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GROM Grom Social Enterprises

Filed: 17 May 21, 5:12pm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

 

For the transition period from ________ to _________

 

Commission File Number:  000-55585

 

Grom Social Enterprises, Inc.

(Exact name of registrant as specified in its charter)

 

Florida 46-5542401
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

2060 NW Boca Raton Blvd. #6, Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (561) 287-5776

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
Not applicableNot applicableNot applicable

 

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. Yes þ    No o

 

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).  Yes þ    No  o

 

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 fileroAccelerated filero
Non-accelerated filerþSmaller reporting companyþ
  Emerging growth companyþ

 

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 ¨     No þ

 

As of May 14, 2021, 192,355,783 shares of the registrant’s common stock were outstanding.

 

 

 

   

 

 

GROM SOCIAL ENTERPRISES, INC.

 

Table of Contents

 

Part I – FINANCIAL INFORMATIONPage
   
Item 1.Financial Statements4
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations30
Item 3.Quantitative and Qualitative Disclosures about Market Risk33
Item 4.Controls and Procedures33
   
Part II – OTHER INFORMATION 
   
Item 1.Legal Proceedings34
Item 1A.Risk Factors34
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds34
Item 3.Defaults upon Senior Securities34
Item 4.Mine Safety Disclosures34
Item 5.Other Information34
Item 6.Exhibits35

 

 

 

 

 

 

 

 

 

 

 

 2 

 

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current assumptions, expectations, and beliefs concerning future developments and their potential effect on our business. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” or the negative of these terms or other comparable terminology, although the absence of these words does not necessarily mean that a statement is not forward-looking. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements.

 

Factors that may cause or contribute actual results to differ from these forward-looking statements include, but are not limited to:

 

 ·adverse economic conditions;

 

 ·the Company’s ability to raise capital to fund its operations

 

 ·the Company’s ability to monetize its gromsocial.com database of users

 

 ·industry competition

 

 ·the Company’s ability to integrate its acquisitions

 

 ·the Company’s ability to attract and retain qualified senior management and technical personnel;

 

 ·the continued effect of the Covid-19 pandemic on the Company’s operations; and

 

 ·other risks and uncertainties related to the social media, animation services, nutritional products, and web filtering services marketplace and our business strategy.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties and other factors. Considering these risks, uncertainties, and assumptions, the events described in the forward-looking statements may not occur or may occur to a different extent or at a different time than we have described.

 

All forward-looking statements speak only as of the date of this Report. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, or other information contained herein, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance.

 

 

 

 

 

 

 3 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GROM SOCIAL ENTERPRISES INC.

Consolidated Balance Sheets

 

 

  March 31,  December 31, 
  2021  2020 
   (Unaudited)     
ASSETS        
Current assets:        
Cash and cash equivalents $581,950  $120,300 
Accounts receivable, net  725,649   587,932 
Inventory, net  27,339   48,198 
Prepaid expenses and other current assets  343,254   386,165 
Total current assets  1,678,192   1,142,595 
Operating lease right of use assets  528,348   602,775 
Property and equipment, net  846,714   965,109 
Goodwill  8,380,504   8,380,504 
Intangible assets, net  5,469,610   5,566,339 
Deferred tax assets, net -- noncurrent  531,557   531,557 
Other assets  76,175   76,175 
Total assets $17,511,100  $17,265,054 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Accounts payable $778,111  $1,126,114 
Accrued liabilities  1,964,509   1,794,232 
Advanced payments and deferred revenues  694,737   967,053 
Convertible notes, net -- current  1,612,259   2,349,677 
Loans payable -- current  192,739   189,963 
Related party payables  142,516   143,741 
Income taxes payable  102,559   102,870 
Lease liabilities -- current  303,940   304,326 
Total current liabilities  5,791,370   6,977,976 
Convertible notes, net of loan discounts  292,083   897,349 
Lease liabilities  253,076   328,772 
Loans payable  67,235   95,931 
Other noncurrent liabilities  369,597   367,544 
Total liabilities  6,773,361   8,667,572 
         
Commitments and contingencies      
         
Stockholders' Equity:        
Series A preferred stock, $0.001 par value. 10,000,000 shares authorized; zero shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively      
Series B preferred stock, $0.001 par value. 10,000,000 shares authorized; 9,215,884 and 5,625,884 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively  9,215   5,626 
Common stock, $0.001 par value. 500,000,000 shares authorized; 189,316,295 and 188,354,282 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively  189,317   188,355 
Additional paid-in capital  68,667,661   64,234,749 
Accumulated earnings (deficit)  (58,107,489)  (55,791,914)
Accumulated other comprehensive income  (20,965)  (39,334)
Total stockholders' equity  10,737,739   8,597,482 
Total liabilities and equity $17,511,100  $17,265,054 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 4 

 

 

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

       

 

  Three Months Ended March 31,  Three Months Ended March 31, 
  2021  2020 
       
Sales $1,875,284  $1,292,239 
Cost of goods sold  800,434   612,093 
Gross profit  1,074,850   680,146 
Operating expenses:        
Depreciation and amortization  217,515   195,965 
Selling and marketing  30,276   34,317 
General and administrative  1,350,799   1,449,348 
Professional fees  187,109   52,718 
Stock based compensation     16,200 
Total operating expenses  1,785,699   1,748,548 
Loss from operations  (710,849)  (1,068,402)
Other income (expense)        
Interest expense, net  (648,846)  (277,763)
Loss on settlement of debt  (947,179)   
Unrealized loss on change in fair value of derivative liabilities     (767)
Other gains (losses)  (8,701)  98 
Total other income (expense)  (1,604,726)  (278,432)
Loss before income taxes  (2,315,575)  (1,346,834)
Provision for income taxes (benefit)      
Net loss  (2,315,575)  (1,346,834)
         
Convertible preferred stock beneficial conversion feature and other discounts accreted as a deemed dividend      
         
Net loss attributable to common stockholders $(2,315,575) $(1,346,834)
         
Basic and diluted loss per common share $(0.01) $(0.01)
         
Weighted-average number of common shares outstanding:        
Basic and diluted  189,827,352   168,649,145 
         
Comprehensive loss:        
Net loss $(2,315,575) $(1,346,834)
Foreign currency translation adjustment  18,369   33,454 
Comprehensive loss $(2,297,206) $(1,313,380)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 5 

 

 

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

 

 

                          Accumulated    
  

Series A

Preferred Stock

  

Series B

Preferred Stock

  Common Stock  Additional Paid-in  Retained  Other Comprehensive  Total Stockholders' 
  Shares  Value  Shares  Value  Shares  Value  Capital  Earnings  Income  Equity 
                               
Balance, December 31, 2019  925,000  $925     $   167,382,807  $167,383  $58,154,730  $(50,048,481) $(97,560) $8,176,997 
                                         
Net loss                       (1,346,834)     (1,346,834)
Change in foreign currency translation                          33,454   33,454 
Issuance of common stock in exchange for consulting, professional and other services              2,404,153   2,404   238,101         240,505 
Issuance of common stock in lieu of cash for accounts payable, loans payable and other accrued obligations              500,000   500   49,500         50,000 
Issuance of common stock in connection with the issuance of convertible note(s)              8,120,000   8,120   560,280         568,400 
Conversion of convertible notes and accrued interest into common stock              259,300   259   14,741         15,000 
Recognition of beneficial conversion features related to convertible notes                    44,129         44,129 
                                         
Balance, March 31, 2020  925,000  $925     $   178,666,260  $178,666  $59,061,481  $(51,395,315) $(64,106) $7,781,651 

 

 

 

 

 

 6 

 

 

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (Continued)

 

 

                          Accumulated    
  Preferred Stock  Preferred Stock  Common Stock  Additional Paid-in  Retained  Other Comprehensive  Total Stockholders' 
  Shares  Value  Shares  Value  Shares  Value  Capital  Earnings  Income  Equity 
                               
Balance, December 31, 2020    $   5,625,884  $5,626   188,354,282  $188,355  $64,234,749  $(55,791,914) $(39,334) $8,597,482 
                                         
Net income (loss)                       (2,315,575)     (2,315,575)
Change in foreign currency translation                          18,369   18,369 
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings        950,000   950         949,050         950,000 
Issuance of Series B preferred stock in exchange for consulting, professional and other services        75,000   75         74,925         75,000 
Exchange of convertible notes and accrued interest for Series B preferred stock        2,564,175   2,564         2,561,611         2,564,175 
Issuance of common stock in exchange for consulting, professional and other services              537,013   537   79,593         80,130 
Issuance of common stock in connection with the issuance of convertible note(s)              425,000   425   29,325         29,750 
Issuance of common stock warrants in connection with the issuance of convertible note(s)                    489,313         489,313 
Recognition of beneficial conversion features related to convertible notes                    249,095         249,095 
                                         
