended September 30, 2022, the Company issued and shares of common stock, respectively, upon the conversion of $1,200,000 and $5,775,000, respectively, in convertible note principal and accrued interest.
During the three and nine months ended September 30, 2021, the Company issued shares of common stock, upon the conversion of $665,392, in convertible note principal and accrued interest.
Common Stock Issued in Connection with Series C Stock Dividends
During the three and nine months ended September 30, 2022, the Company issued and shares of common stock, respectively, valued at $187,216 and $833,739, respectively, for cumulative dividends declared on its Series C Stock.
Common Stock Issued in Connection with the Issuance of Convertible Promissory Notes
During the three and nine months ended September 30, 2021, the Company issued and shares of common stock, respectively, valued at $10,000 and $39,750, respectively, in connection with the issuance of convertible notes.
Common Stock Issued in the Acquisition of a Business
During the three and nine months ended September 30, 2021, the Company issued shares of common stock valued at $5,000,000 in connection with the acquisition of a business.
Stock Purchase Warrants
Stock purchase warrants are accounted for as equity in accordance with ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
The following table reflects all outstanding and exercisable warrants at September 30, 2022 and December 31, 2021. All warrants are exercisable for a period of three to five years from the date of issuance:
As of September 30, 2022, the outstanding stock purchase warrants had an aggregate intrinsic value of $.
Stock Options
The following table represents all outstanding and exercisable stock options as of September 30, 2022.
During the three and nine months ended September 30, 2022, the Company recorded $ and $, respectively, in stock-based compensation costs related to stock options.
During the three and nine months ended September 30, 2021, the Company recorded $ in stock-based compensation costs related to stock options.
Stock-based compensation expense is reported in selling, general and administrative on the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss. As of September 30, 2022, there were $ in total unrecognized stock-based compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of years.
As of September 30, 2022, the outstanding stock options had an aggregate intrinsic value of $. |
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COMMITMENTS AND CONTINGENCIES |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2022 | |||
| Commitments and Contingencies Disclosure [Abstract] | |||
| COMMITMENTS AND CONTINGENCIES |
In the ordinary course of business, the Company and its subsidiaries are subject to various pending and potential legal actions, arbitration proceedings, claims, investigations, examinations, regulatory proceedings, information gathering requests, subpoenas, inquiries and matters relating to compliance with laws and regulations (collectively, legal proceedings).
Based on the Company’s current knowledge, and taking into consideration its legal expenses, the Company does not believe it is a party to, nor are any of its subsidiaries the subject of, any legal proceeding that would have a material adverse effect on the Company’s consolidated financial condition or liquidity.
See also Note 7 (“Leases”).
See also Note 8 (“Business Combination”)
See also Note 15 (“Income Taxes”).
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SUBSEQUENT EVENTS |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2022 | |||
| Subsequent Events [Abstract] | |||
| SUBSEQUENT EVENTS |
In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to September 30, 2022 to the date these condensed consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these condensed consolidated financial statements, except as follows:
On October 6, 2022, L1 Capital converted $100,000 from its Second Tranche convertible notes for 185,186 shares and a cash settlement of $72,832. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
9 Months Ended |
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Sep. 30, 2022 | |
| Accounting Policies [Abstract] | |
| Impact of COVID-19 | Impact of COVID-19
On January 30, 2020, the World Health Organization announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 has and continues to significantly affect the United States and global economies.
The Company has experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings and travel restrictions, which affect both the Company’s and its service providers. The Company has significant operations in Manila, Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result of the Philippines government’s call to contain COVID-19, the Company’s animation studio, located in Manila, Philippines, which accounts for approximately 88% of the Company’s total revenues on a consolidated basis, was forced to close its offices for significant periods of time from March 2020 through December 2021.
In response to the outbreak and business disruption, the Company has instituted employee safety protocols to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices and production studio. The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, the Company started to recall artist and employees to return to the studio which is currently operating at 50% seat capacity.
While restrictions have eased, the risk continues as new variants are being discovered. The full extent of potential impacts on the Company’s business, financing activities and the global economy will depend on future developments, which cannot be predicted due to the uncertain nature of the continued COVID-19 pandemic, government mandated shut downs, and its adverse effects, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. These effects could have a material adverse impact on the Company’s business, operations, financial condition and results of operations.
