Company Quick10K Filing
Grom Social Enterprises
Price0.16 EPS-0
Shares152 P/E-7
MCap24 P/FCF-22
Net Debt-1 EBIT-4
TEV24 TEV/EBIT-7
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-09-02
10-Q 2020-03-31 Filed 2020-08-06
10-K 2019-12-31 Filed 2020-06-30
10-Q 2019-09-30 Filed 2019-11-19
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-20
10-K 2018-12-31 Filed 2019-04-16
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-04-17
10-Q 2017-09-30 Filed 2017-11-20
10-Q 2017-06-30 Filed 2017-08-11
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-03-27
10-Q 2016-09-30 Filed 2016-11-09
10-Q 2016-06-30 Filed 2016-08-12
10-Q 2016-03-31 Filed 2016-05-11
8-K 2020-05-29
8-K 2020-05-14
8-K 2020-03-30
8-K 2020-03-16
8-K 2019-11-11
8-K 2019-05-31
8-K 2019-01-15
8-K 2018-10-15
8-K 2018-09-20
8-K 2018-09-17
8-K 2018-06-01
8-K 2018-05-21
8-K 2018-01-10
8-K 2017-12-29
8-K 2017-12-27

GRMM 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 grom_ex3101.htm
EX-31.2 grom_ex3102.htm
EX-32 grom_ex3200.htm

Grom Social Enterprises Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
2015117302015201620182020
Assets, Equity
2.41.60.8-0.1-0.9-1.72015201620182020
Rev, G Profit, Net Income
0.80.50.2-0.0-0.3-0.62015201620182020
Ops, Inv, Fin

10-Q 1 grom_10q-063020.htm FORM 10-Q

 

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 June 30, 2020

 

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 class Trading Symbol(s) Name of each exchange on which registered
Not applicable Not applicable Not 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 filer o Accelerated filer o
Non-accelerated filer þ Smaller reporting company þ
    Emerging growth company þ

 

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 September 1, 2020, 187,348,894 shares of the registrant’s common stock were outstanding.

  

 

   

 

 

GROM SOCIAL ENTERPRISES, INC.

 

Table of Contents

 

 

 

 

 

 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

   

 

   June 30,   December 31, 
   2020   2019 
         
ASSETS          
Current assets:          
Cash and cash equivalents  $756,790   $506,219 
Accounts receivable, net   540,322    545,662 
Inventory, net   30,376    29,562 
Prepaid expenses and other current assets   259,576    329,128 
Total current assets   1,587,064    1,410,571 
Operating lease right of use assets   738,467    874,159 
Property and equipment, net   694,429    852,145 
Goodwill   8,853,261    8,853,261 
Intangible assets, net   5,759,797    5,953,255 
Deferred tax assets, net -- noncurrent   249,265    238,581 
Other assets   74,309    79,065 
Total assets  $17,956,592   $18,261,037 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $774,364   $808,520 
Accrued liabilities   1,832,235    1,651,482 
Advanced payments and deferred revenues   823,041    627,082 
Convertible notes, net -- current   2,904,825    4,828,656 
Derivative liabilities   91,517    77,584 
Related party payables   310,582    462,137 
Lease liabilities -- current   283,789    263,252 
Total current liabilities   7,020,353    8,718,713 
Convertible notes, net of loan discounts   2,525,828    505,000 
Lease liabilities   480,935    633,098 
Loans payable   253,912     
Other noncurrent liabilities   207,725    227,229 
Total liabilities   10,488,753    10,084,040 
           
Commitments and contingencies        
           
Stockholders' Equity:          
Series A preferred stock, $0.001 par value. 2,000,000 shares authorized; 925,000 and zero shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively     925       925  
Series B preferred stock, $0.001 par value. 10,000,000 shares authorized; 250,000 and zero shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively     250        
Common stock, $0.001 par value. 500,000,000 shares authorized; 184,084,636 and 167,382,807 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively     184,085       167,383   
Additional paid-in capital   59,665,726    58,154,730 
Accumulated earnings (deficit)   (52,348,423)   (50,048,481)
Accumulated other comprehensive income   (34,724)   (97,560)
Total stockholders' equity   7,467,839    8,176,997 
Total liabilities and equity  $17,956,592   $18,261,037 

 

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
June 30,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
   Six Months Ended
June 30,
 
   2020   2019   2020   2019 
                 
Sales  $1,746,979   $2,075,081   $3,039,218   $4,041,941 
Cost of goods sold   661,180    1,050,372    1,273,273    1,864,874 
Gross margin   1,085,799    1,024,709    1,765,945    2,177,067 
Operating expenses:                    
Depreciation and amortization   193,234    226,371    389,199    448,799 
Selling and marketing   21,960    32,934    56,277    61,033 
General and administrative   1,093,880    1,224,670    2,543,228    2,744,390 
Professional fees   54,760    342,893    107,478    633,662 
Stock based compensation   46,400    16,200    62,600    32,400 
Total operating expenses   1,410,234    1,843,068    3,158,782    3,920,284 
Income (loss) from operations   (324,435)   (818,359)   (1,392,837)   (1,743,217)
Other income (expense)                    
Interest income (expense), net   (612,379)   (313,622)   (890,142)   (689,782)
Gain (loss) on settlement of debt               (363,468)
Unrealized gain (loss) on change in fair value of derivative liabilities   (13,166)       (13,933)    
Other gains (losses)   (3,128)   18,727    (3,030)   39,574 
Total other income (expense)   (628,673)   (294,895)   (907,105)   (1,013,676)
Net income (loss)   (953,108)   (1,113,254)   (2,299,942)   (2,756,893)
                     