Balance, March 31, 2021    $   9,215,059  $9,215   189,316,295  $189,317  $68,667,661  $(58,107,489) $(20,965) $10,737,739 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 7 

 

 

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Cash Flows (Unaudited)

 

 

  Three Months Ended March 31,  Three Months Ended March 31, 
  2021  2020 
Cash flows from operating activities of continuing operations:        
Net loss $(2,315,575) $(1,346,834)
Adjustments to reconcile net loss to cash used in operating activities:        
Depreciation and amortization  217,515   195,965 
Amortization of debt discount  441,986   91,746 
Common stock issued in exchange for fees and services  155,130   240,505 
Deferred taxes     1,042 
Stock based compensation     16,200 
Loss on extinguishment of debt  947,179    
Unrealized loss on change in fair value of derivative liabilities     767 
Changes in operating assets and liabilities:        
Accounts receivable  (137,717)  (2,464)
Inventory  20,859   (966)
Prepaid expenses and other current assets  42,911   (63,029)
Operating lease right of use assets  (1,671)  24,205 
Other assets     6,605 
Accounts payable  (348,794)  (21,676)
Accrued liabilities  261,402   249,506 
Advanced payments and deferred revenues  (272,315)  442,844 
Income taxes payable and other noncurrent liabilities  1,742   (1,153)
Related party payables  (1,225)  (77,375)
Net cash used in operating activities  (988,573)  (244,112)
         
Cash flows from investing activities:        
Purchase of fixed assets  (2,391)  (15,267)
Net cash used in financing activities  (2,391)  (15,267)
         
Cash flows from financing activities:        
Proceeds from issuance of preferred stock, net of issuance costs  950,000    
Proceeds from issuance of convertible notes  666,500   3,655,000 
Repayments of convertible notes  (157,141)  (3,078,857)
Repayments of loans payable  (25,921)   
Net cash provided by financing activities  1,433,438   576,143 
         
Effect of exchange rates on cash and cash equivalents  19,176   11,352 
Net increase in cash and cash equivalents  461,650   328,116 
Cash and cash equivalents at beginning of period  120,300   506,219 
Cash and cash equivalents at end of period $581,950  $834,335 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $74,299  $ 
Cash paid for income taxes $  $ 
         
Supplemental disclosure of non-cash investing and financing activities:        
Common stock issued for financing costs incurred in connection with convertible and promissory notes $29,750  $568,400 
Common stock issued to reduce accounts payable and other accrued liabilities $  $50,000 
Common stock warrants issued in connection with convertible promissory notes $489,313  $ 
Conversion of convertible notes and accrued interest into common stock $  $15,000 
Conversion of convertible notes and accrued interest into preferred stock $1,616,996  $ 
Discount for beneficial conversion features on convertible notes $249,095  $44,129 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 8 

 

 

GROM SOCIAL ENTERPRISES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1.NATURE OF OPERATIONS

 

Grom Social Enterprises, Inc. (the “Company”, “Grom” “we”, “us” or “our”), a Florida corporation f/k/a Illumination America, Inc. (“Illumination”), is a media, technology and entertainment company that focuses on 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.

 

The Company operates its business through the following four wholly-owned subsidiaries:

 

 ·Grom Social, Inc. (“Grom Social”) was incorporated in the State of Florida on March 5, 2012 and operates the Company’s social media network designed for children under the age of 13 years.

 

 ·TD Holdings Limited (“TD Holdings”) was incorporated in Hong Kong on September 15, 2005. TD Holdings operates through its two subsidiary companies: (i) Top Draw Animation Hong Kong Limited (“TDAHK”), a Hong Kong corporation and (ii) Top Draw Animation, Inc. (“Top Draw” or “TDA”), a Philippines corporation. The group’s principal activities are the production of animated films and televisions series.

 

 ·Grom Educational Services, Inc. (“GES”) was incorporated in the State of Florida on January 17, 2017. GES operates the Company’s web filtering services provided to schools and government agencies.

 

 ·Grom Nutritional Services, Inc. (“GNS”) was incorporated in the State of Florida on April 19, 2017. GNS intends to market and distribute nutritional supplements to children. GNS has not generated any revenue since its inception.

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Going Concern

 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. On a consolidated basis, the Company has incurred significant operating losses since inception.

 

Because the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about the Company’s ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing. Historically, the Company has raised capital through private placements, convertible notes and officer loans as an interim measure to finance working capital needs and may continue to raise additional capital through the sale of common stock or other securities and obtaining some short-term loans in order to fund its operations.

 

 

 

 

 9 

 

 

Impact of COVID-19

 

On January 30, 2020, the World Health Organization announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 has and continues to significantly affect the United States and global economies.

  

The Company has experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings and travel restrictions, which affect both the Company’s and its service providers. The Company has significant operations in Manila, Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result of the Philippines government’s call to contain COVID-19, the Company’s animation studio, located in Manila, Philippines, which accounts for approximately 90% of the Company’s total revenues on a consolidated basis, has been mostly closed.

 

In response to the outbreak and business disruption, the Company has instituted employee safety protocols to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices and production studio. The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity.

 

The outbreak has and 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.

 

Management’s Representation of Interim Financial Statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments 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, 2020, as presented in the Company’s Annual Report on Form 10-K filed on April 13, 2021 with the SEC.

  

Basis of Presentation

 

The condensed consolidated financial statements of the Company have been prepared in accordance with GAAP and are expressed in United States dollars. For the three months ended March 31, 2021, the condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Grom Social, TD Holdings, GES, GNS, and IAL. All intercompany accounts and transactions are eliminated in consolidation.

 

 

 

 

 10 

 

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to revenue recognition, valuation of accounts receivable and inventories, purchase price allocation of acquired businesses, impairment of long-lived assets and goodwill, valuation of financial instruments, income taxes, 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.

  

Revenue Recognition

 

The Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 outlines a single comprehensive model for revenue arising from contracts with customers. The guidance provided in Accounting Standards Codification (“ASC”) Topic 606 ("ASC 606") requires entities to use a five-step model to recognize revenue by allocating the consideration from contracts to performance obligations on a relative standalone selling price basis. Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The standard also requires new disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer.

 

Animation Revenue

 

For the three months ended March 31, 2021 and 2020, the Company recorded a total of $1,713,658 and $1,153,236, respectively, of animation revenue from contracts with customers.

 

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.

 

The Company identifies a contract under ASC 606 once (i) it is approved by all parties, (ii) the rights of the parties are identified, (iii) the payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable.

 

The Company evaluates the services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The services in the Company’s contracts are distinct from one another as the referring parties typically can direct all, limited, or single portions of the various preproduction and production activities required to create and design and entire episode to us and we therefore have a history of developing standalone selling prices for all of these distinct components. Accordingly, our contracts are typically accounted for as containing multiple performance obligations.

 

The Company determines the transaction price for each contract based on the consideration it expects to receive for the distinct services being provided under the contract.

 

 

 

 

 11 

 

 

The Company recognizes revenue as performance obligations are satisfied and the customer obtains control of the services. In determining when performance obligations are satisfied, the Company considers factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of the Company’s revenue is recognized over time as it performs under the contract due to the contractual terms present in each contract which irrevocably transfer control of the work product to the customer as the services are performed.

 

For performance obligations recognized over time, revenue is recognized based on the extent of progress made towards completion of the performance obligation. The Company uses the percentage-of-completion cost-to-cost measure of progress because it best depicts the transfer of control to the customer as the Company incurs costs against its contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. The percentage-of-completion cost-to-cost method requires management to make estimates and assumptions that affect the reported amounts of contract assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the total estimated amount of costs that will be incurred for a project or job.

 

Web Filtering Revenue

 

For the three months ended March 31, 2021 and 2020, the Company recorded a total of $161,241 and $138,143, respectively, of web filtering revenue from contracts with customers.

  

Web filtering revenue from subscription sales is recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases computer hardware and a software and support service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale. The Company immediately recognizes revenue attributable to the computer hardware as it is non-refundable and control passes to the customer. The advanced billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue on a straight-line basis over the subscription period. 

  

Contract Assets and Liabilities

 

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.