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| Basis of Presentation | Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conjunction with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted. For the three and nine months ended September 30, 2022, the condensed consolidated financial statements include the accounts of the Company and its operating subsidiaries Grom Social, TD Holdings, GES, GNS, and Curiosity. The Company recognizes noncontrolling interest related to its less-than-wholly-owned subsidiary, Curiosity, as equity in the consolidated financial statements separate from the parent entity’s equity. The net income (loss) attributable to noncontrolling interest is included in net income (loss) in the condensed consolidated statements of operations and comprehensive loss.
These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments, which includes intercompany balances and transactions are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto at December 31, 2021, as presented in the Company’s Annual Report on Form 10-K filed on April 15, 2022 with the SEC.
Certain prior period statement of operations and statement of cash flows captions and balances have been reclassified to conform with the current year presentation, including the allocation of $79,810 and $252,343, respectively from depreciation and amortization and $95,899 and $303,214, respectively in certain fixed overhead costs from selling, general, and administrative expenses previously presented under operating expenses to cost of goods sold during the three and nine months ended September 30, 2021. In the statement of cash flow, the amortization of rights-of-use assets is presented as an adjustment to reconcile net loss to cash used in operating activities and changes to operating lease liabilities are presented as a change in operating assets and liabilities. These two reclassifications were previously presented as a net movement titled operating lease right-of-use assets under changes in operating assets and liabilities. The changes do not have any financial impact on the Company’s reported revenue, reported net loss, or cash flows from operations.
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| Use of Estimates | Use of Estimates
The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. The results of operations for the three months and nine months ended September 30, 2022, are not necessarily indicative of the operating results for the full year.
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| Update to Significant Accounting Policies | Update to Significant Accounting Policies
The Company has changed its accounting policy related to Publishing Revenue, refer to Revenues – Publishing Revenue note (Note 3) for the new significant accounting policy. This change did not have a significant impact on our operations for the three and nine months ended September 30, 2022 and 2021.
Other than noted above, there have been no other new or material changes to the significant accounting policies discussed in the Company’s audited financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC on April 15, 2022, that are of significance, or potential significance, to the Company.
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| Recent Accounting Pronouncements – Issued, not yet Adopted | Recent Accounting Pronouncements – Issued, not yet Adopted
There were no new accounting pronouncements issued in the three and nine months ended September 30, 2022, which could impact the Company.
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| Recently Issued Accounting Pronouncements Adopted | Recently Issued Accounting Pronouncements Adopted
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. ASU 2021-04 provides guidance on modifications or exchanges of freestanding equity-classified written call options that are not within the scope of another Topic. Entities should treat a modification of the terms or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after modification or exchange, as an exchange of the original instrument for a new instrument. ASU 2021-04 provides further guidance on measuring the effect of such modifications or exchanges, and also provides guidance on the recognition of such modifications or exchanges on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company adopted this ASU on January 1, 2022, which did not result in a material impact to the condensed consolidated financial statements and disclosures.
