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 May 12, 2023, 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 | 33 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 39 |
| Item 4. | Controls and Procedures | 39 |
| Part II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 40 |
| Item 1A. | Risk Factors | 40 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 40 |
| Item 3. | Defaults upon Senior Securities | 40 |
| Item 4. | Mine Safety Disclosures | 40 |
| Item 5. | Other Information | 40 |
| Item 6. | Exhibits | 41 |
| 2 |
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
When used in this Quarterly Report, including the documents that we have incorporated by reference, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Discussions containing forward-looking statements may be found in the material set forth under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Quarterly Report.
Forward-looking statements are necessarily subjective, are based upon our current plans, intentions, objectives, goals, strategies, beliefs, projections and expectations, and involve known and unknown risks, uncertainties and other important factors.
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Any or all of our forward-looking statements in this report may turn out to be inaccurate. Important factors that may cause actual results, our performance or achievements, or industry results to differ materially from those contemplated by such forward-looking statements include, without limitation, those discussed under the caption “Risk Factors” in this Quarterly Report. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.
| 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Balance Sheets
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (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 | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Dividends payable | ||||||||
| Advanced payments and deferred revenues | ||||||||
| Convertible notes payable, net – current | ||||||||
| Related party payables | ||||||||
| Lease liabilities – current | ||||||||
| Total current liabilities | ||||||||
| Convertible notes payable, net of loan discounts | ||||||||
| Lease liabilities | ||||||||
| 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 March 31, 2023 and December 31, 2022, respectively | ||||||||
| Series B preferred stock, $ par value. shares authorized; zero shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | ||||||||
| Series C preferred stock, $ par value. shares authorized; shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | ||||||||
| Common stock, $ par value. shares authorized; and shares issued and outstanding as of March 31, 2023 and December 31, 2022, 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 March 31, | Three Months Ended March 31, | |||||||
| 2023 | 2022 | |||||||
| 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 income (expense), net | ( | ) | ( | ) | ||||
| Other gains (losses) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes (benefit) | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||
| Net loss attributable to Grom Social Enterprises, Inc. stockholders | ( | ) | ( | ) | ||||
| Dividends to Series C preferred stockholders | ||||||||
| 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 | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Noncontrolling | Total Stockholders' | ||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Deficit | Loss | Interests | Equity | ||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Conversion of Series C preferred stock into common stock | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock as payment for Series C preferred stock dividends payable | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Conversion of note principal and accrued interest into common stock | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Recognition of beneficial conversion features related to notes payable | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| 6 |
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Noncontrolling | Total Stockholders' | ||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Deficit | Loss | Interests | Equity | ||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series C preferred stock into common stock | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with sales made under private offerings | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with the exercise of common stock purchase warrants | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock purchase warrants as consideration for waiver of a financing covenant | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 7 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of right-of-use assets | ||||||||
| Provision for doubtful accounts | ||||||||
| Common stock purchase warrants issued for financing costs | ||||||||
| Common stock issued in exchange for fees and services | ||||||||
| Retirement benefit cost | ||||||||
| Stock based compensation | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities | ( | ) | ||||||
| Advanced payments and deferred revenues | ( | ) | ( | ) | ||||
| Income taxes payable and other noncurrent liabilities | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from the sale of property and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock, net of issuance costs | ||||||||
| Proceeds from exercise of common stock purchase warrants, net of issuance costs | ||||||||
| Proceeds from issuance of convertible notes | ||||||||
| Repayments of convertible notes | ( | ) | ( | ) | ||||
| Repayments of loans payable | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| 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 to reduce dividends payable to Series C preferred stockholders | $ | $ | ||||||
| Common stock warrants issued in connection with convertible promissory notes | $ | $ | ||||||
| Conversion of note principal and accrued interest into common stock | $ | $ | ||||||
| Dividends payable to Series C preferred stockholders | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 8 |
GROM SOCIAL ENTERPRISES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited)
| 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 five operating subsidiaries:
| · | Grom Social, Inc. (“Grom Social”), incorporated in the State of Florida on March 5, 2012, operates the Company’s social media network designed for children under the age of 13 years. | |
| · | TD Holdings Limited (“TD Holdings”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited, 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”), incorporated in the State of Florida on January 17, 2017, operates the Company’s web filtering services provided to schools and government agencies. | |
| · | Grom Nutritional Services, Inc. (“GNS”), incorporated in the State of Florida on April 19, 2017, intends to market and distribute nutritional supplements to children. It has been nonoperational since its inception. | |
| · | Curiosity Ink Media, LLC (“Curiosity”), organized in the State of Delaware on January 9, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and 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.
| 9 |
On a consolidated basis, the Company has incurred significant operating losses since its inception. As of March 31, 2023, The Company has an accumulated deficit of $ million. During the three months ended March 31, 2023, it used approximately $ million in cash for operating activities.
The Company has funded its operations primarily through sales of its common stock in public markets, proceeds from the exercise of warrants to purchase common stock, and the sale of convertible notes. Future capital requirements will depend on many factors, including the (i) rate of revenue growth, (ii) expansion of sales and marketing activities, (iii) timing and extent of spending on content development efforts, and (iv) market acceptance of the Company’s content, products and services.
The Company’s management intends to raise additional funds through the issuance of equity securities or debt to enable the Company to meet its obligations for the twelve-month period. However, 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 and/or raise additional capital could have a material adverse effect on the Company’s ability to achieve its intended business objectives. 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.