 

The following table depicts the composition of our contract assets and liabilities as of March 31, 2021 and December 31, 2020:

 

  March 31, 2021  

December 31, 2020

 
       
Animation contract assets $666,837  $525,709 
Web filtering contract assets  51,475   54,886 
Other contract assets  7,337   7,337 
Total contract assets $725,649  $587,932 
         
Animation contract liabilities $143,648  $410,709 
Web filtering contract liabilities  539,589   544,844 
Other contract liabilities  11,500   11,500 
Total contract liabilities $694,737  $967,053 

  

 

 

 12 

 

 

Recent Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations except as noted below:

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under this pronouncement, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment change for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis.

 

On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 amends the effective date for ASU 2017-04 to fiscal years beginning after December 15, 2022, and interim periods therein.

 

Early adoption continues to be permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on its financial statements for both annual and interim reporting periods.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is evaluating the impact of this amendment on its consolidated financial statements.

 

In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its consolidated financial statements.

 

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is evaluating the impact of this guidance on its unaudited condensed consolidated financial statements.

 

 

 

 

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3.ACCOUNTS RECEIVABLE, NET

 

The following table sets forth the components of the Company’s accounts receivable at March 31, 2021, and December 31, 2020:

 

  

March 31,

2021

  

December 31,

2020

 
       
Billed accounts receivable $587,882  $443,806 
Unbilled accounts receivable  188,336   188,029 
Allowance for doubtful accounts  (50,569)  (43,903)
Total accounts receivable, net $725,649  $587,932 

 

During the three months ended March 31, 2021, the Company had five customers that accounted for 91.3% of revenues and three customers that accounted for 56.2% of accounts receivable. During the year ended December 31, 2020, the Company had three customers that accounted for 68.5% of revenues and one customer that accounted for 29.9% of accounts receivable.

  

4.PROPERTY AND EQUIPMENT

 

The following table sets forth the components of the Company’s property and equipment at March 31, 2021 and December 31, 2020:

 

  March 31, 2021  December 31, 2020 
  Cost  Accumulated Depreciation  Net Book Value  Cost  Accumulated Depreciation  Net Book Value 
Capital assets subject to depreciation:                        
Computers, software and office equipment $2,803,063  $(2,333,580) $469,483  $2,800,872  $(2,257,797) $543,075 
Machinery and equipment  192,988   (157,146)  35,842   192,988   (152,149)  40,839 
Vehicles  163,525   (113,915)  49,610   163,525   (106,826)  56,699 
Furniture and fixtures  422,219   (371,089)  51,130   422,234   (364,655)  57,579 
Leasehold improvements  1,143,703   (929,648)  214,055   1,143,704   (903,381)  240,323 
Total fixed assets  4,725,498   (3,905,378)  820,120   4,723,323   (3,784,808)  938,515 
Capital assets not subject to depreciation:                        
Construction in progress  26,594      26,594   26,594      26,594 
Total fixed assets $4,752,092  $(3,905,378) $846,714  $4,749,917  $(3,784,808) $965,109 

 

For the three months ended March 31, 2021 and 2020, the Company recorded depreciation expense of $120,786 and $99,236, respectively.

 

5.LEASES

 

The Company has entered into operating leases primarily for real estate. These leases have terms which range from three years to five years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment.

 

In the United States, the Company leases approximately 2,100 square feet of office space in Boca Raton, Florida at the rate of $4,000 per month pursuant to a three-year lease which expires in October 2021. The Florida office space is the location of the Company’s corporate headquarters and administrative staff.

 

 

 

 

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The Company’s animation operations leases portions of three floors aggregating approximately 28,800 square feet in the West Tower of the Philippine Stock Exchange Centre in Pasig City, Manila. The space is used for administration and production purposes. The Company pays approximately $24,000 per month in the aggregate for such space (which increases by approximately 5% annually). These leases expire in December 2022.

 

The Company’s web filtering operations lease approximately 1,400 square feet of office space in Norcross, Georgia. The Company pays approximately $2,100 per month pursuant to a five-year lease which expires in December 2023. The lease payment increases by approximately 3% annually.

 

These operating leases are listed as separate line items on the Company's condensed consolidated financial statements 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 condensed consolidated financial statements.  

 

Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized ROU assets and lease liabilities for operating leases of approximately $528,348 in assets, $303,940 in current liabilities and $253,076 in noncurrent liabilities as of March 31, 2021. For the three months ended March 31, 2021, the Company recognized approximately $90,993 in total lease costs.

 

The following table presents the remaining amortization of the Company’s lease liabilities under ASC 842 for each of the following years ending December 31:

 

2021 $228,245 
2022  302,781 
2023  25,990 
  $557,016 

 

Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.

 

Information related to the Company's operating ROU assets and related lease liabilities are as follows:

 

  Three Months Ended
March 31, 2021
 
Cash paid for operating lease liabilities $92,665 
Weighted-average remaining lease term  2.2 
Weighted-average discount rate  10% 
Minimum future lease payments $639,219 

    

The remaining future minimum payment obligations at March 31, 2021 for operating leases are as follows:

 

2021 $274,972 
2022 $335,659 
2023 $28,588 

 

 

 

 

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6.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, 2021 and December 31, 2020, the carrying amount of the Company’s goodwill was $8,380,504. 

 

The following table sets forth the components of the Company’s intangible assets at March 31, 2021 and December 31, 2020:

 

  March 31, 2021  December 31, 2020 
  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  10.00  $1,600,286  $(756,436) $843,850  $1,600,286  $(716,429) $883,857 
Web filtering software  5.00   1,134,435   (964,270)  170,165   1,134,435   (907,548)  226,887 
Subtotal     2,734,721   (1,720,705)  1,014,016   2,734,721   (1,623,977)  1,110,744 
Intangible assets not subject to amortization:                            
Trade names     4,455,595      4,455,595   4,455,595      4,455,595 
Total intangible assets    $7,190,316  $(1,720,705) $5,469,611  $7,190,316  $(1,623,977) $5,566,339 

 

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:

 

2021 $290,187 
2022  160,029 
2023  160,029 
2024  160,029 
2025  160,029 
Thereafter  83,712 
  $1,014,016 

  

7. ACCRUED LIABILITIES

 

The following table sets forth the components of the Company’s accrued liabilities at March 31, 2021 and December 31, 2020:

 

  

March 31,

2021

  

December 31,

2020

 
       
Executive and employee compensation $1,856,532  $1,642,959 
Interest on convertible notes and promissory notes  83,598   135,980 
Other accrued expenses and liabilities  24,380   15,293 
Total accrued liabilities $1,964,509  $1,794,232 

 

 

 

 

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8. RELATED PARTY PAYABLES

 

Acquisition of TD Holdings

 

Wayne Dearing, the Managing Director of TD Holdings, was issued a promissory note in the principal amount of $2,000,000 on July 1, 2016 in connection with the Company’s acquisition of TD Holdings. The note, as amended, was due to mature on April 1, 2020. On March 16, 2020, the Company paid Mr. Dearing $1,500,000 against the principal amount of the note and restructured the remaining $500,000 in unpaid principal. Under the new terms, the note bears interest at a rate of 12% per annum and matures on June 30, 2021. Principal and interest are payable monthly in arrears, amortized over a four-year period. At March 31, 2021, the principal balance remaining on this note totaled $414,556 and is classified under Convertible Notes – Current in the Company’s consolidated financial statements.

 

Mr. Dearing’s wife, Stella Dearing, is the Director of Operations of Top Draw and receives an annual salary of $83,000.

 

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 website and mobile application. These individuals have created over 1,400 hours of original short form content. 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.

 

Compensation for services provided by the Marks family is expected to continue for the foreseeable future. Each member of the Marks family is actively involved in the creation of content for the website and mobile app, including numerous videos focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special events.

 

Liabilities Due to Executive and Other Officers

 

Pursuant to verbal agreements, Messrs. Marks and Leiner have made loans to the Company to help fund operations. These loans are non-interest bearing and callable on demand. No such loans were made to the Company during the three months ended March 31, 2021.

  

On July 11, 2018, our director Dr. Thomas Rutherford loaned the Company $50,000. The loan bears interest at a rate of 10% per annum and was due on August 11, 2018. No formal notice of default or demand for payment has been received by the Company.

 

As of March 31, 2021 and December 31, 2020, the aggregate related party payables were $142,516 and $143,741, respectively.