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REVENUES (Tables) |
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| Schedule of disaggregated revenue |
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| Schedule of accounts receivable |
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PROPERTY AND EQUIPMENT (Tables) |
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| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of property and equipment |
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OTHER ASSETS (Tables) |
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| Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule Of Other Assets |
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LEASES (Tables) |
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| Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of operating right-of-use assets |
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| Schedule of amortization of lease liabilities |
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BUSINESS COMBINATIONS (Tables) |
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| Business Combination and Asset Acquisition [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| Schedule Of Components Of Income Tax Expense Benefit |
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| Schedule of Recognized Identified Assets Acquired and Liabilities Assumed |
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| Schedule of identifiable intangible assets |
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GOODWILL AND INTANGIBLE ASSETS (Tables) |
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| Schedule of intangible assets |
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| Schedule of amortization |
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ACCRUED LIABILITIES (Tables) |
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| Payables and Accruals [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Liabilities |
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CONVERTIBLE NOTES (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of convertible debt |
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| Schedule of future debt maturity payments |
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DERIVATIVE LIABILITY (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Liability | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DERIVATIVE LIABILITY (Details - Assumptions) |
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FAIR VALUE MEASUREMENTS (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of financial instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of changes in the fair value financial liabilities |
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STOCKHOLDERS’ EQUITY (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of warrants |
|
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| Schedule of options |
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REVENUES (Details - Revenue by segment) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Total Sales | $ 1,484,958 | $ 1,514,692 | $ 3,855,665 | $ 4,778,527 |
| Animation [Member] | ||||
| Total Sales | 1,419,153 | 1,383,196 | 3,493,732 | 4,373,409 |
| Web Filtering [Member] | ||||
| Total Sales | 63,234 | 130,928 | 358,950 | 403,676 |
| Produced And Licensed Content [Member] | ||||
| Total Sales | 0 | 0 | 0 | 0 |
| Publishing [Member] | ||||
| Total Sales | 2,321 | 0 | 2,321 | 0 |
| Other Revenue [Member] | ||||
| Total Sales | $ 250 | $ 568 | $ 662 | $ 1,442 |
REVENUES (Details - Accounts Receivable) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Revenue from Contract with Customer [Abstract] | ||
| Billed accounts receivable | $ 507,784 | $ 822,536 |
| Unbilled accounts receivable | 563,570 | 187,751 |
| Allowance for doubtful accounts | (36,273) | (41,708) |
| Total accounts receivable, net | 1,035,081 | 968,579 |
| Total advanced payments and deferred revenues | $ 615,316 | $ 404,428 |
REVENUES (Details Narrative) - Customer Concentration Risk [Member] |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Dec. 31, 2021 |
|
| Revenue Benchmark [Member] | Four Customers [Member] | |||||
| Disaggregation of Revenue [Line Items] | |||||
| Concentration percentage | 81.80% | 81.70% | 71.40% | 76.50% | |
| Accounts Receivable [Member] | One Customers [Member] | |||||
| Disaggregation of Revenue [Line Items] | |||||
| Concentration percentage | 18.90% | 18.90% | |||
| Accounts Receivable [Member] | Two Customers [Member] | |||||