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 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 affected 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 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 also implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, the Company started to recall artists and employees to return to the studio. It is currently operating at 50% seat capacity.
The outbreak may continue to spread, which could materially impact the Company’s business. 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.
| 10 |
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 months ended March 31, 2023, 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 loss attributable to noncontrolling interest is included in net 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 for a fair presentation of financial position and results of operations. All such adjustments, which include 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, 2022, as presented in the Company’s Annual Report on Form 10-K filed on April 17, 2023 with the SEC.
Certain amounts for the prior year period have been reclassified to conform to current year’s presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The most significant estimates relate to revenue recognition, valuation of accounts receivable, goodwill and other long-lived assets, and contingencies. The Company bases its estimates on historical experience, known or expected trends and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Update to Significant Accounting Policies
There have been no 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, 2022 as filed with the SEC on April 17, 2023, that are of significance, or potential significance, to the Company.
| 4. | REVENUES |
The Company recognizes revenue from contracts with customers in accordance with FASB ASC 606. The Company’s main types of revenue contracts consists of the following:
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 aftereffects.
The Company provides services under fixed-price contracts. Under fixed-price contracts, the Company agrees to perform the specified 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.
| 11 |
Web Filtering Revenue
Web filtering revenue from subscription sales is recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases a computer appliance 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 appliance 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 revenues are 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 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 month 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 ecommerce sales, commercial services, and subscription and advertising revenue from the Grom Social mobile application.
| 12 |
The following table depicts the disaggregated revenue listed above within the Sales caption in the condensed consolidated statements of operations:
Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |||||||
| Animation | $ | $ | ||||||
| Web Filtering | ||||||||
| Publishing | ||||||||
| Other | ||||||||
| Total Sales | $ | $ | ||||||
The following table sets forth the components of the Company’s accounts receivable and advanced payments and deferred revenues at March 31, 2023, and December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
| Billed accounts receivable | $ | $ | ||||||
| Unbilled accounts receivable | ||||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total accounts receivable, net | $ | $ | ||||||
| Total advanced payments and deferred revenues | $ | $ | ||||||
During the three months ended March 31, 2023,
the Company had three customers that accounted for
| 13 |
At March 31, 2023, the Company had three customers
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.
| 5. | INVENTORY |
Inventory consists of costs incurred to produce animated content for third party customers. Costs incurred to produce the animated content for 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 March 31, 2023 and December 31, 2022,
the Company’s inventory totaled $
| 6. | PROPERTY AND EQUIPMENT |
The following table sets forth the components of the Company’s property and equipment at March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
| 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 | 4,227,737 | (4,044,191 | ) | 183,546 | 4,587,558 | (4,326,487 | ) | 261,071 | ||||||||||||||||
| Capital assets not subject to depreciation: | ||||||||||||||||||||||||
| Construction in progress | ||||||||||||||||||||||||
| Total fixed assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
For the three months ended March 31, 2023 and
2022, the Company recorded depreciation expense of $
| 14 |
| 7. | OTHER ASSETS |
The following table sets forth the components of the Company’s other assets at March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||
| Capitalized website development costs | $ | $ | ||||||
| Prepublication costs | ||||||||
| Produced and licensed content costs | ||||||||
| Deposits | ||||||||
| Other noncurrent assets | ||||||||
| Total other assets | $ | $ | ||||||
Capitalized Website Development Costs
The Company capitalizes certain costs associated with the development of its Santa.com website after the preliminary project stage is complete and until the website is ready for its intended use. Planning and operating costs are expensed as incurred. Capitalization begins when the preliminary project stage is complete, project plan is defined, functionalities are determined and internal and external resources are identified. Qualified costs incurred during the operating stage of our software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs that cannot be separated between maintenance of, and minor upgrades and enhancements to the websites are expensed as incurred.
Capitalized website costs are amortized on a straight-line basis over their estimated useful life of three years beginning with the time when it is ready for intended use. Amounts amortized are presented through cost of sales. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Prepublication Costs
Prepublication costs include costs incurred to create and develop the art, prepress, editorial, digital conversion and other content required for the creation of the master copy of a book or other media. Prepublication costs are amortized on a straight-line basis over a two- to five-year period based on expected future revenue. The Company regularly reviews the recoverability of the capitalized costs based on expected future revenues.
Produced and Licensed Content Costs
Produced and licensed content costs include capitalizable direct costs, production overhead, interest and development costs and are stated at the lower of cost, less accumulated amortization, or fair value. Marketing, distribution and general and administrative costs are expensed as incurred.
| 15 |
Film, television and direct to consumers through streaming services production and residual costs are expensed over the product life cycle based upon the ratio of the current period’s revenues to estimated remaining total revenues (Ultimate Revenues) for each production. For film productions and direct to consumer services, Ultimate Revenues include revenues from all sources that will be earned within ten years from the date of the initial release. For television series, Ultimate Revenues include revenues that will be earned within ten years from delivery of the first episode, or if still in production, five years from delivery of the most recent episode, if later. Costs of film, television and direct to consumer productions are subject to regular recoverability assessments, which compare the estimated fair values with the unamortized costs. The Company bases these fair value measurements on the Company’s assumptions about how market participants would price the assets at the balance sheet date, which may be different than the amounts ultimately realized in future periods. The amount by which the unamortized costs of film and television productions exceed their estimated fair values is written off. Costs for projects that have been abandoned are written off. Projects that have not been set for production within three years are also written off unless management has committed to a plan to proceed with the project and is actively working on and funding the project.