  

9.CONVERTIBLE NOTES

 

The following tables set forth the components of the Company’s convertible notes as of March 31, 2021 and December 31, 2020:

 

  

March 31,

2021

  December 31,
2020
 
8% - 12% Convertible Promissory Notes (Bridge Notes) $1,178,787  $373,587 
10% Unsecured Convertible Redeemable Notes – Variable Conversion Price  100,000   265,000 
10% Secured Convertible Notes with Original Issuance Discounts (OID Notes)  153,250   153,250 
12% Senior Secured Convertible Notes (Newbridge)     52,572 
12% Senior Secured Convertible Notes (Original TDH Notes)  829,122   882,175 
12% Senior Secured Convertible Notes (TDH Secured Notes)  414,556   1,645,393 
12% Senior Secured Convertible Notes (Additional Secured Notes)  78,766   260,315 
Loan discounts  (850,139)  (385,266)
Total convertible notes, net  1,904,342   3,247,026 
Less: current portion of convertible notes, net  (1,612,259)  (2,349,677)
Convertible notes, net $292,083  $897,349 

 

 

 

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8% - 12% Convertible Promissory Notes (Bridge Notes)

 

On November 30, 2020, the Company entered into a securities purchase agreement with EMA Financial, LLC (“EMA”) pursuant to which the Company issued to EMA a nine-month 8% convertible promissory note in the principal amount of $260,000 (the “EMA Note”) for a $234,000 investment. The term of the EMA Note may be extended by EMA up to an additional year. The EMA Note is convertible into common stock of the Company at any time after 180 days from issuance. The conversion price of the EMA Note is equal to the lower of: (i) $0.06 per share, or (ii) 70% of the lowest trading price of the common stock during the ten consecutive trading days including and immediately preceding the conversion date.

 

On February 17, 2021, the terms of the EMA financing were amended to (a) increase the principal amount of the EMA Note to $265,200, (b) reduce the conversion rate to $0.04, and (c) add a three-year warrant to purchase up to 2,652,000 shares of the Company’s common stock, at an exercise price of $0.05 per share.

 

ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. In connection with the EMA warrant issuance, the Company allocated a fair value of $71,909 to the stock warrants and recorded a debt discount which will be amortized to interest expense over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $0.06, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate of 0.19% and (iv) an expected volatility of the price of the underlying common stock of 224.9%.

 

On December 17, 2020, the Company entered into a note purchase agreement with Quick Capital, LLC (“Quick Capital”) pursuant to which the Company issued Quick Capital a nine-month convertible promissory note in the principal amount of $113,587 (the “Quick Note”) for a $100,000 investment, which included an original issuance discount of 8% and a $4,500 credit for Quick Capital’s transaction expenses. The Quick Note may be converted into shares of common stock at (i) a 30% discount to the lowest price per share of any debt or securities offering by the Company if the Company’s common stock is listed on NASDAQ or NYSE within 90 days of the Quick Note issuance; (ii) the lesser of (A) $0.04 or (B) a 30% discount to the average of the two lowest closing prices during the ten trading days prior to the conversion date; (iii) $0.04 per share, upon an event of default as described in the Note.

 

The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $12,621. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.

 

In connection with the Quick Note issuance, the Company also issued a three-year warrant to purchase up to an aggregate of 1,183,197 shares of the Company’s common stock at an exercise price of $0.05 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $0.05, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate of 0.19% and (iv) an expected volatility of the price of the underlying common stock of 224.3%. As a result, the Company allocated a fair value of $33,056 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.

 

On February 9, 2021, the Company entered into a securities purchase agreement with Auctus Fund, LLC (“Auctus”) pursuant to which the Company issued to Auctus a twelve-month 12% convertible promissory note in the principal amount of $500,000. The note is convertible into shares common stock at a conversion price of $0.06 per share. The net proceeds received by the Company were $428,000 after deducting fees and expenses related to the transaction.

 

The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $155,875. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.

 

 

 

 

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In connection with the note issuance, Auctus was also issued a five-year warrant to purchase up to an aggregate of 6,250,000 shares of the Company’s common stock, at an exercise price of $0.06 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $0.14, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.48% and (iv) an expected volatility of the price of the underlying common stock of 259.2%. As a result, the Company allocated a fair value of $272,125 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.

 

On March 11, 2021, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”) pursuant to which the Company issued to FirstFire a twelve-month 12% convertible promissory note in the principal amount of $300,000. At any time after 180 days from the date of issuance, FirstFire may convert any amount due under the note into shares of the Company’s common stock at a conversion price of $0.06 per share. The net proceeds received by the Company were $238,500 after deducting fees and expenses related to the transaction.

 

The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $93,220. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.

 

In connection with the issuance of the note, FirstFire was also issued a five-year warrant to purchase up to an aggregate of 3,750,000 shares of the Company’s common stock, at an exercise price of $0.06 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $0.13, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.78% and (iv) an expected volatility of the price of the underlying common stock of 258.6%. As a result, the Company allocated a fair value of $145,280 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.

 

At March 31, 2021, the principal balance of these notes was $1,178,787 and the remaining balance on the associated loan discounts was $788,531.

 

10% Unsecured Convertible Redeemable Note – Variable Conversion Price

 

On July 9, 2019, the Company issued a convertible redeemable note to an unrelated party in the principal amount of $100,000 less $5,000 in third party fees resulting in net cash proceeds to the Company of $95,000. The note accrues interest at a rate of 10% per annum, was due on July 9, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 30% discount from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.

 

The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $51,730. This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.

 

The Company also analyzed the conversion feature of the note for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of the convertible note is subject to a variable conversion rate. The aggregate fair value of the derivative at the issuance date of the note was $85,410 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $43,270 which was up to the face value of the convertible note with the excess fair value at initial measurement of $42,140 being recognized as derivative expense.

 

On October 2, 2020, the lender converted all amounts outstanding on the note into 1,535,507 shares of common stock.

 

On March 1, 2020, the Company issued a convertible redeemable note to an unrelated party in the principal amount of $100,000. The note accrues interest at a rate of 10% per annum, was due on August 31, 2020 and is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.

   

 

 

 

 19 

 

 

The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $44,129. This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.

 

In connection with the note issuance, the Company also issued a five-year warrant to purchase up to an aggregate of 500,000 shares of the Company’s common stock at an exercise price of $0.10 per share. ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. This resulted in the debt being recorded at a discount which will be amortized to interest expense over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $0.10, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.89% and (iv) an expected volatility of the price of the underlying common stock of 144.4%. As a result, the Company allocated a fair value of $30,935 to the stock warrants.

 

At March 31, 2021, the remaining principal balance of $100,000 and accrued interest of $10,822 was in default of payment. No formal notices of default or demands for payment have been received by the Company.

  

On November 20, 2020, the Company issued a convertible redeemable note to an unrelated party in the principal amount of $165,000 less a $15,000 original issuance discount resulting in net cash proceeds to the Company of $150,000. The note accrues interest at a rate of 10% per annum, was due on February 15, 2021 and is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.

 

The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $50,871. This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.

 

On February 17, 2021, the Company entered into a debt exchange agreement with the holder of the convertible promissory note, in the aggregate amount of $169,000 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreement, the holder exchanged the outstanding note, and all amounts owed by the Company thereunder, for 169,000 shares of the Company’s 8% Series B convertible preferred stock. At the time of the exchange, all amounts due under the note was deemed to be paid in full and the note was cancelled.

 

At March 31, 2021, the principal balance of this note was $0 and all associated loan discounts were fully amortized.

 

10% Secured Convertible Notes with Original Issuance Discounts (“OID Notes”)

 

During the year ended December 31, 2017, the Company issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $601,223. The notes were issued with original issuance discounts of 10.0%, or $60,122, bear interest at a rate of 10% per annum, are payable semiannually in cash, and carry a two-year term with a fixed conversion price of $0.78. In connection with the issuance of these notes, the Company issued to such investors an aggregate of 150,305 shares of common stock as an inducement to lend. These shares were valued at $78,321 with share prices ranging between $0.48 and $0.70 per share. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.

 

On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of 331,954 shares of the Company’s Series B preferred stock (“Series B Stock) were issued to noteholders for an aggregate of $211,223 of outstanding principal and accrued and unpaid interest. On November 30, 2020, the Company entered into a debt exchange agreement with the remaining holder of these 10% convertible notes pursuant to which an aggregate of 158,000 shares of Series B Stock were issued to the noteholder for an aggregate of $111,250 of outstanding principal and accrued and unpaid interest.

 

 

 

 

 20 

 

 

At March 31, 2021, the principal balance of these notes was $0 and all associated loan discounts were fully amortized.

 

During the year ended December 31, 2018, the Company issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $1,313,485 in a private offering. The notes were issued with original issuance discounts of 10.0%, or $131,348, bear interest at a rate of 10% per annum, are payable semiannually in cash, and carry a two-year term with a fixed conversion price of $0.78. In connection with the issuance of these notes, the Company issued to such investors an aggregate of 328,371 shares of common stock as an inducement to lend. These shares were valued at $198,259 with share prices ranging between $0.30 and $0.81 per share. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.