| Disaggregation of Revenue [Line Items] | |||||
| Concentration percentage | 61.30% | 61.30% | |||
INVENTORY (Details Narrative) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Inventory, net | $ 103,594 | $ 91,361 |
| Inventory work-in-progress | 90,394 | 77,501 |
| Inventory finished goods | $ 13,200 | $ 13,860 |
PROPERTY AND EQUIPMENT (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Property, Plant and Equipment [Abstract] | ||||
| Depreciation expense | $ 75,337 | $ 97,139 | $ 248,384 | $ 330,679 |
OTHER ASSETS (Details) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||
| Capitalized website development costs | $ 916,118 | $ 411,800 |
| Prepublication costs | 160,083 | 152,286 |
| Produced and licensed content costs | 296,441 | 76,701 |
| Deposits | 65,475 | 76,052 |
| Other noncurrent assets | (0) | 4,321 |
| Total other assets | $ 1,438,117 | $ 721,160 |
OTHER ASSETS (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended |
|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2022 |
|
| Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||
| Amortization | $ 704 | $ 1,203 |
LEASES (Details - Operating right-of-use assets and related lease liabilities) |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
USD ($)
| |
| Leases [Abstract] | |
| Cash paid for operating lease liabilities | $ 344,721 |
| Weighted-average remaining lease term (in years) | 1 year |
| Weighted-average discount rate | 10.00% |
LEASES (Details - Future minimum payment obligations) |
Sep. 30, 2022
USD ($)
|
|---|---|
| Leases [Abstract] | |
| Remainder of 2022 | $ 101,990 |
| 2023 | 114,411 |
| 2024 | 50,235 |
| 2025 | 40,291 |
| 2026 | 42,306 |
| Thereafter | 44,421 |
| Total future lease payments | 393,654 |
| Less: Imputed interest | (31,234) |
| Present value of lease liabilities | $ 362,420 |
LEASES (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Dec. 31, 2021 |
|
| Lessee, Operating Lease, Liability, to be Paid | $ 393,654 | $ 393,654 | |||
| Operating Lease, Right-of-Use Asset | 384,117 | 384,117 | $ 593,405 | ||
| Operating Lease, Liability, Current | 201,592 | 201,592 | 333,020 | ||
| Operating Lease, Liability, Noncurrent | 160,828 | 160,828 | $ 284,848 | ||
| Operating Lease, Expense | 109,829 | $ 90,993 | 330,462 | $ 272,980 | |
| Office Space Boca Raton Fl [Member] | |||||
| Lessee, Operating Lease, Liability, to be Paid | $ 94,898 | $ 94,898 | |||
BUSINESS COMBINATIONS (Details) - Curiosity Ink Media L L C [Member] |
Aug. 19, 2021
USD ($)
shares
|
|---|---|
| Business Acquisition [Line Items] | |
| Payments to Acquire Businesses, Gross | $ 400,000 |
| Business Acquisition, Equity Interest Issued or Issuable, Number of Shares | shares | 5,421,962 |
| Notes Issued | $ 278,000 |
| Contingent purchase consideration | 5,586,493 |
| Business Combination, Consideration Transferred | $ 11,686,455 |
BUSINESS COMBINATIONS (Details 1) - Curiosity Ink Media L L C [Member] |
Aug. 19, 2021
USD ($)
|
|---|---|
| Business Combination, Separately Recognized Transactions [Line Items] | |
| Cash and cash equivalents | $ 26,408 |
| Inventory | 65,734 |
| Produced and licensed content cost | 187,920 |
| Goodwill And Intangible Assets | 14,271,969 |
| Accounts payable | (113,462) |
| Noncontrolling interest | (2,752,114) |
| Total identifiable assets acquired, and liabilities assumed | $ 11,686,455 |
BUSINESS COMBINATIONS (Details 2) |
Sep. 30, 2022
USD ($)
|
|---|---|
| Acquired Finite-Lived Intangible Assets [Line Items] | |
| Total identifiable intangible assets | $ 468,426 |
| Licensing Agreements [Member] | |
| Acquired Finite-Lived Intangible Assets [Line Items] | |
| Total identifiable intangible assets | 341,728 |
| Books And Stories Content [Member] | |
| Acquired Finite-Lived Intangible Assets [Line Items] | |
| Total identifiable intangible assets | $ 126,698 |
BUSINESS COMBINATIONS (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Aug. 19, 2021 |
Sep. 30, 2022 |
Jun. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Dec. 31, 2021 |
Jul. 29, 2021 |
|
| Business Acquisition [Line Items] | ||||||||
| Goodwill | $ 21,907,599 | $ 21,907,599 | $ 22,376,025 | |||||
| Amortization of Intangible Assets | $ 42,505 | $ 99,729 | $ 134,764 | $ 290,187 | ||||
| Purchase Agreement [Member] | Convertible Notes Payable [Member] | ||||||||
| Business Acquisition [Line Items] | ||||||||
| Long-Term Debt, Gross | $ 278,000 | |||||||
| Curiosity Ink Media [Member] | ||||||||
| Business Acquisition [Line Items] | ||||||||
| Purchase of outstanding interest percentage | 80.00% | |||||||