The following tables set forth the components of the Company’s capitalized costs at March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization |
Net Book Value |
Gross Carrying Value | Accumulated Depreciation |
Net Book Value |
|||||||||||||||||||
| Prepublication costs | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Produced and licensed content costs | ||||||||||||||||||||||||
| Capitalized website development costs | ( |
) | ( |
) | ||||||||||||||||||||
| Total capitalized costs | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
For the three months ended March 31, 2023 and
2022, the Company recorded amortization expense of $
| 8. | LEASES |
The Company has entered into operating leases
primarily for office space. These leases have original 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. During the three months ended March 31, 2023, the Company did
The future minimum payment obligations at March 31, 2023 for operating leases are as follows:
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total future minimum payment obligations | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of lease liabilities | $ |
| 16 |
These operating leases are listed as separate line items on the Company's Consolidated Balance Sheets and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's Consolidated Balance Sheets.
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 right-of-use assets and related lease liabilities are as follows:
| Three Months Ended March 31, 2023 | ||||
| Cash paid for operating lease liabilities | $ | |||
| Weighted-average remaining lease term in years | ||||
| Weighted-average discount rate | ||||
For the three months ended March 31, 2023 and
2022, the Company recorded rent expenses related to lease obligations of $
| 9. | 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
| 17 |
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 $2.82 per share which represents 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 Curiosity 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 Curiosity Note may be prepaid at any time, in whole or in part. The Curiosity 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 $
| 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 | $ | |||
| 18 |
During the year ended December 31, 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 $
The following table summarizes the individually identifiable intangible assets subsequently recognized:
| Licensing agreements | $ | |||
| Books and stories content | ||||
| Total identifiable intangible assets | $ | |||
| 10. | 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 March 31, 2023 and December 31, 2022, the carrying
amount of the Company’s goodwill was $
The following table sets forth the components of the Company’s intangible assets at March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
| Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Licensing agreement | ( | ) | ( | ) | ||||||||||||||||||||||||
| Subtotal | ( | ) | ( | ) | ||||||||||||||||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||||||||||||||
| Books and stories content | ||||||||||||||||||||||||||||
| Trade names | ||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
For the three months ended March 31, 2023 and
2022, the Company recorded amortization expense of $
| 19 |
The following table provides information regarding estimated remaining amortization expense for intangible assets subject to amortization for each of the following years ending December 31:
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total remaining intangible assets subject to amortization | $ | |||
| 11. | ACCRUED LIABILITIES |
The following table sets forth the components of the Company’s accrued liabilities at March 31, 2023 and December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
| Executive and employee compensation | $ | $ | ||||||
| Interest on convertible notes and promissory notes | ||||||||
| Other accrued expenses and liabilities | ||||||||
| Total accrued liabilities | $ | $ | ||||||
| 12. | 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 app. 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.
As of March 31, 2023, Zach and Luke Marks
were employed by Grom Social as its Founder and Content Creator, and Content Coordinator, respectively, and receive annual salaries
of $
For the three months ended March 31, 2023 and
2022, the Marks family was paid a total of $
Compensation for services provided by members of the Marks family is expected to continue for the foreseeable future.
| 20 |
Liabilities Due to Executive Officers and Directors
On July 11, 2018, our director Dr. Thomas Rutherford
loaned the Company $
As of March 31, 2023 and December 31, 2022,
the aggregate related party payables balance was $
| 13. | EMPLOYEE BENEFIT PLAN |
The Company’s subsidiary, Top Draw Animation, has an unfunded, non-contributory defined benefit plan covering its permanent employees.
Under the existing regulatory framework, the Company is required to pay eligible employees at least the minimum regulatory benefit upon retirement, which provides a retirement benefit equal to 22.5 days’ pay for every year of credited service, subject to age and service requirements. The regulatory benefit is paid in a lump sum upon retirement. The existing regulatory framework does not require minimum funding of the plan.
Retirement benefit expenses and liabilities are determined in accordance with an actuarial study made for the plan utilizing the net interest approach which disaggregates the defined benefit cost into the following components: service costs (cost of services received); net interest (financing effect of paying for benefits in advance or in arrears); and remeasurements (period-to-period fluctuations in the amounts of defined benefit obligations and plan assets).
Under the net interest approach, service cost and net interest on the defined benefit liability (asset) are both recognized in the statement of operations, while remeasurements of the defined benefit liability (asset) are recognized in other comprehensive income. Remeasurements recognized in other comprehensive income shall not be reclassified to profit or loss in a subsequent period.