Convertible preferred stock beneficial conversion feature and other discounts accreted as a deemed dividend       (100,694)       (740,899)
                     
Net loss attributable to common stockholders  $(953,108)  $(1,213,948)  $(2,299,942)  $(3,497,792)
                     
Basic and diluted earnings (loss) per common share  $(0.01)  $(0.01)  $(0.01)  $(0.02)
                     
Weighted-average number of common shares outstanding:                    
Basic and diluted   172,813,273    144,780,176    176,897,958    142,413,660 
                     
Comprehensive loss:                    
Net income (loss)  $(953,108)  $(1,113,254)  $(2,299,942)  $(2,756,893)
Foreign currency translation adjustment   29,382    9,966    62,836    21,070 
Comprehensive income (loss)  $(923,726)  $(1,103,288)  $(2,237,106)  $(2,735,823)

 

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    
                    Additional     Other  Total 
  Series A Preferred Stock  Series B Preferred Stock  Common Stock  Paid-in  Retained  Comprehensive  Stockholders' 
  Shares  Value  Shares  Value  Shares  Value  Capital  Earnings  Income  Equity 
                               
Balance, March 31, 2019  800,000  $800     $   144,830,713  $144,831  $53,643,794  $(47,100,846) $(142,150) $6,546,429 
                                         
Net income (loss)                       (1,113,254)     (1,113,254)
Change in foreign currency translation                          9,966   9,966 
Issuance of Series A preferred stock with common stock in connection with sales made under private offerings  125,000   125               55,431         55,556 
Issuance of common stock in connection with sales of Series A preferred stock              625,000   625   68,819         69,444 
Beneficial conversion feature related to preferred stock                    31,250         31,250 
Deemed dividend on conversion of convertible preferred stock to common stock                    (31,250)        (31,250)
Accretion of Series A preferred stock                    69,444         69,444 
Deemed dividend on accretion of Series A preferred stock                    (69,444)        (69,444)
Issuance of common stock in connection with sales made under private offerings              1,233,333   1,233   183,767         185,000 
Issuance of common stock in exchange for consulting, professional and other services              499,444   500   108,852         109,352 
Issuance of common stock in connection with the issuance of convertible note(s)              80,130   80   18,852         18,932 
                                         
Balance, June 30, 2019  925,000  $925     $   147,268,620  $147,269  $54,079,515  $(48,214,100) $(132,184) $5,881,425 

 

 

 

 

 6 

 

 

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(continued)

 

 

                          Accumulated    
                    Additional     Other  Total 
  Series A Preferred Stock  Series B Preferred Stock  Common Stock  Paid-in  Retained  Comprehensive  Stockholders' 
  Shares  Value  Shares  Value  Shares  Value  Capital  Earnings  Income  Equity 
                               
Balance, March 31, 2020  925,000  $925     $   178,666,260  $178,666  $59,061,481  $(51,395,315) $(64,106) $7,781,651 
                                         
Net income (loss)                       (953,108)     (953,108)
Change in foreign currency translation                          29,382   29,382 
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings        250,000   250         249,750         250,000 
Issuance of common stock as compensation to employees, officers and/or directors              420,000   420   35,180         35,600 
Issuance of common stock in exchange for consulting, professional and other services              1,999,414   1,999   139,701         141,700 
Issuance of common stock in connection with the issuance of convertible note(s)              2,749,677   2,750   164,864         167,614 
Conversion of convertible note and accrued interest into common stock              249,285   250   14,750         15,000 
                                         
Balance, June 30, 2020  925,000  $925   250,000  $250   184,084,636  $184,085  $59,665,726  $(52,348,423) $(34,724) $7,467,839 

 

 

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

 

 

 

 7 

 

 

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(continued)

 

                          Accumulated    
                    Additional     Other  Total 
  Series A Preferred Stock  Series B Preferred Stock  Common Stock  Paid-in  Retained  Comprehensive  Stockholders' 
  Shares  Value  Shares  Value  Shares  Value  Capital  Earnings  Income  Equity 
                               
Balance, December 31, 2018    $     $   138,553,655  $138,554  $52,254,286  $(45,457,207) $(153,254) $6,782,379 
                                         