 

On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of 316,000 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $200,000 of outstanding principal and accrued and unpaid interest.

 

As of March 31, 2021, the principal balance of these notes was $97,250 and all associated loan discounts were fully amortized. No formal notices of default or demands for payment have been received by the Company.

 

During the year ended December 31, 2018, the Company also issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $356,000 in a private offering. The notes were issued with original issuance discounts of 20.0%, or $71,200, bear interest at a rate of 10% per annum, are payable semiannually in cash, and carry a two-year term with a fixed conversion price of $0.50. In connection with the issuance of these notes, the Company issued to such investors an aggregate of 203,000 shares of common stock as an inducement to lend. These shares were valued at $62,269 with share prices ranging between $0.29 and $0.35 per share. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.

 

As of March 31, 2021, the principal balance of these notes was $56,000 and all associated loan discounts were fully amortized. No formal notices of default or demands for payment have been received by the Company.

  

12% Senior Secured Convertible Notes (Newbridge Offering)

 

On November 30, 2018, the Company closed a private offering in which it sold 12% secured convertible promissory notes (“12% Notes”) in an aggregate principal amount of $552,000 and issued an aggregate of 730,974 shares of its common stock to nine accredited investors pursuant to a private placement memorandum and subscription agreement. The 12% Notes which are due and payable two years from issuance are secured by certain assets of the Company and rank senior to all other indebtedness of the Company except for the $4,000,000 promissory notes (the “TD Notes”) issued to the shareholders of TD Holdings in connection with a share sale agreement dated June 30, 2016, as amended. Messrs. Marks and Leiner pledged an aggregate of 10,000,000 shares of common stock of the Company pursuant to a pledge and security agreement to secure the timely payment of the 12% Notes. The 12% Notes are convertible, in whole or in part, by the noteholders at a conversion rate of $0.40 if the Company’s common stock trades or is quoted at more than $0.40 per share for 10 consecutive days. The conversion price is subject to adjustment resulting from certain corporate actions including the subdivision or combination of stock, payment of dividends, reorganization, reclassification, consolidations, merger or sale of the Company.

 

Interest on the 12% Notes is payable monthly in 21 equal installments commencing four months after the issuance of the 12% Notes. Upon the occurrence of an event of default, the interest rate will increase to 15% and the 12% Notes will become immediately due and payable. The Company may prepay the 12% Notes in full at any time by paying accrued interest and 110% of the outstanding principal balance. Newbridge Securities Corporation acted as exclusive placement agent for the offering and received (i) $55,200, (ii) 113,586 shares of common stock, and (iii) $11,040, representing a non-accountable expense allowance for its services.

  

As of March 31, 2021, the principal balance of these notes was $0 and all associated loan discounts were fully amortized.

 

 

 

 

 21 

 

 

12% Senior Secured Convertible Notes (Original TDH Notes)

 

On June 20, 2016, the Company issued $4,000,000 of senior secured promissory notes to the shareholders of TD Holdings (the “TDH Sellers”) in connection with a share sale agreement pursuant to which the Company acquired 100% of the common stock of TD Holdings (“the TDH Share Sale Agreement”). The notes bear interest at 5.0% per annum and are due on the earlier of (i) June 20, 2018 or (ii) the date on which the Company successfully completes a qualified initial public offering as defined in the agreement. The notes are collateralized by all of the assets of TD Holdings.

 

First Amendment to the TDH Share Sale Agreement

 

On January 3, 2018, the Company entered into an amendment to the TDH Share Sale Agreement (the “First Amendment”). Under the terms of the First Amendment:

 

 ·The maturity date of the notes was extended from July 1, 2018 until July 1, 2019.

 

 ·The interest rate on the notes during for one-year extension period from July 2, 2018 to July 1, 2019 was increased to 10%.

 

 ·Interest is payable quarterly in arrears during the one-year extension period, instead of annually in arrears. The first such quarterly interest payment of $100,000 is due on September 30, 2018.

 

 ·Under the terms of the terms of TDH Share Sale Agreement, the TDH Sellers could earn up to an additional $5.0 million in contingent earnout payments. The original earnout period ended on December 31, 2018. The First Amendment extended the earnout period by one year to December 31, 2019.

  

As consideration to enter into the First Amendment, the Company issued 800,000 shares of its common stock valued at $480,000 to the TDH Sellers.

  

Second Amendment to the TDH Share Sale Agreement

 

On January 15, 2019, the Company entered into a second amendment to the TDH Share Sale Agreement (the “Second Amendment”). Under the terms of the Second Amendment:

 

 ·The maturity date of the notes was extended from July 1, 2019 to April 2, 2020.
   
 ·The TDH Sellers shall have the right to convert the notes at a conversion price of $0.27 per share, either in whole or in part at any time prior to the maturity, subject to the terms and conditions set forth in the Second Amendment. 
   
 ·In the event that the notes are not repaid prior to July 2, 2019, no funds will be transferred by TDH to the Company.
   
 ·The payment terms of the contingent earnout was modified from 50% payable in cash and 50% payable in stock to 75% payable in cash and 25% payable in stock.

 

As consideration to enter into the Second Amendment, the Company issued an additional 800,000 shares of its common stock valued at $220,000 to the TDH Sellers.

 

Due to the inclusion of a conversion feature, the Second Amendment was considered an extinguishment and subsequent reissuance of the notes under the guidelines of ASC 470-20-40-7 through 40-9. As a result, the Company recorded a loss on the extinguishment of debt of $363,468 related to the Second Amendment during the year ended December 31, 2019.

 

 

 

 

 22 

 

 

The principal value of the notes was reclassified to convertible notes, net – current on the Company’s condensed consolidated financial statements.

 

Third Amendment to the TDH Share Sale Agreement

 

On March 16, 2020, the Company entered into a third amendment (the “Third Amendment”) to the TDH Share Sale Agreement, pursuant to which the Company’s subsidiary, Grom Holdings, had acquired 100% of the common stock of TDH (representing ownership of the animation studio) from certain individuals (the “TDH Sellers”). The Company used the proceeds received from the TDH Secured Notes Offering to pay the TDH Sellers $3,000,000 of the principal due under the Original TDH Notes, leaving a balance due to the TDH Sellers of $1,000,000 in principal (plus accrued interest and costs). In addition, the accrued interest of $361,767 due to the TDH Sellers pursuant to the Original TDH Notes will be paid by three monthly payments of $93,922, commencing April 16, 2020, and twelve monthly installments of $6,667 commencing April 16, 2020.

 

Pursuant to the Third Amendment, the TDH Sellers and the Company agreed, among other things:

 

 ·To extend the maturity date of the remaining Original TDH Notes by one year to June 30, 2021;
   
 ·To increase the interest rate on the remaining Original TDH Notes to 12%;
   
 ·To grant a first priority security interest on the shares of TDH and TDAHK to the TDH Sellers, pari passu with the holders of the TDH Secured Notes; and
   
 ·To pay the balance of the Original TDH Notes monthly in arrears, amortized over a four-year period.

 

As of March 31, 2021, the principal balance of the Original TDH Notes was $829,122.

  

12% Senior Secured Convertible Notes (“TDH Secured Notes”)

 

On March 16, 2020, the Company sold (the “TDH Secured Notes Offering”) an aggregate $3,000,000 of its 12% senior secured convertible notes (the “TDH Secured Notes”), to eleven accredited investors (the “TDH Secured Note Lenders”), pursuant to a subscription agreement with the TDH Secured Note Lenders. Interest on the TDH Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the TDH Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024. Pursuant to the TDH Secured Notes, TD Holdings will pay amounts due under the TDH Secured Notes. Prepayment of amounts due under TDH Secured Notes is subject to a prepayment penalty in an amount equal to 4% of the amount prepaid.

 

The TDH Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $0.10 per share.

 

The Company’s obligations under the TDH Secured Notes, are secured by Grom Holdings’ shares of stock of TDH, and of its wholly owned subsidiary, TDAHK. The TDH Secured Notes rank equally and ratably on a pari passu basis with (i) the other TDH Secured Notes and (ii) the Original TDH Notes issued by the Company pursuant to TDH Share Sale Agreement.