The amount of the defined benefit liability reported under other noncurrent liabilities in the consolidated balance sheet is determined as follows:
| March 31, 2023 | December 31, 2022 | |||||||
| Benefit obligation | $ | $ | ||||||
| Plan assets | ||||||||
| Total | $ | $ | ||||||
| 21 |
The components of the accumulated benefit cost to be recognized under selling, general and administrative expense in consolidated statement of operations are the service cost (current service cost, past service cost or credit and settlement gains or losses) and net interest expense on the net defined benefit liability:
| March 31, 2023 | March 31, 2022 | |||||||
| Current service cost | $ | $ | ||||||
| Net interest expense | ||||||||
| Total | $ | $ | ||||||
The change in the accumulated benefit cost in the consolidated balance sheet for the three months ended March 31, 2023 is as follows:
| 2023 | ||||
| Balance, January 1 | $ | |||
| Foreign currency translation | ||||
| Expense recognized in other comprehensive income | ||||
| Remeasurement on actuarial gain (loss) recognized | ( | ) | ||
| Contributions paid | ( | ) | ||
| Balance, March 31 | $ | |||
The cumulative amount of actuarial gains recognized in other comprehensive income for the three months ended March 31, 2023 and 2022 is as follows:
| 2023 | 2022 | |||||||
| Balance, January 1 | $ | ( | ) | $ | ||||
| Foreign currency translation | ||||||||
| Actuarial gain (loss) | ( | ) | ||||||
| Balance, March 31 | ||||||||
| Tax effect | ( | ) | ||||||
| Cumulative actuarial gain (loss), net of tax | $ | ( | ) | $ | ||||
The assumptions used to determine retirement benefits for the three months ended March 31, 2023 are as follows:
| March 31, 2023 | ||||
| Discount rate | ||||
| Salary increase rate | ||||
| 22 |
| 14. | CONVERTIBLE NOTES |
The following tables set forth the components of the Company’s convertible notes as of March 31, 2023 and December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
| 8% Unsecured Convertible Note (Curiosity) | $ | $ | ||||||
| 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 March 31, 2023, 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 $
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 $
| 23 |
During the three months ended March 31, 2022,
the Company issued an aggregate shares of common stock to L1 upon the conversion of $
As of March 31, 2023, the principal balance of
L1 Note was $
10% Senior Secured Convertible Note with Original Issuance Discount (L1– Second Tranche)
On January 20, 2022 (the “Second Tranche
Closing”), the Company and LI 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 $126.00 per share (the “Conversion Price”) into 13,889 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 $57.60) multiplied by 102% of the amount due on such date. In the event that the ten-trading day VWAP drops below $57.60 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 $16.20 (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 $
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
| 24 |
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 LI 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 year ended December 31, 2022, the Company issued an aggregate 108,025 shares of common stock and repaid $1,146,901 in cash to L1 upon the conversion of $1,750,000 of outstanding principal.
As of March 31, 2023, the principal balance of
the Second Tranche Notes was $
10% Secured Convertible Notes with Original Issuance Discounts (“OID Notes”)
During the year ended December 31, 2017, the
Company issued a series of secured, convertible notes with original issuance discounts to accredited investors. The notes were issued
with original issuance discounts of 10.0%, bear interest at a rate of 10% per annum (payable semiannually in cash), and carry a two-year
term with a fixed conversion price of $748.80.
As of March 31, 2023, the remaining principal balance of these notes was $
During the year ended December 31, 2018, the
Company issued a series of secured, convertible notes with original issuance discounts to accredited investors. The notes were issued
with original issuance discounts of 20.0%, bear interest at a rate of 10% per annum (payable semiannually in cash), and carry a two-year
term with a fixed conversion price of $480.00.
As of March 31, 2023, the remaining principal balance of these notes was $
As of March 31, 2023, the aggregate 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 $96.00 per share.
| 25 |
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 $96.00. 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 $
As of March
31, 2023, the principal balance of the TDH Secured 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 $96.00 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 $96.00. Accordingly, an aggregate of shares of
common stock were issued. These shares were valued at $
As of March 31, 2023, the principal
balance of the Additional Secured Notes was $
| 26 |
Future Minimum Principal Payments
The remaining principal repayments based upon the maturity dates of the Company’s borrowings for each of the next five years are as follows:
| Remainder of 2023 | $ | |||
| 2024 | ||||
| Total future minimum principal payments | $ | |||
| 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-month periods ended March 31, 2023 and 2022 was
| 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 March 31, 2023 and December 31, 2022, the Company had shares of Series A Stock issued and outstanding.
Series B Preferred Stock
As of March 31, 2023 and December 31, 2022, the Company had shares of Series B Stock issued and outstanding, respectively.
| 27 |
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 $57.60 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 $57.60 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 January 24, 2022, the Company issued shares of common stock to a stockholder upon the conversion of shares of Series C preferred stock.
As of March 31, 2023 and December 31, 2022, the Company had shares of Series C Stock issued and outstanding, respectively.
For the three months ended March 31, 2023, 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 March 31, 2023 and December 31, 2022, respectively.