Net income (loss)                       (2,756,893)     (2,756,893)
Change in foreign currency translation                          21,070   21,070 
Issuance of Series A preferred stock with common stock in connection with sales made under private offerings  925,000   925               410,226         411,151 
Issuance of common stock in connection with sales of Series A preferred stock              4,625,000   4,625   509,224         513,849 
Beneficial conversion feature related to preferred stock                    231,050         231,050 
Deemed dividend on conversion of convertible preferred stock to common stock                    (231,050)        (231,050)
Accretion of Series A preferred stock                    509,849         509,849 
Deemed dividend on accretion of Series A preferred stock                    (509,849)        (509,849)
Issuance of common stock in connection with sales made under private offerings              1,233,333   1,233   183,767         185,000 
Issuance of common stock in exchange for consulting, professional and other services              1,876,782   1,877   457,120         458,997 
Issuance of common stock in lieu of cash for loans payable and other accrued obligations              99,720   100   26,840         26,940 
Issuance of common stock in connection with the issuance of convertible note(s)              80,130   80   18,852         18,932 
Issuance of common stock in connection with the amendment of terms of promissory note(s)              800,000   800   219,200         220,000 
                                         
Balance, June 30, 2019  925,000  $925     $   147,268,620  $147,269  $54,079,515  $(48,214,100) $(132,184) $5,881,425 

 

 

 8 

 

 

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(continued)

 

                          Accumulated    
                    Additional     Other  Total 
  Series A Preferred Stock  Series B Preferred Stock  Common Stock  Paid-in  Retained  Comprehensive  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 income (loss)                       (2,299,942)     (2,299,942)
Change in foreign currency translation                          62,836   62,836 
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings        250,000   250         249,750         250,000 
Issuance of common stock as compensation to employees, officers and/or directors              420,000   420   35,180         35,600 
Issuance of common stock in exchange for consulting, professional and other services              4,403,567   4,403   377,802         382,205 
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)              10,869,677   10,870   725,144         736,014 
Conversion of convertible note and accrued interest into common stock              508,585   509   29,491         30,000 
Recognition of beneficial conversion features related to convertible notes                    44,129         44,129 
                                         
Balance, June 30, 2020  925,000  $925   250,000  $250   184,084,636  $184,085  $59,665,726  $(52,348,423) $(34,724) $7,467,839 

 

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

 

 

 

 

 9 

 

 

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Cash Flows (Unaudited)

 

 

   Six Months Ended June 30,   Six Months Ended June 30, 
   2020   2019 
Cash flows from operating activities of continuing operations:          
Net income (loss)  $(2,299,942)  $(2,756,893)
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation and amortization   389,199    448,799 
Amortization of debt discount   221,306    269,349 
Common stock issued for financing costs   167,614    18,932 
Common stock issued in exchange for fees and services   382,205    458,998 
Deferred taxes   (10,684)   (19,358)
Stock based compensation   62,600    32,400 
Loss on extinguishment of debt       363,468 
Unrealized (gain) loss on change in fair value of derivative liabilities   13,933     
Changes in operating assets and liabilities:          
Accounts receivable   5,340    222,971 
Inventory   (814)   (19,732)
Prepaid expenses and other current assets   42,553    81,018 
Operating lease right of use assets   26,219    11,095 
Other assets   4,756    38,281 
Accounts payable   (34,226)   136,923 
Accrued liabilities   237,116    202,298 
Advanced payments and deferred revenues   195,959    152,022 
Income taxes payable and other noncurrent liabilities   (19,505)   (32,727)
Related party payables   (151,555)   (190,850)
Net cash provided by (used in) operating activities   (767,926)   (583,006)
           
Cash flows from investing activities:          
Purchase of fixed assets   (38,025)   (194,276)
Net cash provided by (used in) financing activities   (38,025)   (194,276)
           
Cash flows from financing activities:          
Proceeds from issuance of preferred stock, net of issuance costs   250,000    411,151 
Proceeds from issuance of common stock, net of issuance costs       698,849 
Proceeds from issuance of convertible notes   3,655,000     
Proceeds from loans payable   253,912     
Repayments of convertible notes   (3,143,145)   (131,429)
Net cash provided by (used in) financing activities   1,015,767    978,571 
           
Effect of exchange rates on cash and cash equivalents   40,754    21,170 
Net increase (decrease) in cash and cash equivalents   250,570    222,459 
Cash and cash equivalents at beginning of period   506,219    633,593 
Cash and cash equivalents at end of period  $756,789   $856,052 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $   $208,493 
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  $568,400   $ 
Common stock issued to reduce accounts payable and other accrued liabilities  $50,000   $26,940 
Conversion of convertible notes and accrued interest into common stock  $30,000   $ 
Discount for beneficial conversion features on convertible notes  $44,129   $ 

 

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

 

 

 

 10 

 

 

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.

 

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.

 

 

 

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The Company has experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and as a result of 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 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, 2019, as presented in the Company’s Annual Report on Form 10-K filed on June 30, 2020 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 and six months ended June 30, 2020, 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.

 

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.

 

 

 

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Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued 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 entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. 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. This new guidance was initially effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016 and early adoption was not permitted. However, in July 2015, the FASB voted to defer the effective date of this ASU by one year for reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date. As a result, the effective date for the Company is January 1, 2018.

 

Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company adopted this ASU in accordance with the modified retrospective method, effective January 1, 2018 for all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy GAAP.

 

Under the applicable revenue recognition guidance for fiscal 2017 and prior years, these transactions were recognized when the amounts were billed to the customer.

 

As a result of the Company’s transition to ASC 606, the Company recorded a net change in beginning retained earnings of $263,741 on January 1, 2018 due to the cumulative effect of adopting ASC 606.