 

If the Company sells the animation studio located in Manila, Philippines, which is currently owned by TDH through TDAHK (the “Animation Studio”), for more than $12,000,000, and so long as any amount of principal is outstanding under the TDH Secured Notes, the Company will pay the TDH Secured Notes holders from the proceeds of the sale (i) all amounts of principal outstanding under the TDH Secured Notes, (ii) such amount of interest which would be due and payable assuming the TDH Secured Notes were held to maturity (minus any amounts of interest previously paid hereunder), and (iii) an additional 10% of the amount of principal outstanding under the TDH Secured Notes within five days of the closing of such sale.

 

 

 

 

 23 

 

 

 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 $0.10. Accordingly, an aggregate of 6,000,000 shares of common stock were issued to the TDH Secured Note holders on March 16, 2020. These shares were valued at $420,000, or $0.07 per share, which represents fair market value. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the notes.

 

On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 1,739,580 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $1,101,000 of outstanding principal and accrued and unpaid interest.

 

On November 30, 2020, the Company entered into a debt exchange agreement with another holder of these 12% TDH Secured Notes pursuant to which an aggregate of 158,000 shares of Series B Stock were issued to the noteholder for an aggregate of $99,633 of outstanding principal and accrued and unpaid interest.

 

On February 17, 2021, the Company entered into debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 2,106,825 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $1,256,722 of outstanding principal and accrued and unpaid interest.

 

As of March 31, 2021, the principal balance of these notes was $414,556 and the remaining balance on the associated loan discounts was $51,771.

 

12% Senior Secured Convertible Notes (Additional Secured Notes)

 

On March 16, 2020, the Company issued to seven accredited investors (the “Additional Secured Note Lenders”) an aggregate of $1,060,000 of its 12% senior secured convertible notes (the “Additional Secured Notes”) in a private offering pursuant to a subscription agreement with substantially the same terms as the TDH Secured Notes except that the Additional Secured Notes are secured by all of the assets of the Company other than the shares and other assets of TDH and TDAHK, pursuant to a security agreement by and among the Company and the Additional Secured Note Lenders.

 

Interest on the Additional Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the Additional Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024. Prepayment of the amounts due under the Additional Secured Notes is subject to a prepayment penalty of 4% of the amount prepaid.

  

The Additional Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $0.10 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 $0.10. Accordingly, an aggregate of 2,120,000 shares of common stock were issued. These shares were valued at $148,000, or $0.07 per share, which represents fair market value. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.

 

On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of 1,236,350 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $782,500 of outstanding principal and accrued and unpaid interest.

 

On February 17, 2021, the Company entered into a debt exchange agreement with another holder of these 12% Additional Secured Notes pursuant to which an aggregate of 288,350 shares of the Company’s Series B Stock were issued to the noteholder for an aggregate of $191,273 of outstanding principal and accrued and unpaid interest.

 

 

 

 

 24 

 

 

As of March 31, 2021, the principal balance of these notes was $78,766 and the remaining balance on the associated loan discounts was $9,836.

 

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:

 

2021 $2,416,907 
2022 $151,900 
2023 $171,165 
2024 $14,509 
2025 and thereafter $ 

 

10.STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

The Company is authorized to issue 25,000,000 shares of preferred stock, par value of $0.001 per share.

 

Series A Preferred Stock

 

On February 22, 2019, the Company designated 2,000,000 shares of its preferred stock as 10% Series A convertible preferred stock, par value $0.001 per share (“Series A Stock”). Each share of Series A Stock is convertible, at any time, into five shares of common stock of the Company.

 

On each of February 27, 2019 and March 11, 2019, the Company received $400,000 from the sale of 400,000 shares of Series A Stock to accredited investors in private offerings pursuant to Section 4(a)(2) and/or Rule 506(b) of Regulation D, as promulgated under the Securities Act of 1933, as amended (the “Securities Act”). As an inducement to purchase the Series A Stock, each investor also received 2,000,000 restricted shares of the Company’s common stock.

 

On April 2, 2019, the Company received $125,000 from the sale of 125,000 shares of Series A Stock to an accredited investor in a private offering pursuant to Section 4(a)(2) and/or Rule 506(b) of Regulation D, as promulgated under the Securities Act. As an inducement to purchase the Series A Stock, the investor also received 625,000 restricted shares of the Company’s common stock.

 

As a result of the issuance of the Series A Stock, the Company recorded a beneficial conversion feature and other discounts as a deemed dividend in its condensed consolidated financial statements of $740,899.

  

On August 6, 2020, the Company entered into exchange agreements with the holders of 925,000 issued and outstanding shares of the Company’s Series A Stock pursuant to which such shares of Series A Stock were exchanged for an aggregate of 1,202,500 shares of the Company’s Series B Stock. See Series B Preferred Stock below for more details.

 

As of March 31, 2021 and December 31, 2020, the Company had zero and 925,000 shares of Series A Stock issued and outstanding, respectively.

 

Series B Preferred Stock

 

On August 4, 2020, the Company filed with the Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series B Stock designating 10,000,000 shares as Series B Preferred Stock (the “Series B Stock”). The Series B Stock ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.

 

 

 

 

 25 

 

 

The holder may at any time after the 12-month anniversary of the issuance of the shares of Series B Stock convert such shares into common stock at a conversion price equal to the 30-day volume weighted average price (“VWAP”) of a share of common stock for each share of Series B Stock to be converted. In addition, the Company at any time may require conversion of all or any of the Series B Stock then outstanding at a 50% discount to the 30-day VWAP.

 

Each share of Series B Stock entitles the holder to fifty votes for each share of Series B Stock. The consent of the holders of at least two-thirds of the shares of Series B Stock is required for the amendment to any of the terms of the Series B Stock, to create any additional class of stock unless the stock ranks junior to the Series B Stock, to make any distribution or dividend on any securities ranking junior to the Series B 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 B Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in common stock in arrears quarterly commencing 90 days from issuance.

 

Upon a liquidation, dissolution or winding up of the Company, the holders of the Series B 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 B Stock upon a liquidation until Series B stockholders receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series B 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 June 19, 2020, the Company received gross cash proceeds of $250,000 from one accredited investor, pursuant to the terms of a subscription agreement, and subsequently issued an aggregate of 250,000 shares of Series B Stock on August 6, 2020.

 

On August 6, 2020, the Company, entered into debt exchange agreements with holders of the Company’s (i) OID Notes in the aggregate amount of $411,223 of outstanding principal and accrued and unpaid interest; (ii) TDH Secured Notes, in the aggregate amount of $1,101,000 of outstanding principal and accrued and unpaid interest; and (iii) Additional Secured Notes, which were secured by all of the other assets of the Company in the aggregate amount of $782,500 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders of the notes exchanged outstanding and all amounts owed by the Company thereunder, for an aggregate of 3,623,884 shares of the Company’s Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid-in-full and the notes were cancelled.

 

In addition, on August 6, 2020, the Company entered into exchange agreements (the “Series A Exchange Agreements”) with the holders of 925,000 issued and outstanding shares of the Company’s Series A Stock. Pursuant to the terms of the Series A Exchange Agreements, the holders of Series A Stock exchanged their shares for an aggregate of 1,202,500 shares of the Company’s Series B Stock. At the time of the exchange, all of the exchanged shares of Series A Stock were cancelled.

 

On September 22, 2020, the Company received gross cash proceeds of $233,500 from two accredited investors, pursuant to the terms of a subscription agreement, and subsequently issued an aggregate of 233,500 shares of Series B Stock on November 30, 2020.

 

On November 30, 2020, the Company entered into debt exchange agreements with holders of the Company’s (i) OID Notes in the aggregate amount of $111,250 of outstanding principal and accrued and unpaid interest; and (ii) TDH Secured Notes, in the aggregate amount of $99,633 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders of the outstanding notes exchanged all amounts owed by the Company thereunder, for an aggregate of 316,000 shares of the Company’s Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid-in-full and the notes were cancelled.

 

 

 

 

 26 

 

 

On February 17, 2021, the Company entered into debt exchange agreements with holders of three of the Company’s convertible promissory notes in the aggregate amount of $1,700,905 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders exchanged the outstanding notes, and all amounts owed by the Company thereunder, for an aggregate of 2,564,175 shares of the Company’s Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid in full and the notes were cancelled.

 

On February 17, 2021, the Company entered into subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 300,000 shares of Series B Stock for aggregate gross proceeds of $300,000.

 

On March 31, 2021, the Company entered into subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 650,000 shares of Series B Stock for aggregate gross proceeds of $650,000.

 

During the three months ended March 31, 2021, the Company issued 75,000 shares of Series B Stock with a fair market value of $75,000 to its attorneys for legal services rendered.

  

As of March 31, 2021 and December 31, 2020, the Company had 9,215,059 and 5,625,884 shares of Series B Stock issued and outstanding, respectively.