| 28 |
Reverse Stock Split
On October 4, 2022, the Board and shareholders
approved the granting of authority to the Board to amend the Company’s articles of incorporation to effect a reverse stock split
of the issued and outstanding shares of its 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, and with such reverse stock split to be effective at such time and date, if
at all, as determined by the Board in its sole discretion. On December 9, 2022, the Board effected a
PIPE Offering and Related Waiver
On January 25, 2023, the Company consummated a
private investment in public equity financing (the “PIPE Offering”) pursuant to the terms of the Securities Purchase Agreement,
dated January 25, 2023, as amended (the “2023 SPA”), by and between it and the purchaser named therein (the “2023 SPA
Selling Stockholder”) and issued (i) shares of common stock; (ii) warrants (the “Purchase Warrants”)
to purchase an aggregate of shares of common stock; and (iii) prefunded warrants (the “Pre-Funded Warrants,”
and together with the Purchase Warrants, the “Warrants”) to purchase an aggregate of 1,227,434 shares of common stock. The
purchase price of each share of common stock and associated Purchase Warrant was $
In connection with the PIPE Offering, the Company
entered into a waiver agreement (the “Waiver”) with L1 Capital Global Opportunities Master Fund (“L1”) waiving
certain provisions of the Securities Purchase Agreement, dated as of September 14, 2021 (the “2021 SPA”), by and between it
and L1. Pursuant to the terms of the Waiver, L1 waived certain provisions of the 2021 SPA and in consideration thereof, the Company (i)
issued purchase warrants substantially similar to the Purchase Warrants issued in connection with the 2023 SPA; and (ii) paid
a cash fee of $
The Purchase Warrants are immediately exercisable
for $
Pursuant to the 2023 SPA, the Company is obligated to hold a special stockholders’ meeting no later than 60 days following the date of the 2023 SPA to solicit the approval of the issuance of the shares of common stock, Warrants and the shares of common stock underlying the Warrants in compliance with the rules of the Nasdaq Stock Market (without regard to any limitations on exercise set forth in the Purchase Warrant Agreement or the prefunded warrant agreement (the “Prefunded Warrant Agreement”). On March 27, 2023, the Company held a virtual special meeting of stockholders, and at the meeting, the issuance of the securities in compliance with the rules of the Nasdaq Stock Market has been approved.
In connection with the PIPE Offering, the Company entered into a Registration Rights Agreement with the Purchasers, dated January 25, 2023 (the “Registration Rights Agreement”). The Registration Rights Agreement provides that we shall file a registration statement covering the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) with the SEC no later than the 7th calendar day following the date of the Registration Rights Agreement, and have the registration statement declared effective by the SEC as promptly as possible after the filing thereof, but in any event no later than the 30th calendar day following the date of the Registration Rights Agreement, or in the event of a “full review” by the SEC, the 45th day following the date of the Registration Rights Agreement. On February 2, 2023, the Company filed the registration statement, and on February 9, 2023, the registration statement was declared effective by the SEC.
| 29 |
Common Stock Issued in Exchange for Consulting, Professional and Other Services
During the three months ended March 31, 2023,
the Company issued shares of common stock with a fair market value of $
During the three months ended March 31, 2022,
the Company issued shares of common stock with a fair market value of $
Common Stock Issued in Connection with the Conversion of Note Principal and Accrued Interest
During the three months ended March 31 2022, the
Company issued shares of common stock upon the conversion of $
Common Stock Issued in Connection with Series C Stock Dividends
During the three months ended March 31, 2022,
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 March 31, 2023 and December 31, 2022. 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, 2022 | $ | |||||||||||
| Warrants issued | ||||||||||||
| Warrants exercised | ( | ) | ||||||||||
| Warrants forfeited | ( | ) | ||||||||||
| December 31, 2022 | ||||||||||||
| Warrants issued | ||||||||||||
| Warrants exercised | ( | ) | ||||||||||
| Warrants forfeited | ||||||||||||
| Balance March 31, 2023 | $ | |||||||||||
| 30 |
On January 31, 2023, in connection with the PIPE
Offering described above, the Company issued
The Purchase Warrants were valued using the Black-Scholes
option pricing model with the following average assumptions: the Company’s stock price on the date of the issuance ($), an expected
dividend yield of %, a historical volatility of %, a risk-free interest rate of %, and an expected term of one year. The Purchase
Warrants were allocated a relative fair value of $
On January 31, 2023, the Company also issued
During the three months ended March 31, 2023,
the Company issued shares of common stock upon the exercise of prefunded warrants for gross proceeds of $
During the three months ended March 31, 2023,
the Company also issued shares of common stock upon the cashless exercise of
As of March 31, 2023, 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 March 31, 2023.
| 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 months ended March 31, 2023 and 2022, the Company recorded $ and $, respectively, in stock-based compensation costs related to stock options.
As of March 31, 2023, the total unrecognized cost of stock-based compensation related to stock options was $. This cost is expected to be recognized over a weighted average period of years.
As of March 31, 2023, the outstanding stock options had an aggregate intrinsic value of $.
| 31 |
| 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 8 (“Leases”).
See also Note 9 (“Business Combinations”).
See also Note 15 (“Income Taxes”).
| 18. | SUBSEQUENT EVENTS |
On April 14, 2023, the Company issued 493,000 shares of common stock upon the cashless exercise of 580,000 purchase warrants.
On April 21, 2023, the Company repaid $50,000 of note principal to Dr. Thomas Rutherford, one of its directors.
On April 26, 2023, the Company issued 223,125 shares of common stock upon the cashless exercise of 262,500 purchase warrants.
On April 28, 2023, the Company issued 493,000 shares of common stock upon the cashless exercise of 580,000 purchase warrants.
| 32 |
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 Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which we filed with the Securities and Exchange Commission on April 17, 2023, 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.
The share and per share information in the following discussion reflects a reverse stock split of our outstanding common stock at a 1-for-30 ratio, effective as of December 9, 2022.
Overview
We were incorporated in the State of Florida on April 14, 2014 under the name Illumination America, Inc.