 

Animation Revenue

 

For the six months ended June 30, 2020 and 2019, the Company recorded a total of $2,687,614 and $3,707,458, 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 after effects. 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.

 

 

 

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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 six months ended June 30, 2020 and 2019, the Company recorded a total of $349,998 and $330,052, 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 June 30, 2020, and December 31, 2019:

 

  

June 30,

2020

  

December 31,

2019

 
         
Animation contract assets  $458,912   $513,388 
Web filtering contract assets   74,073    24,937 
Other contract assets   7,337    7,337 
Total contract assets  $540,332   $545,662 
           
Animation contract liabilities  $254,115   $51,054 
Web filtering contract liabilities   557,426    564,528 
Other contract liabilities   11,500    11,500 
Total contract liabilities  $823,041   $627,082 

 

 

 

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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 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.

 

3. ACCOUNTS RECEIVABLE, NET

 

The following table sets forth the components of the Company’s accounts receivable at June 30, 2020, and December 31, 2019:

 

  

June 30,

2020

  

December 31,

2019

 
         
Billed accounts receivable  $474,066   $353,778 
Unbilled accounts receivable   109,103    233,869 
Allowance for doubtful accounts   (42,837)   (41,985)
Total accounts receivable, net  $540,332   $545,662 

 

As of December 31, 2019, the Company evaluated its outstanding trade receivables and established a provision for doubtful accounts of $41,985. As of June 30, 2020, the Company determined that no additional provision for doubtful accounts was necessary.

 

During the six months ended June 30, 2020, the Company had three customers that accounted for 76.9% of revenues and three customers that accounted for 51.9% of accounts receivable. During the year ended December 31, 2019, the Company had three customers that accounted for 42.3% of revenues and one customer that accounted for 38.7% of accounts receivable.

  

4. PROPERTY AND EQUIPMENT

 

The following table sets forth the components of the Company’s property and equipment at June 30, 2020 and December 31, 2019:

 

   June 30, 2020   December 31, 2019 
   Cost   Accumulated Depreciation   Net Book Value   Cost   Accumulated Depreciation   Net Book Value 
Capital assets subject to depreciation:                              
Computers, software and office equipment  $2,237,985   $(2,031,810)  $206,175   $2,184,327   $(1,882,567)  $301,760 
Machinery and equipment   181,397    (138,015)   43,382    175,761    (125,272)   50,489 
Vehicles   160,927    (91,602)   69,325    158,849    (77,133)   81,716 
Furniture and fixtures   412,644    (343,078)   69,566    399,512    (323,771)   75,741 
Leasehold improvements   1,110,372    (830,340)   280,032    1,081,076    (764,070)   317,006 
Total fixed assets   4,103,325    (3,434,845)   668,480    3,999,525    (3,172,813)   826,712 
Capital assets not subject to depreciation:                              
Construction in progress   25,949        25,949    25,433        25,433 
Total fixed assets  $4,129,274   $(3,434,845)  $694,429   $4,024,958   $(3,172,813)  $852,145 

 

 

 

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For the six months ended June 30, 2020 and 2019, the Company recorded depreciation expense of $195,741 and $255,341, 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. 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. For the six months ended June 30, 2020, the Company recognized approximately $181,987 in total lease costs

 

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
June 30, 2020
 
Cash paid for operating lease liabilities  $177,883 
Weighted-average remaining lease term   2.6 
Weighted-average discount rate   10% 
Minimum future lease payments  $906,888 

   

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

 

2020  $263,253 
2021   304,326 
2022   302,781 
2023   25,990 
2024 and thereafter    
   $896,350 

 

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 June 30, 2020, the carrying amount of the Company’s goodwill was $8,853,261. 

 

The following table sets forth the components of the Company’s intangible assets at June 30, 2020 and December 31, 2019:

 

   June 30, 2020   December 31, 2019 
   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   $(636,214)  $963,872   $1,600,286   $(556,400)  $1,043,886 
Web filtering software   5.00    1,134,435    (794,105)   340,331    1,134,435    (680,661)   453,774 
Subtotal       2,734,721    (1,430,519)   1,304,202    2,734,721    (1,237,061)   1,497,660 
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   $(1,430,519)  $5,759,797   $7,190,316   $(1,237,061)  $5,953,255 

 

 

 

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For the six months ended June 30, 2020 and 2019, the Company recorded amortization expense of $193,458 and $193,458, respectively, for intangible assets subject to amortization.

 

The following table provides information regarding estimated amortization expense for intangible assets subject to amortization for each of the following years ending December 31:

 

2020  $386,916 
2021   386,916 
2022   160,029 
2023   160,029 
2024   160,029 
Thereafter   243,742 
   $1,497,660 

 

7.  ACCRUED LIABILITIES

 

The following table sets forth the components of the Company’s accrued liabilities at June 30, 2020 and December 31, 2019:

 

  

June 30,

2020

  

December 31,

2019

 
         
Executive and employee compensation  $1,492,487   $1,237,531 
Interest on convertible notes and promissory notes   269,615    314,309 
Other accrued expenses and liabilities   70,133    99,641 
Total accrued liabilities  $1,832,235   $1,651,482 

 

8.  RELATED PARTY PAYABLES

 

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. Mr. Marks’ wife Sarah, his sons Zachary (the founder of Grom), Luke, Jack, and Dawson, and his daughters Caroline and Victoria all work for the Company either as employees or contractors.