 

Common Stock

 

The Company is authorized to issue 500,000,000 shares of common stock, par value of $0.001 per share and had 189,316,295 and 188,354,282 shares of common stock issued and outstanding as of March 31, 2021 and December 31, 2020, respectively.

 

Common Stock Issued in Exchange for Consulting, Professional and Other Services

 

During the three months ended March 31, 2021, the Company issued 537,013 shares of common stock with a fair market value of $80,130 to contractors for services rendered.

 

During the three months ended March 31, 2020, the Company issued 2,414,053 shares of common stock with a fair market value of $ 240,505 to contractors for services rendered.

 

Common Stock Issued in lieu of Cash for Loans Payable and Other Accrued Obligations

 

During the three months ended March 31, 2020, the Company issued 500,000 shares of common stock with a fair market value of $50,000 to satisfy loans payable and other accrued obligations.

 

Common Stock Issued in Connection with the Conversion of Convertible Note Principal and Accrued Interest

 

During the three months ended March 31 2020, the Company issued 259,300 shares of common stock upon the conversion of $15,000 in convertible note principal and accrued interest.

 

Common Stock Issued in Connection with the Issuance of Convertible Promissory Notes

 

During the three months ended March 31, 2021, the Company issued 425,000 shares of common stock valued at $29,750 in connection with the issuance of convertible notes.

 

 

 

 

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During the three months ended March 31, 2020, the Company issued 8,120,000 shares of common stock valued at $568,400 in connection with the issuance of convertible notes.

 

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, 2021 and December 31, 2020. 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 Contractual Life (Yrs.) 
          
Balance January 1, 2020  5,664,744  $0.28   1.79 
Warrants issued  1,683,197  $0.06     
Warrants exercised    $     
Warrants forfeited    $     
December 31, 2020  7,347,941  $0.23   1.66 
Warrants issued  12,652,000  $0.06     
Warrants exercised    $     
Warrants forfeited    $     
Balance March 31, 2021  19,999,941  $0.12   1.69 

  

Stock Options

 

The following table represents all outstanding and exercisable stock options as of March 31, 2021.

 

Year Issued Options
Issued
  Options
Forfeited
  Options
Outstanding
  Vested
Options
  Strike Price  Weighted Average Remaining Life (Yrs.) 
                   
2013  7,735,350   (834,000)  6,901,350   6,901,350  $0.24   2.47 
2016  5,421,000   (5,004,000)  417,000   417,000  $0.78   0.17 
2018  60,000      60,000   60,000  $0.78   2.08 
Total  13,216,350   (5,838,000)  7,378,350   7,378,350  $0.48   2.28 

 

During the three months ended March 31, 2021 and 2020, the Company did not record any stock-based compensation expense related to stock options.

  

11.COMMITMENTS AND CONTINGENCIES

 

None.

 

 

 

 

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12.SUBSEQUENT EVENTS

 

In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to September 30, 2020 to the date these condensed consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these condensed consolidated financial statements, except as follows:

 

On April 1, 2021, the Company entered into a binding letter of intent with Curiosity Ink Media, LLC, a California limited liability company (“Curiosity”), Russell Hicks (“Hicks”), Brent Watts (“Watts”), and the other members of Curiosity (collectively, the “Sellers”), pursuant to which the Company agreed to acquire an aggregate of 80% of Curiosity’s membership interests (the “80% Membership Interests”) from the Sellers, on a pro rata basis, for a purchase price of $3,678,000, of which: (i) $400,000 is payable in cash, to be used to pay down a portion of loans made to Curiosity by Hicks and Watts; (ii) $3,000,000 is payable in shares of the Company’s common stock, valued at a price per share equal to the 20-day volume-weighted average price of the Company’s common stock; and (iii) $278,000 is payable by the issuance to Hicks and Watts of 8% convertible promissory notes payable in equal monthly installments, on an amortized basis over 18 months. The Sellers will have the opportunity to receive up to an additional $2,000,000 in acquisition consideration, paid in shares of the Company’s common stock, based upon the successful execution of certain specified contracts and/or material agreements. The Sellers will also have the opportunity to receive an additional $17,500,000 in purchase consideration, paid 50% in cash and 50% in shares of the Company’s common stock, based upon achieving certain performance milestones through December 31, 2023. The Company has the exclusive right to acquire the 80% Membership Interests through June 30, 2021. The consummation of the acquisition is contingent upon the parties entering into a definitive agreement and other closing conditions.

 

On April 12, 2021, the Company issued 2,000,000 shares of common stock upon the conversion of $100,000 in convertible note principal and $11,151 in accrued interest.

 

On April 16, 2021 (the “Effective Date”), the Company, entered into a securities purchase agreement (the “Labrys Purchase Agreement”) with Labrys Fund, LP, a Delaware limited partnership (“Labrys”), pursuant to which the Company issued to Labrys a one-year convertible promissory note in the principal amount of $300,000 (the “Labrys Note”). In connection with the issuance of the Labrys Note, Labrys was also issued a five-year warrant to purchase up to an aggregate of 3,750,000 shares of the Company’s common stock (the “Warrant Shares”), at an exercise price of $0.06 per share. The Company received net proceeds of $266,000, after deducting an original issue discount in the amount of $30,000 and $4,000 for Labrys’s legal fees. The Labrys Note bears interest at a rate of 12% per annum. The first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. In the event the Company fails to pay any amount when due under the Labrys Note, the interest rate will increase to the lesser of 16%, or the maximum amount permitted by law. Labrys may convert any amount due under the Labrys Note into shares of the Company’s common stock at a conversion price of $0.06 per share. The conversion price and number of shares of the Company’s common stock issuable upon conversion of the Labrys Note is subject to adjustment from time to time in the event of any merger, consolidation, distribution of shares, or other dilutive issuances.

 

Labrys may not exercise the warrant or convert the Labrys Note if such exercise or conversion would cause it, together with its affiliates, to beneficially own in excess of 4.99% of the Company’s common stock. The warrant may be exercised for cash, or, if the market price of the Company’s common stock is greater than the warrant exercise price, on a cashless basis. The number of Warrant Shares is subject to adjustment for certain dilutive events or corporate actions.

 

Labrys has right of first refusal to participate in any offer or sale of the Company’s equity or debt securities, piggyback registration rights with respect to conversion and Warrant Shares. While any of the Labrys Note, the conversion shares, the Warrants, or the Labrys Warrant Shares are outstanding, the Company will not sell securities on more favorable terms. While any amount remains unpaid under the Labrys Note, the Company will not enter into any subsequent variable rate transactions.

 

On May 7, 2021, the Company filed a certificate of amendment to the Company’s articles of incorporation, as previously amended, with the Secretary of State of the State of Florida, to effect a reverse stock split of the Company’s common stock, $0.001 par value per share, at a rate of 1-for-32, effective as of May 13, 2021. On May 17, 2021, the Financial Industry Regulatory Authority notified the Company that the Reverse Stock Split would take effect in the over-the-counter market at the start of business on May 19, 2021. At the open of trading on May 19, 2021, the Company’s trading symbol will change from “GRMM” to “GRMMD.” The “D” will be removed 20 business days after the split becomes effective in the market. The reverse stock split will not impact the number of authorized shares of common stock which will remain at 500,000,000 shares. The share and per share information in these condensed consolidated financial statements do not give effect to the reverse stock split of the outstanding common stock at 1-for-32 ratio.

 

 

 

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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, 2020, which we filed with the Securities and Exchange Commission on April 13, 2021, that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

 

Overview

 

The Company is a media, technology and entertainment company that focuses on 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. We operate our business through the following four wholly-owned subsidiaries:

 

 ·Grom Social, Inc. was incorporated in the State of Florida on March 5, 2012 and operates our social media network designed for children under the age of 13 years.

 

 ·TD Holdings Limited (“TD Holdings”) was incorporated in Hong Kong on September 15, 2005. TD Holdings operates through its two subsidiary companies: (i) Top Draw Animation Hong Kong Limited, a Hong Kong corporation and (ii) Top Draw Animation, Inc., a Philippines corporation. The group’s principal activities are the production of animated films and televisions series.

 

 ·Grom Educational Services, Inc. (“GES”) was incorporated in the State of Florida on January 17, 2017. GES operates our web filtering services provided to schools and government agencies.

 

 ·Grom Nutritional Services, Inc. (“GNS”) was incorporated in the State of Florida on April 19, 2017. GNS intends to market and distribute nutritional supplements to children. GNS has not generated any revenue since its inception.