On August 17, 2017, we acquired Grom Holdings, Inc., a Delaware corporation (“Grom Holdings”), pursuant to a share exchange agreement (the “Share Exchange Agreement”) entered into on May 15, 2017 (the “Share Exchange”). In connection with the Share Exchange, the Company acquired 100% of the outstanding shares of capital stock of Grom Holdings from Grom Holdings’ stockholders in exchange for an aggregate of 115,473 shares of common stock, par value $0.001 per share, of the Company. As a result of the Share Exchange, the stockholders of Grom Holdings acquired approximately 92% of the Company’s then-issued and outstanding shares of common stock and Grom Holdings became a wholly-owned subsidiary of the Company. In connection with the Share Exchange, on August 17, 2017, we changed our name to Grom Social Enterprises, Inc.
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., incorporated in the State of Florida on March 5, 2012, operates our social media network designed for children under the age of 13 years. | |
| · | TD Holdings Limited (“TD Holdings”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited, a Hong Kong corporation, and (ii) Top Draw Animation, Inc. ((“Top Draw” or “TDA”), a Philippines corporation. The group’s principal activities are the production of animated films and televisions series. | |
| · | Grom Educational Services, Inc. (“GES”), incorporated in the State of Florida on January 17, 2017, operates our web filtering services provided to schools and government agencies. | |
| · | Grom Nutritional Services, Inc. (“GNS”), incorporated in the State of Florida on April 19, 2017, intends to market and distribute nutritional supplements to children. It has been nonoperational since its inception. | |
| · | Curiosity Ink Media, LLC (“Curiosity”), organized in the State of Delaware on January 9, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and family entertainment properties and associated business opportunities. |
| 33 |
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.
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 affect the United States and global economies.
We 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 animation studio, located in Manila, Philippines, 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 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 our administrative offices and production studio. We also implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, we started to recall artists and employees to return to the studio. We are 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 Developments
PIPE Offering and Related Waiver
On January 25, 2023, we consummated a private investment in public equity financing (the “PIPE Offering”) pursuant to the terms of the Securities Purchase Agreement, dated January 25, 2023, as amended (the “2023 SPA”), by and between us and the purchaser named therein (the “2023 SPA Selling Stockholder”) and issued (i) 100,000 shares of common stock; (ii) 1,327,434 warrants (the “Purchase Warrants”) to purchase an aggregate of 2,323,010 shares of common stock; and (iii) 1,227,434 prefunded warrants (the “Pre-Funded Warrants,” and together with the Purchase Warrants, the “Warrants”) to purchase an aggregate of 1,227,434 shares of common stock. The purchase price of each share of common stock and associated Purchase Warrant was $2.26. The purchase of each Pre-Funded Warrant and associated Purchase Warrant was $2.25. The aggregate gross proceeds of the PIPE Offering was approximately $3.0 million, before deducting fees to the placement agent and other expenses payable by us. EF Hutton, division of Benchmark Investments, LLC, acted as the exclusive placement agent in connection with the PIPE Offering.
| 34 |
In connection with the PIPE Offering, we entered into a waiver agreement (the “Waiver”) with L1 Capital Global Opportunities Master Fund (“L1”) waiving certain provisions of the Securities Purchase Agreement, dated as of September 14, 2021 (the “2021 SPA”), by and between us and L1. Pursuant to the terms of the Waiver, L1 waived certain provisions of the 2021 SPA and in consideration thereof, we (i) issued 150,000 purchase warrants substantially similar to the Purchase Warrants issued in connection with the 2023 SPA; and (ii) paid a cash fee of $50,000 to L1.
The Purchase Warrants are immediately exercisable for $2.26 per share of common stock, subject to certain adjustments, including with respect to stock dividends, splits, subsequent rights offerings, pro rata distributions and a Fundamental Transaction (as defined in the purchase warrant agreement (the “Purchase Warrant Agreement”)), until the fifth anniversary of the original issuance date (the “Expiration Date”). The Prefunded Warrants are immediately exercisable for $0.01 per share of common stock, subject to certain adjustments, including with respect to stock dividends, splits, subsequent rights offerings, pro rata distributions and a Fundamental Transaction (as defined in the Prefunded Warrant), until all of the Prefunded Warrants are exercised in full. The exercise of the Warrants is subject to beneficial ownership limitations.
Pursuant to the 2023 SPA, the Company is obligated to hold a special stockholders’ meeting no later than 60 days following the date of the 2023 SPA to solicit the approval of the issuance of the shares of common stock, Warrants and the shares of common stock underlying the Warrants in compliance with the rules of the Nasdaq Stock Market (without regard to any limitations on exercise set forth in the Purchase Warrant Agreement or the prefunded warrant agreement (the “Prefunded Warrant Agreement”). On March 27, 2023, we held a virtual special meeting of stockholders, and at the meeting, the issuance of the securities in compliance with the rules of the Nasdaq Stock Market has been approved.
In connection with the PIPE Offering, we entered into a Registration Rights Agreement with the Purchasers, dated January 25, 2023 (the “Registration Rights Agreement”). The Registration Rights Agreement provides that we shall file a registration statement covering the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) with the SEC no later than the 7th calendar day following the date of the Registration Rights Agreement, and have the registration statement declared effective by the SEC as promptly as possible after the filing thereof, but in any event no later than the 30th calendar day following the date of the Registration Rights Agreement, or in the event of a “full review” by the SEC, the 45th day following the date of the Registration Rights Agreement. On February 2, 2023, we filed the registration statement, and on February 9, 2023, the registration statement was declared effective by the SEC.