 

  · The amount paid to these related parties during the six months ended June 30, 2020 were as follows: Zachary $21,000.

 

  · The amounts paid to these related parties during the six months ended June 30, 2019 was as follows: Sarah $12,600, Zachary $33,750, Luke $14,400, Jack $1,800, Victoria $2,250 and Caroline $3,750.

 

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

 

Messrs. Darren Marks and Melvin Leiner, both officers of the Company, have made numerous loans to Grom 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 June 30, 2020. Neither Mr. Marks nor Mr. Leiner have any intention of calling these loans at present. The loan balances are classified as short-term obligations under Related Party Payables on the Company’s balance sheet. As of June 30, 2020 and December 31, 2019, the outstanding balances due to Mr. Marks were $101,596 and $215,122, respectively, and the outstanding balances due to Mr. Leiner were $173,429 and $210,929, respectively.

 

 

 

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On July 13, 2018, Dr. Thomas Rutherford, a director, loaned the Company $50,000 to help fund operations. The loan is non-interest bearing and callable on demand. Dr. Rutherford does not have any intention of calling the loan at present. The loan balance is classified as a short-term obligation under Related Party Payables on the Company’s balance sheet.

 

As of June 30, 2020 and December 31, 2019, the aggregate related party payables were $310,582 and $462,137, respectively.

 

9. CONVERTIBLE NOTES

 

The following tables set forth the components of the Company’s convertible notes as of June 30, 2020 and December 31, 2019:

 

  

June 30,

2020

   December 31,
2019
 
10% Unsecured Convertible Redeemable Notes – Variable Conversion Price  $176,364   $100,000 
10% Secured Convertible Notes with Original Issuance Discounts   664,473    664,473 
12% Senior Secured Convertible Notes (Newbridge)   210,286    289,143 
12% Senior Secured Convertible Notes (Original TDH Notes)   983,666    4,000,000 
12% Senior Secured Convertible Notes (TDH Secured Notes)   2,954,265    505,000 
12% Senior Secured Convertible Notes (Additional Secured Notes)   1,057,781     
Loan discounts   (616,182)   (224,958)
Total convertible notes, net   5,430,653    5,333,658 
Less: current portion of convertible notes, net   (2,904,825)   (4,828,658)
Convertible notes, net  $2,525,828   $505,000 

 

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, is 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 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. At June 30, 2020, the Company remeasured the fair value of its derivative liabilities at $91,517 and recorded an unrealized loss of $13,933 from change in fair value for the six months ended June 30, 2020. The fair value of the embedded derivative was determined using a Black-Scholes option pricing model based on the following assumptions: (1) expected volatility of 190.9%, (2) risk-free interest rate of 0.16%, (3) an exercise price of $0.036, and (4) an expected life of 0.02 years.

 

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, is 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.

 

 

 

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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 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.

  

10% Secured Convertible Notes with Original Issuance Discounts

 

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. As of June 30, 2020, the principal balance of these notes was $311,223 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. As of June 30, 2020, the principal balance of these notes was $297,250 and all associated loan discounts were fully amortized.

 

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 June 30, 2020, the principal balance of these notes was $56,000 and the remaining balance on the associated loan discounts was $942.

 

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.

 

 

 

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As of June 30, 2020, the remaining principal balance on the 12% Notes was $210,286 and the remaining unamortized discounts were $73,574.

 

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.

 

 

 

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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 thereafter nine monthly installments of $6,667.

 

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 June 30, 2020, the principal balance of the Original TDH Notes was $983,666.

 

 

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.

 

 

 

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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. As of June 30, 2020, the principal balance of these notes was $2,954,265 and the remaining balance on the associated loan discounts was $389,375.

 

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. As of June 30, 2020, the principal balance of these notes was $1,057,781 and the remaining balance on the associated loan discounts was $137,579.

 

Future Minimum Principal Payments

 

The principal repayments based upon the maturity dates of the Company’s borrowings for each of the next five years are as follows:

 

2020  $1,929,452 
2021  $1,758,149 
2022  $1,046,862 
2023  $1,179,630 
2024  $210,666 

 

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.

 

 

 

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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.

 

As of June 30, 2020 and December 31, 2019, the Company had 925,000 shares of Series A Stock issued and outstanding.

 

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.

 

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.

 

Common Stock

 

The Company is authorized to issue 500,000,000 shares of common stock, par value of $0.001 per share and had 184,084,636 and 167,382,807 shares of common stock issued and outstanding as of June 30, 2020 and December 31, 2019, respectively.

 

 

 

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Common Stock Issued as Compensation to Employees, Officers and/or Directors

 

During the six months ended June 30, 2020, the Company issued 420,000 shares of common stock with a fair market value of $35,600 to employees, officers and/or directors as compensation.

 

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

 

During the six months ended June 30, 2020, the Company issued 4,403567 shares of common stock with a fair market value of $382,205 to contractors for services rendered.

 

During the six months ended June 30, 2019, the Company issued 1,876,782 shares of common stock with a fair market value of $458,997 to contractors for services rendered.