 

Impact of COVID-19

 

The Company has experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and delays as a result of government-imposed quarantines, office closings and travel restrictions, which affect both the Company 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 90% of the Company’s total revenues on a consolidated basis, has been mostly closed.

 

In response to the outbreak and business disruption, the Company has instituted employee safety protocols to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices and production studio. The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity.

 

Recent Events

 

On May 7, 2021, the Company filed a certificate of amendment to the Company’s articles of incorporation, as previously amended, with the Secretary of State of the State of Florida, to effect a reverse stock split of the Company’s common stock, $0.001 par value per share, at a rate of 1-for-32, effective as of May 13, 2021. On May 17, 2021, the Financial Industry Regulatory Authority notified the Company that the Reverse Stock Split would take effect in the over-the-counter market at the start of business on May 19, 2021. At the open of trading on May 19, 2021, the Company’s trading symbol will change from “GRMM” to “GRMMD.” The “D” will be removed 20 business days after the split becomes effective in the market. The reverse stock split will not impact the number of authorized shares of common stock which will remain at 500,000,000 shares. The share and per share information in this Quarterly Report do not give effect to the reverse stock split of the outstanding common stock at 1-for-32 ratio.

 

 

 

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Results of Operations

 

Comparison of Results of Operations for the Three Months Ended March 31, 2021 and 2020

 

Revenue

 

Revenue for the three months ended March 31, 2021 was $1,875,284, compared to revenue of $1,292,239 during the three months ended March 31, 2020, representing an increase of $583,045 or 45.1%.

  

Animation revenue for the three months ended March 31, 2021 was $1,713,958, compared to animation revenue of $1,153,236 during the three months ended March 31, 2020, representing an increase of $560,722 or 48.6%. The increase in animation revenue is primarily attributable to the increase in the overall number of contracts completed as client delays caused by concerns related to the spread of COVID-19 began to subside.

 

Web filtering revenue for the three months ended March 31, 2021 was $161,241, compared to web filtering revenue of $138,143 during the three months ended March 31, 2020, representing an increase of $23,098 or 16.7%. The increase is primarily due to an increase in organic sales growth, and the timing or loss of multi-year contract renewals.

 

Subscription and advertising revenue from our Grom Social website, Grom Social mobile application and MamaBear safety mobile application have been nominal. Subscription and advertising revenue for the three months ended March 31, 2021 was $384 compared to subscription and advertising revenue of $860 during the three months ended March 31, 2020, representing a decrease of $476 or 55.3%, primarily attributable to a decrease in marketing and promotion activities.

 

Gross Profit

 

Our gross profits vary significantly by subsidiary. Historically, our animation business has realized gross profits between 45% and 55%, while our web filtering business has realized gross profits between 75% and 90%. Additionally, our gross profits may vary from period to period due to the nature of the business of each subsidiary, and the timing and volume of customer contracts and projects. Current gross margins percentages may not be indicative of future gross margin performance.

 

Gross profit for the three months ended March 31, 2021 and 2020 were $1,074,850, or 57.3%, and $680,146, or 52.6%, respectively. The increase in gross profit is primarily attributable to an increase in web filtering sales and higher contract margins in our animation business.

 

Operating expenses

 

Operating expenses for the three months ended March 31, 2021 were $1,785,699, compared to operating expenses of $1,748,548 during the three months ended March 31, 2020, representing an increase of $37,151 or 2.1%. The increase is primarily attributable to an increase in fees for professional services rendered during the three months ended March 31, 2021. General and administrative expenses were $1,350,799 for the three months ended March 31, 2021, compared to $1,449,348 for the three months ended March 31, 2020, representing a decrease of $98,549 or 6.8%. Professional fees were $187,109 for the three months ended March 31, 2021, compared to $52,718 for the three months ended March 31, 2020, representing an increase of $134,391 or 254.9%.

 

Other Income (Expense)

 

Net other expense for the three months ended March 31, 2021 was $1,604,726, compared to a net other expense of $278,432 for the three months ended March 31, 2020, representing an increase of $1,326,294 or 476.3%. The increase in net other expense is primarily attributable to a one-time extinguishment loss of $947,179 related to the exchange of $1,447,996 in principal and interest accrued under certain convertible notes for 2,395,175 shares of our Series B preferred stock.

 

 

 

 

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Interest expense is comprised of interest incurred on our convertible notes and from the amortization of note discounts. Interest expense was $648,846 for the three months ended March 31, 2021, compared to $277,763 during the three months ended March 31, 2020, representing a decrease of $371,083 or 133.6%. The increase is primarily attributable to an increase in amortization expense associated with debt discounts recorded during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

  

Net Loss Attributable to Common Stockholders

 

We realized a net loss attributable to common stockholders of $2,315,575, or $0.01 per share, for the three months ended March 31, 2021, compared to a net loss attributable to common stockholders of $1,346,834, or $0.01 per share, during the three months ended March 31, 2020, representing an increase in net loss attributable to common stockholders of $969,741 or 71.9%.

 

Liquidity and Capital Resources

 

At March 31, 2021, we had cash and cash equivalents of $581,950.

 

Net cash used in operating activities for the three months ended March 31, 2021 was $988,573, compared to net cash used in operating activities of $244,122 during the three months ended March 31, 2020, representing an increase in cash used of $744,461, primarily due to the change in operating assets and liabilities.

 

Net cash used in investing activities for the three months ended March 31, 20201 was $2,391, compared to net cash used in investing activities of $15,267 during the three months ended March 31, 2020 representing a decrease in cash used of $12,876. 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, 2021.

 

Net cash provided by financing activities for the three months ended March 31, 2021 was $1,433,438, compared to net cash provided by financing activities of $576,143 for the three months ended March 31, 2020, representing an increase in cash provided of $857,295. Our primary sources of cash from financing activities were attributable to $666,500 in proceeds from the sale of 8% - 12% convertible notes and $950,000 in proceeds from the sale of our Series B Stock during the three months ended March 31, 2021, as compared to $3,655,000 in proceeds from the sale of 12% senior secured convertible notes during the three months ended March 31, 2020. On March 16, 2020, the Company repaid $3,000,000 in principal due to the former shareholders of TD Holdings Limited on a convertible note originally dated September 20, 2016.

  

We currently have a monthly consolidated cash operating loss ranging between $100,000 to $150,000, or approximately $1,200,000 to $1,800,000 annually. In order to fund our operations for the next twelve months, we believe that we will need to raise $2,000,000. Historically, we have funded our operations through sales of equity, debt issuances and officer loans. We currently have no commitment from any investment banker or other traditional funding sources and no definitive agreement with any third party to provide us with financing, either debt or equity, and there can be no assurances that we will be able to raise additional funds, or if we are successful, on favorable terms. Future equity sales may result in dilution to current shareholders and debt may have negative covenants. In addition, the COVID-19 pandemic has had and may continue to have an adverse effect on the capital markets and our ability to raise additional funding. The failure to obtain the financing necessary to allow us to continue to implement our business plan will have a significant negative impact on our anticipated results of operations.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. On a consolidated basis, we have incurred significant operating losses since inception. Because we do not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, we will need to raise additional funds and are currently exploring sources of financing. Historically, we have raised capital through private offerings of debt and equity and officer loans to finance working capital needs. There can be no assurances that we will be able to continue to raise additional capital through the sale of common stock or other securities or obtain short-term loans.

 

 

 

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Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Critical Accounting Estimates

 

Our financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these 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 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. Our critical accounting estimates are more fully discussed in Note 2 to our unaudited financial statements contained herein.

 

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

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of March 31, 2021, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2021 to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act were recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Act Commission's rules and forms and that our disclosure controls are effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

  

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

 

Changes in Internal Control over Financial Reporting

 

During the period covered by this Report, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

There are no pending legal proceedings to which the Company 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 Registration Statement on Form S-1, filed with the SEC on April 28, 2021.

 

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 January 27, 2021, the Company issued 425,000 shares of common stock to an accredited investor in connection with the issuance of a promissory note in the principal amount of $165,000.

 

On February 19, 2021, the Company issued 500,000 shares of common stock to a consultant for investor relations services provided to the Company.

 

On March 31, 2021, the Company issued 37,013 shares of common stock to a contractor for technology design 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.

  

 

 

 

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Item 6. Exhibits.

 

Exhibit No. Description
   
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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, 2021By:/s/ Darren Marks
  Darren Marks
  

Chief Executive Officer and President

(Principal Executive Officer)

   
   
Date: May 17, 2021By:/s/ Melvin Leiner
  Melvin Leiner
  Executive Vice President, Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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