Notice of Delisting of Failure to Satisfy a Continued Listing Rule or Standard
On April 10, 2023, we received a deficiency letter (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying us that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we were not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). The Notice had no immediate effect on the continued listing status of our common stock on Nasdaq, and, therefore, our listing remains fully effective. We have been provided an initial compliance period of 180 calendar days from the date of the Notice, or until October 9, 2023, to regain compliance with Nasdaq Listing Rule 5550(a)(2).
Reverse Stock Split
On October 4, 2022, the Board and shareholders approved the granting of authority to the Board to amend our articles of incorporation to effect a reverse stock split of the issued and outstanding shares of our 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, and with such reverse stock split to be effective at such time and date, if at all, as determined by the Board in its sole discretion. On December 9, 2022, the Board effected a 1-for-30 reverse stock split to address a Nasdaq deficiency letter that we received on May 24, 2022.
The reverse stock split did not have any impact on the number of authorized shares of common stock, which remains at 500,000,000 shares. All share and per share information in this Quarterly Report reflects the reverse stock split of our outstanding common stock at a ratio of 1-for-30.
| 35 |
Results of Operations
Comparison of Results of Operations for the Three Months Ended March 31, 2023 and 2022
Revenue
Revenue for the three months ended March 31, 2023 was $1,199,643, compared to revenue of $1,231,125 during the three months ended March 31, 2022, representing a decrease of $31,482 or 2.6%.
Animation revenue for the three months ended March 31, 2023 was $1,057,669, compared to animation revenue of $1,048,613 during the three months ended March 31, 2022, representing an increase of $9,056 or 0.9%. The increase in animation revenue is nominal.
Web filtering revenue for the three months ended March 31, 2023 was $90,810, compared to web filtering revenue of $182,244 during the three months ended March 31, 2022, representing a decrease of $91,434 or 50.2%. The decrease is primarily due to a decrease in organic sales growth, and the timing of multi-year contract renewals.
Publication revenue for the three months ended March 31, 2023 was $10,101 compared to publication revenue of $0 during the three months ended March 31, 2022, representing an increase of $10,101 or 100.0%. Publishing revenues were generated from the sales of our graphic novels.
Other revenue for the three months ended March 31, 2023 was $41,063 compared to other revenue of $268 during the three months ended March 31, 2022, representing an increase of $40,795. Other revenue corresponds to ecommerce sales, commercial services, and subscription and/or advertising revenue from the Grom Social mobile app. The increase in other revenue is attributable to sales of our graphic novel, Thunderous, and revenue recognized for commercial services rendered.
No revenue was generated from our produced and licensed content during either of the three months ended March 31, 2023 and 2022.
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 profit percentages may not be indicative of future gross profit performance.
Gross profit for the three months ended March 31, 2023 and 2022 were $540,137, or 45.0%, and $314,1750, or 25.5%, respectively. The increase in gross profit is primarily attributable to higher contract margins in our animation business and the reduction of certain fixed overhead expenses.
Operating Expenses
Operating expenses for the three months ended March 31, 2023 were $2,305,470, compared to operating expenses of $2,163,335 during the three months ended March 31, 2022, representing an increase of $142,135 or 6.6%. The increase is primarily attributable to an increase in selling, general and administrative costs and depreciation and amortization rendered during the three months ended March 31, 2023 as described below.
| 36 |
Selling, general and administrative (“SG&A”) are comprised of selling, marketing and promotional expenses, compensation and benefits, insurance, investor relations, rent and related facility costs, research and development, and other general expenses. SG&A expenses were $1,875,360 for the three months ended March 31, 2023, compared to $1,694,819 for the three months ended March 31, 2022, representing an increase of $180,541 or 10.7%. The increase is largely attributable to higher employment and benefit costs realized during the three months ended March 31, 2023.
Stock-based compensation, a non-cash component of our SG&A, was $44,822 for the three months ended March 31, 2023, compared to $48,142 for the three months ended March 31, 2022. Stock-based compensation is attributable to the amortization of the fair value for options to purchase shares of our common stock in connection with grants made under certain employment agreements entered into at the time of our acquisition of Curiosity.
Professional fees are comprised of accounting and compliance services, legal services, and certain other advisory and consultancy fees. Professional fees were $279,920 for the three months ended March 31, 2023, compared to $404,066 for the three months ended March 31, 2022, representing a decrease of $127,146 or 31.5%. The decrease is largely attributable to lower accounting fees realized by during the three months ended March 31, 2023. During the three months ended March 31, 2022, we completed the post-acquisition audit of the financial statements for Curiosity.
Depreciation and amortization included in operating expenses was $153,190 for the three months ended March 31, 2023, compared to $64,450 for the three months ended March 31, 2022, representing an increase of $88,740 or 137.7%. The increase is primarily attributable to the amortization of capitalized costs from the development of our Santa.com ecommerce website and prepublication costs from our graphic novels and other published content.
Other Income (Expense)
Net other expense for the three months ended March 31, 2023 was $464,992, compared to a net other expense of $1,607,286 for the three months ended March 31, 2022, representing a decrease of $1,142,294 or 71.1%. The decrease in other expense is primarily attributable to reduced interest expense from the amortization and write off of debt discounts on convertible notes due to conversions.
Interest expense is generally comprised of interest accrued and/or paid on our convertible notes, and from the amortization of note discounts. Interest expense was $480,778 for the three months ended March 31, 2023, compared to $1,631,022 during the three months ended March 31, 2022, representing a decrease of $1,150,244 or 70.5%. In January 2023, we recognized $350,039 in interest expense for the warrants issued to L1 Capital in exchange for the Waiver (see PIPE Offering and Related Waiver above).