  

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

 

During the six months ended June 30, 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.

 

During the six months ended June 30, 2019, the Company issued 99,720 shares of common stock with a fair market value of $26,940 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 six months ended June 30, 2020, the Company issued 508,585 shares of common stock upon the conversion of $30,000 in convertible note principal and accrued interest.

 

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

 

During the six months ended June 30, 2020, the Company issued 10,869,677 shares of common stock valued at $736,014 in connection with the issuance of convertible notes. Refer to the disclosures for TDH Secured Notes and Additional Secured Notes under Note 9 – Convertible Debt for additional information.

 

During the six months ended June 30, 2019, the Company issued 80,130 shares of common stock valued at $18,932 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.

 

 

 

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The following table reflects all outstanding and exercisable warrants at June 30, 2020 and December 31, 2019. All warrants are exercisable for a period of five years from the date of issuance:

  

   Number of Warrants Outstanding   Weighted Average Exercise Price   Weighted Average Contractual Life (Yrs.) 
             
Balance January 1, 2019   781,910   $1.36    1.38 
Warrants issued   5,450,000   $0.25      
Warrants exercised      $      
Warrants forfeited   (567,166)  $      
December 31, 2019   5,664,744   $0.28    1.79 
Warrants issued   500,000   $0.10      
Warrants exercised      $      
Warrants forfeited      $      
Balance June 30, 2020   6,164,744   $0.26    1.52 

  

Stock Options

 

The following table represents all outstanding and exercisable stock options as of June 30, 2020.

 

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    3.22 
2015   11,467,500    (11,467,500)          $0.36     
2016   5,421,000        5,421,000    5,421,000   $0.78    0.69 
2018   60,000        60,000    60,000   $0.78    2.84 
Total   24,683,850    (12,301,500)   12,282,348    12,282,348   $0.48    1.69 

 

During the six months ended June 30, 2020 and 2019, the Company did not record any stock-based compensation expense related to stock options.

 

11. COMMITMENTS AND CONTINGENCIES

 

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.

 

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.

 

12. SUBSEQUENT EVENTS

 

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

 

 

 

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Exchange Agreements

 

On August 6, 2020, the Company, entered into exchange agreements (the “Debt Exchange Agreements”) with holders of the Company’s (a) 10% convertible notes (the “OID Notes”) in the aggregate amount of $411,223 of outstanding principal and accrued and unpaid interest; (b) 12% secured convertible notes, which were secured against the assets of TD Holdings, (the “TDH Notes”), in the aggregate amount of $1,101,000 of outstanding principal and accrued and unpaid interest; and (iii) 12% secured convertible notes, which were secured against all of the other assets of the Company (the “Other Secured Notes”, and together with the OID Notes and the TDH Notes, the “Notes”) 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 the outstanding Notes, and all amounts owed by the Company thereunder, for an aggregate of 3,623,884 shares of the Company’s newly designated Series B 8% convertible preferred stock (the “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” and together with the Debt Exchange Agreements, the “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 Preferred Stock were cancelled.

 

In connection with the execution and delivery of the Exchange Agreements, the holders of the Notes and the Series A stockholders executed and delivered proxies to Darren Marks and Melvin Leiner, both officers and directors of the Company, granting each of them the power to vote all their shares in the Company for a period of two years. As a result, Messrs. Marks and Leiner, collectively, have an aggregate of 314,596,923 votes, or 71.6% of the voting capital of the Company.

 

Subscription Agreements

 

On August 6, 2020, the Company issued an aggregate of 250,000 shares of Series B Stock to one accredited investor for gross cash proceeds of $250,000, pursuant to the terms of a subscription agreement.

 

Series B 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 ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.

 

The holder may at any time after the 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.

 

 

 

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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, 2019, which we filed with the Securities and Exchange Commission on June 30, 2020, 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 focused on delivering content to children under the age of 13 years in a safe secure Children’s Online Privacy Protection Act compliant platform that 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 as a result of 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 closed.

 

Recent Events

 

Exchange Agreements

 

On August 6, 2020, the Company, entered into exchange agreements (the “Debt Exchange Agreements”) with holders of the Company’s (a) 10% convertible notes (the “OID Notes”) in the aggregate amount of $411,223 of outstanding principal and accrued and unpaid interest; (b) 12% secured convertible notes, which were secured against the assets of TD Holdings, (the “TDH Notes”), in the aggregate amount of $1,101,000 of outstanding principal and accrued and unpaid interest; and (iii) 12% secured convertible notes, which were secured against all of the other assets of the Company (the “Other Secured Notes”, and together with the OID Notes and the TDH Notes, the “Notes”) 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 the outstanding Notes, and all amounts owed by the Company thereunder, for an aggregate of 3,623,884 shares of the Company’s newly designated Series B 8% convertible preferred stock (the “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.

 

 

 

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In addition, on August 6, 2020, the Company entered into exchange agreements (the “Series A Exchange Agreements” and together with the Debt Exchange Agreements, the “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 Preferred Stock were cancelled.