| Shares issued | 1,771,883 | |||||||
| Shares issued | $ 2.82 | |||||||
| Long-Term Debt, Gross | $ 400,000 | |||||||
| Debt Instrument, Interest Rate, Effective Percentage | 8.00% | |||||||
| Goodwill | $ 14,271,969 | |||||||
| Goodwill, Period Increase (Decrease) | $ 468,426 | |||||||
| Increase (Decrease) in Intangible Assets, Current | 468,426 | |||||||
| Amortization of Intangible Assets | $ 15,944 | |||||||
GOODWILL AND INTANGIBLE ASSETS (Details - Amortization schedule) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Remainder of 2022 | $ 42,505 | |
| 2023 | 170,022 | |
| 2024 | 170,022 | |
| 2025 | 170,022 | |
| 2026 | 93,708 | |
| Thereafter | 247,513 | |
| Total remaining intangible assets subject to amortization | $ 893,792 | $ 686,827 |
GOODWILL AND INTANGIBLE ASSETS (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Dec. 31, 2021 |
|
| Goodwill and Intangible Assets Disclosure [Abstract] | |||||
| Carrying amount goodwill | $ 21,907,599 | $ 22,376,025 | |||
| Amortization of Intangible Assets | $ 42,505 | $ 99,729 | $ 134,764 | $ 290,187 | |
ACCRUED LIABILITIES (Details) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Payables and Accruals [Abstract] | ||
| Executive and employee compensation | $ 187,211 | $ 238,669 |
| Interest on convertible notes and promissory notes | 78,425 | 31,997 |
| Other accrued expenses and liabilities | 138,337 | 129,663 |
| Total accrued liabilities | $ 403,973 | $ 400,329 |
RELATED PARTY TRANSACTIONS AND PAYABLES (Details Narrative) - USD ($) |
9 Months Ended | |||
|---|---|---|---|---|
Sep. 30, 2022 |
Dec. 31, 2021 |
Sep. 30, 2021 |
Jul. 11, 2018 |
|
| Related Party Transaction [Line Items] | ||||
| Accounts payable, related parties | $ 50,000 | $ 50,000 | ||
| Fair market value | 53,647 | |||
| Darren Marks [Member] | ||||
| Related Party Transaction [Line Items] | ||||
| Accounts payable, related parties | $ 7,500 | $ 22,500 | ||
| Rutherford [Member] | ||||
| Related Party Transaction [Line Items] | ||||
| Accounts payable, related parties | $ 50,000 | |||
| Debt interest rate | 10.00% |
CONVERTIBLE NOTES (Details - Debt maturities) |
Sep. 30, 2022
USD ($)
|
|---|---|
| Debt Disclosure [Abstract] | |
| Remainder of 2022 | $ 441,897 |
| 2023 | 217,793 |
| 2024 | 76,046 |
| 2025 and thereafter | 0 |
| Total | $ 735,736 |
DERIVATIVE LIABILITY (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Aug. 11, 2022 |
Jul. 25, 2022 |
Jul. 11, 2022 |
Jun. 28, 2022 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
May 09, 2022 |
Dec. 31, 2021 |
|
| Offsetting Assets [Line Items] | ||||||||||
| Unrealized Gain (Loss) on Derivatives | $ (8,077) | $ 0 | $ 49,047 | $ 0 | ||||||
| Derivative Liability, Current | 48,988 | 48,988 | $ 0 | |||||||
| Second Tranche with L1 Capital [Member] | Convertible Notes [Member] | ||||||||||
| Offsetting Assets [Line Items] | ||||||||||
| Derivative Liability | $ 1,052,350 | |||||||||
| Debt Conversion, Converted Instrument, Amount | $ 400,000 | $ 400,000 | $ 400,000 | $ 450,000 | ||||||
| Debt Conversion, Converted Instrument, Shares Issued | 740,741 | 740,741 | 740,741 | 833,333 | ||||||
| Cash settlement | $ 289,989 | $ 242,548 | $ 245,993 | $ 295,539 | ||||||
| Derivative, Loss on Derivative | $ 66,274 | $ 1,420 | $ 12,436 | $ 39,624 | ||||||
| Unrealized Gain (Loss) on Derivatives | 49,047 | |||||||||
| Derivative Liability, Current | $ 48,988 | $ 48,988 | ||||||||
INCOME TAXES (Details Narrative) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Income Tax Disclosure [Abstract] | ||
| Effective tax rate | 0.00% | 0.00% |
STOCKHOLDERS' EQUITY (Details - Warrant activity) - $ / shares |
9 Months Ended | 12 Months Ended | |
|---|---|---|---|
Sep. 30, 2022 |
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Equity [Abstract] | |||
| Warrants outstanding, beginning balance | 4,247,170 | 229,628 | |
| Weighted Average Exercise Price, Warrants outstanding, beginning balance | $ 4.40 | $ 7.34 | |
| Average Remaining Contractual Term, Warrants outstanding | 2 years 3 months 3 days | 1 year 9 months | 1 year 7 months 28 days |
| Warrants issued | 303,682 | 4,273,733 | |
| Weighted Average Exercise Price, Warrants issued | $ 4.20 | $ 4.18 | |
| Warrants exercised | 0 | (249,480) | |
| Weighted Average Exercise Price, Warrants exercised | $ 0 | $ 0 | |
| Warrants forfeited | (154,687) | (6,711) | |
| Weighted Average Exercise Price, Warrants forfeited | $ 0 | $ 0 | |
| Warrants outstanding, ending balance | 4,396,162 | 4,247,170 | 229,628 |
| Weighted Average Exercise Price, Warrants outstanding, ending balance | $ 4.26 | $ 4.40 | $ 7.34 |