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $2,329,931, or $0.43 per share, for the three months ended March 31, 2023, compared to a net loss attributable to common stockholders of $3,553,451, or $7.59 per share, during the three months ended March 31, 2022, representing a decrease in net loss attributable to common stockholders of $1,223,520 or 34.4%.
Liquidity and Capital Resources
At March 31, 2023, we had cash and cash equivalents of $4,136,755.
Net cash used in operating activities for the three months ended March 31, 2023 was $2,172,556, compared to net cash used in operating activities of $1,600,696 during the three months ended March 31, 2022, representing an increase in cash used of $571,860, primarily due to the change in our operating assets and liabilities, offset in part by the reduction in our net loss.
| 37 |
Net cash used in investing activities for the three months ended March 31, 2023 was $10,505, compared to net cash used in investing activities of $25,825 during the three months ended March 31, 2022 representing a decrease in cash used of $15,320. This change is attributable to a decrease in the amount of fixed assets purchased and/or leasehold improvements made by our animation studio in Manilla, Philippines during the three months ended March 31, 2023.
Net cash provided by financing activities for the three months ended March 31, 2023 was $2,420,579, compared to net cash provided by financing activities of $1,376,522 for the three months ended March 31, 2022, representing an increase in cash provided of $1,044,057. Our primary sources of cash from financing activities during the three months ended March 31, 2023 were attributable to $2,460,668 in net proceeds from the PIPE Offering and stock purchase warrant exercises, as compared to $1,444,000 in proceeds from the second tranche of convertible notes issued to L1 Capital. These increases were offset, in part, by the repayment of convertible notes and loans payable of $40,089 during the three months ended March 31, 2023, as compared to repayments of convertible notes and loans for $67,478 during the three months ended March 31, 2022.
Going Concern
On a consolidated basis, we have incurred significant operating losses since our inception. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. As of March 31, 2023, we have an accumulated deficit of $85.8 million. During the three months ended March 31, 2023, we used approximately $2.2 million in cash for operating activities.
We have funded our operations primarily through sales of our common stock in public markets, proceeds from the exercise of warrants to purchase common stock, and sales of convertible notes. Future capital requirements will depend on many factors, including the (i) rate of revenue growth, (ii) expansion of sales and marketing activities, (iii) timing and extent of spending on content development efforts, and (iv) market acceptance of our content, products and services.
Our management intends to raise additional funds through the issuance of equity securities or debt to enable us to meet our obligations for the twelve-month period. However, there can be no assurance that, in the event 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 and/or raise additional capital could have a material adverse effect on our ability to achieve our intended business objectives. These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these 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 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.
In the three months ended March 31, 2023, there were no significant changes to our critical accounting estimates from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K.
| 38 |
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 March 31, 2023, 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 March 31, 2023.
The Company’s assessment identified certain material weaknesses which are set forth below:
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 as described above in our remediation plan, there were no changes in our internal controls over financial reporting during our first fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
| 39 |
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
There are no pending legal proceedings to which the Company 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 property is not the subject of any pending legal proceedings.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in “Risk Factors” in our Annual Report on Form 10-K, filed with the SEC on April 17, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Except as set forth below, 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.
On February 15, 2023, the Company issued 23,334 shares of common stock to an investor and public relations firm for services provided to the Company.
The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe is exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
| 40 |
Item 6. Exhibits.
| Exhibit No. | Description | |
| 3.1 | Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on January 13, 2016) | |
| 3.2 | Bylaws (Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on January 13, 2016) | |
| 3.3 | Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.3 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 22, 2017) | |
| 3.4 | Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 18, 2019) | |
| 3.5 | Certificate of Amendment to the Articles of Incorporation of the Company, filed May 7, 2021, effective as of May 13, 2021 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 17, 2021) | |
| 3.6 | Certificate of Designation of Preferences, Rights and Limitations of Series C 8% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 24, 2021) | |
| 3.7 | Certificate of Amendment to the Articles of Incorporation of the Company, filed on December 6, 2022 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 8, 2022) | |
| 4.1 | Form of Warrant Agreement (Incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K, filed with the Securities and Exchange Commission on January 31, 2023) | |
| 4.2 | Form of Prefunded Warrant Agreement (Incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K, filed with the Securities and Exchange Commission on January 31, 2023) | |
| 10.1 | Securities Purchase Agreement, dated January 25, 2023, between the Company and Hudson Bay Master Fund Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023) | |
| 10.2 | Amendment No. 1 to Securities Purchase Agreement, dated January 30, 2023, between the Company and Hudson Bay Master Fund Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023) | |
| 10.3 | Amendment No. 2 to Securities Purchase Agreement, dated January 30, 2023, between the Company and Hudson Bay Master Fund Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023) | |
| 10.4 | Waiver Agreement, dated January 30, 2023, between the Company and L1 Capital Global Opportunities Master Fund (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023) | |
| 10.5 | Registration Rights Agreement by and between Grom Social Enterprises, Inc. and the Hudson Bay Master Fund Ltd. dated January 25, 2023 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023) | |
| 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 | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| 41 |
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: May 17, 2023 | By: | /s/ Darren Marks |
| Darren Marks | ||
|
Chief Executive Officer and President (Principal Executive Officer) | ||
| Date: May 17, 2023 | By: | /s/ Jason Williams |
| Jason Williams | ||
| Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) |
| 42 |