 

In connection with the execution and delivery of the Exchange Agreements, the holders of the Notes and the Series A stockholders executed and delivered proxies to Darren Marks and Melvin Leiner, both officers and directors of the Company, granting each of them the power to vote all their shares in the Company for a period of two years. As a result, Messrs. Marks and Leiner, collectively, have an aggregate of 314,596,923 votes, or 71.6% of the voting capital of the Company.

 

Subscription Agreements

 

On August 6, 2020, the Company issued an aggregate of 250,000 shares of Series B Stock to one accredited investor for gross cash proceeds of $250,000, pursuant to the terms of a subscription agreement.

 

Series B 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 ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.

 

The holder may at any time after the 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.

 

Results of Operations

 

Comparison of Results of Operations for the Three Months Ended June 30, 2020 and 2019

 

Revenue

 

Revenue for the three months ended June 30, 2020 was $1,746,979, compared to revenue of $2,075,081 during the three months ended June 30, 2019, representing a decrease of $328,102 or 15.8%.

 

 

 

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Animation revenue for the three months ended June 30, 2020 was $1,534,377, compared to animation revenue of $1,913,695 during the three months ended June 30, 2019, representing a decrease of $379,318 or 19.8%. The decrease in animation revenue is primarily attributable to the decline in the overall number of contracts completed, and client delays in the timing and production of certain animation projects due to concerns related to the spread of COVID-19.

 

Web filtering revenue for the three months ended June 30, 2020 was $211,855, compared to web filtering revenue of $159,462 during the three months ended June 30, 2019, representing an increase of $52,393 or 32.8%. 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 June 30, 2020 was $747 compared to subscription and advertising revenue of $1,924 during the three months ended June 30, 2019, representing a decrease of $1,177 or 61.2%, 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 June 30, 2020 and 2019 were $1,085,799, or 62.2%, and $1,024,709, or 49.4%, 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 June 30, 2020 were $1,410,234, compared to operating expenses of $1,843,068 during the three months ended June 30, 2019, representing a decrease of $432,834 or 23.5%. The decrease is primarily attributable to a decrease in general and administrative expenses and professional services fees resulting from reduced investor relations services, a delay in the timing of certain professional services rendered and general cost cutting efforts undertaken by the Company. General and administrative expenses were $1,093,880 for the three months ended June 30, 2020, compared to $1,224,670 for the three months ended June 30, 2019, representing a decrease of $130,790 or 10.7%. Professional fees were $54,760 for the three months ended June 30, 2020, compared to $342,893 for the three months ended June 30, 2019, representing a decrease of $288,133 or 84.0%.

 

Other Income (Expense)

 

Net other expense for the three months ended June 30, 2020 was $628,673, compared to a net other expense of $295,895 for the three months ended June 30, 2019, representing an increase of $333,778 or 61.3%. The increase in net other expense is primarily attributable to an increase in interest expense attributable to the amortization of debt discounts associated with the issuance of our senior secured convertible notes.

 

Interest expense is comprised of interest incurred on our convertible notes and from the amortization of note discounts. Interest expense was $612,379 for the three months ended June 30, 2020, compared to $313,622 during the three months ended June 30, 2019, representing an increase of $298,757 or 95.3%. The increase is primarily attributable to an increase in amount of expense recorded for the amortization of debt discounts.

 

Net Loss Attributable to Common Stockholders

 

We realized a net loss attributable to common stockholders of $953,108, or $0.01 per share, for the three months ended June 30, 2020, compared to a net loss attributable to common stockholders of $1,113,254, or $0.01 per share, during the three months ended June 30, 2019, representing a decrease in net loss attributable to common stockholders of $160,146 or 14.4%.

 

 

 

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Comparison of Results of Operations for the Six Months Ended June 30, 2020 and 2019

 

Revenue

 

Revenue for the six months ended June 30, 2020 was $3,039,218, compared to revenue of $4,041,941 during the six months ended June 30, 2019, representing a decrease of $1,002,723 or 24.8%.

 

Animation revenue for the six months ended June 30, 2020 was $2,687,613, compared to animation revenue of $3,707,458 during the six months ended June 30, 2019, representing an increase of $1,019,845 or 27.5%. The decrease in animation revenue is primarily attributable to the decline in the overall number of contracts completed, and client delays in the timing and production of certain animation projects due to concerns related to the spread of COVID-19.

 

Web filtering revenue for the six months ended June 30, 2020 was $349,998, compared to web filtering revenue of $330,052 during the six months ended June 30, 2019, representing an increase of $19,946 or 6.0%. The decrease 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 six months ended June 30, 2020 was $1,607 compared to subscription and advertising revenue of $4,432 during the six months ended June 30, 2019, representing a decrease of $2,825 or 63.7%, 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 six months ended June 30, 2020 and 2019 were $1,765,945, or 58.1%, and $2,177,945, or 53.9%, 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 six months ended June 30, 2020 were $3,158,782, compared to operating expenses of $3,902,284 during the six months ended June 30, 2019, representing a decrease of $761,502 or 19.4%. The decrease is primarily attributable to a decrease in general and administrative expenses and professional services fees resulting from reduced investor relations services, a delay in the timing of certain professional services rendered and general cost cutting efforts undertaken by the Company. General and administrative expenses were $2,543,228 for the six months ended June 30, 2020, compared to $2,744,390 for the six months ended June 30, 2019, representing a decrease of $201,162 or 7.3%. Professional fees were $107,478 for the six months ended June 30, 2020, compared to $633,662 for the six months ended June 30, 2019, representing a decrease of $526,184 or 83.0%.

 

Other Income (Expense)

 

Net other expense for the six months ended June 30, 2020 was $907,105, compared to net other expense of $1,013,676 for the six months ended June 30, 2019, representing a decrease of $101,571 or 10.5%. The decrease in net other expense is primarily attributable to a one-time loss on the extinguishment of debt recorded during the six months ended June 30, 2019 as described below, offset in part by higher net interest expense.

 

 

 

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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 $890,142 for the six months ended June 30, 2020, compared to $689,782 during the six months ended June 30, 2019, representing an increase of $200,360 or 29.1%. The increase is attributable to an increase in amount of expense recorded for the amortization of debt discounts associated with the issuance of our senior secured convertible notes.

 

During the six months ended June 30, 2019, we recorded a one-time extinguishment loss of $363,468 related to the amendment of our senior secured promissory notes in the principal amount of $4,000,000 issued to the shareholders of TD Holdings Limited in connection with our acquisition of TD Holdings Limited.

 

Net Loss Attributable to Common Stockholders

 

We realized a net loss attributable to common stockholders of $2,299,942, or $0.01 per share, for the six months ended June 30, 2020, compared to a net loss attributable to common stockholders of $3,497,792, or $0.02 per share, during the six months ended June 30, 2019, representing a decrease in net loss attributable to common stockholders of $1,197,850 or 34.3%.

 

Liquidity and Capital Resources

 

At June 30, 2020, we had cash and cash equivalents of $756,789.

 

Net cash used in operating activities for the six months ended June 30, 2020 was $767,926, compared to net cash used in operating activities of $583, 006 during the six months ended June 30, 2019, representing an increase in cash used of $184,920, primarily due to the change in operating assets and liabilities offset in part by a decrease in our net loss attributable to common stockholders.

 

Net cash used in investing activities for the six months ended June 30, 2020 was $38,025, compared to net cash used in investing activities of $194,276 during the six months ended June 30, 2019 representing a decrease in cash used of $156,251. This decrease is attributable to a reduction in the amount of fixed assets purchased and leasehold improvements made by our animation studio in Manilla, Philippines during the six months ended June 30, 2020.

 

Net cash provided by financing activities for the six months ended June 30, 2020 was $1,1015,767, compared to net cash provided by financing activities of $978,571 for the six months ended June 30, 2019, representing a decrease in cash provided of $37,196. The increase is attributable to an increase in equity and debt capital raised during the six months ended June 30, 2020. Our primary sources of cash from financing activities were attributable to $3,655,000 in proceeds from the sale of 12% senior secured convertible notes and $250,000 in proceeds from the sale of our Series B Stock during the six months ended June 30, 2020, as compared to $925,000 in proceeds from the sale of preferred and common stock in private placement offerings during the six months ended June 30, 2019. 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 June 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.

 

 

 

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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.

 

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 June 30, 2020, 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 June 30, 2020 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 Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on June 30, 2019.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On April 6, 2020, the Company issued 249,285 shares of common stock to a noteholder upon the conversion of $13,636 in convertible note principal and $1,364 of accrued interest.

 

On May 1, 2020, the Company issued 206,165 shares of common stock to a contractor for technology design services provided to the Company.

 

On May 8, 2020, the Company issued an aggregate of 161,137 shares of common stock to nine accredited investors to extend the repayment of principal and accrued interest on certain 10% secured convertible notes with original issuance discounts.

 

On May 8, 2020, the Company issued 224,786 shares of common stock to a contractor for technology design services provided to the Company.

 

On May 11, 2020, the Company issued an aggregate of 964,951 shares of common stock to four accredited investors to extend the repayment of principal and accrued interest on certain 12% senior secured convertible notes.

 

On May 26, 2020, the Company issued an aggregate of 1,249,230 shares of common stock to 15 accredited investors to extend the repayment of principal and accrued interest on certain 12% senior secured convertible notes.

 

On May 29, 2020, the Company issued an aggregate of 307,692 shares of common stock to three accredited investors to extend the repayment of principal and accrued interest on certain 12% senior secured convertible notes.

 

On June 9, 2020, the Company issued 195,962 shares of common stock to a contractor for technology design services provided to the Company.

 

On June 16, 2020, the Company issued an aggregate of 420,000 shares of common stock to employees as bonus compensation.

 

On June 29, 2020, the Company issued 66,667 shares of common stock to an accredited investor in connection with the issuance of a promissory note in the principal amount of $25,000.

 

On June 29, 2020, the Company issued 1,372,501 shares of common stock to a consultant for investor relations 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 and/or Regulation D promulgated thereunder.

 

Item 3. Defaults upon Senior Securities.

 

None.

 

 

 

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Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

  

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:September 2, 2020 By: /s/ Darren Marks
    Darren Marks
   

Chief Executive Officer and President

(Principal Executive Officer)

     
     
Date: September 2, 2020 By: /s/ Melvin Leiner
    Melvin Leiner
    Executive Vice President, Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)