UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
For the transition period from ________ to _________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area
code:
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| The | ||
| The Capital Market |
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of August 14, 2023, shares of the registrant’s common stock were outstanding.
GROM SOCIAL ENTERPRISES, INC.
Table of Contents
| Page | ||
| Part I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 4 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 40 |
| Item 4. | Controls and Procedures | 40 |
| Part II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 42 |
| Item 1A. | Risk Factors | 42 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 42 |
| Item 3. | Defaults upon Senior Securities | 42 |
| Item 4. | Mine Safety Disclosures | 42 |
| Item 5. | Other Information | 42 |
| Item 6. | Exhibits | 43 |
| 2 |
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
When used in this Quarterly Report, including the documents that we have incorporated by reference, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Discussions containing forward-looking statements may be found in the material set forth under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Quarterly Report.
Forward-looking statements are necessarily subjective, are based upon our current plans, intentions, objectives, goals, strategies, beliefs, projections and expectations, and involve known and unknown risks, uncertainties and other important factors.
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Any or all of our forward-looking statements in this report may turn out to be inaccurate. Important factors that may cause actual results, our performance or achievements, or industry results to differ materially from those contemplated by such forward-looking statements include, without limitation, those discussed under the caption “Risk Factors” in this Quarterly Report. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.
| 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Balance Sheets
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Operating lease right of use assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill, net | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Dividends payable | ||||||||
| Advanced payments and deferred revenues | ||||||||
| Convertible notes payable, net – current | ||||||||
| Related party payables | ||||||||
| Lease liabilities – current | ||||||||
| Total current liabilities | ||||||||
| Convertible notes payable, net of loan discounts | ||||||||
| Lease liabilities | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 16) | ||||||||
| Stockholders' Equity: | ||||||||
| Series A preferred stock, $par value. shares authorized; zero shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Series B preferred stock, $par value. shares authorized; zero shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Series C preferred stock, $par value. shares authorized; shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Common stock, $ par value. shares authorized; and shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Grom Social Enterprises, Inc. stockholders' equity | ||||||||
| Noncontrolling interests | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 4 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
| ` | ||||||||||||||||
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on settlement of derivative liabilities | ( | ) | ( | ) | ||||||||||||
| Unrealized gain on change in fair value of derivative liabilities | ||||||||||||||||
| Other gains (losses) | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes (benefit) | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Grom Social Enterprises, Inc. stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Dividends to Series C preferred stockholders | ||||||||||||||||
| Net loss attributable to Grom Social Enterprises, Inc. common stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Basic and diluted loss per common share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
| Comprehensive loss: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to Grom Social Enterprises, Inc. common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 5 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | |||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||||||||
| Balance, April 1, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | ||||||||||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | – | – | – | ||||||||||||||||||||||||||||
| Issuance of common stock as payment for Series C preferred stock dividends payable | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | – | – | – | |||||||||||||||||||||||||||||
| Conversion of note principal and accrued interest into common stock | – | – | – | |||||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | – | ||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | ||||||||||||||||
| Capital | Deficit | Loss | Interests | Equity | ||||||||||||||||
| Balance, April 1, 2022 | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Change in foreign currency translation | ( | ) | ( | ) | ||||||||||||||||
| Dividends declared for Series C preferred stock | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock as payment for Series C preferred stock dividends payable | ||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | ||||||||||||||||||||
| Conversion of note principal and accrued interest into common stock | ||||||||||||||||||||
| Stock based compensation expense related to stock options | ||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
(continued)
| 6 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | |||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||||||||
| Balance, April 1, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | ||||||||||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | – | – | – | ||||||||||||||||||||||||||||
| Issuance of common stock in connection with the exercise of common stock purchase warrants | – | – | – | 1,704,684 | ||||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | – | ||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | ||||||||||||||||
| Capital | Deficit | Loss | Interests | Equity | ||||||||||||||||
| Balance, April 1, 2023 | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Change in foreign currency translation | ( | ) | ( | ) | ||||||||||||||||
| Dividends declared for Series C preferred stock | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock in connection with the exercise of common stock purchase warrants | ( | ) | ||||||||||||||||||
| Stock based compensation expense related to stock options | ||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
(continued)
| 7 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | |||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | ||||||||||||||||||||||||||||
| Conversion of Series C preferred stock into common stock | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | – | – | – | ||||||||||||||||||||||||||||
| Issuance of common stock as payment for Series C preferred stock dividends payable | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | – | – | – | |||||||||||||||||||||||||||||
| Conversion of note principal and accrued interest into common stock | – | – | – | |||||||||||||||||||||||||||||
| Recognition of beneficial conversion features related to notes payable | – | – | – | – | ||||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | – | ||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | ||||||||||||||||
| Capital | Deficit | Loss | Interests | Equity | ||||||||||||||||
| Balance, January 1, 2022 | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Change in foreign currency translation | ( | ) | ( | ) | ||||||||||||||||
| Conversion of Series C preferred stock into common stock | ||||||||||||||||||||
| Dividends declared for Series C preferred stock | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock as payment for Series C preferred stock dividends payable | ||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | ||||||||||||||||||||
| Conversion of note principal and accrued interest into common stock | ||||||||||||||||||||
| Recognition of beneficial conversion features related to notes payable | ||||||||||||||||||||
| Stock based compensation expense related to stock options | ||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
(continued)
| 8 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | |||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | ||||||||||||||||||||||||||||
| Conversion of Series C preferred stock into common stock | – | – | – | – | ||||||||||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | – | – | – | ||||||||||||||||||||||||||||
| Issuance of common stock in connection with sales made under private offerings | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock in connection with the exercise of common stock purchase warrants | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock purchase warrants as consideration for waiver of a financing covenant | – | – | – | – | ||||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | – | ||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | ||||||||||||||||
| Capital | Deficit | Loss | Interests | Equity | ||||||||||||||||
| Balance, January 1, 2023 | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Change in foreign currency translation | ( | ) | ( | ) | ||||||||||||||||
| Conversion of Series C preferred stock into common stock | ||||||||||||||||||||
| Dividends declared for Series C preferred stock | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock in connection with sales made under private offerings | ||||||||||||||||||||
| Issuance of common stock in connection with the exercise of common stock purchase warrants | ||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | ||||||||||||||||||||
| Issuance of common stock purchase warrants as consideration for waiver of a financing covenant | ||||||||||||||||||||
| Stock based compensation expense related to stock options | ||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 9 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Six Months Ended June 30, | Six Months Ended June 30, | |||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of right-of-use assets | ||||||||
| Provision for doubtful accounts | ||||||||
| Common stock issued for financing costs | ||||||||
| Common stock issued in exchange for fees and services | ||||||||
| Derivative expense | ||||||||
| Retirement benefit cost | ||||||||
| Stock based compensation | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Loss on settlement of derivative liability | ||||||||
| Unrealized gain on change in fair value of derivative liabilities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities | ( | ) | ||||||
| Advanced payments and deferred revenues | ( | ) | ||||||
| Income taxes payable and other noncurrent liabilities | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from the sale of property and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock, net of issuance costs | ||||||||
| Proceeds from exercise of common stock purchase warrants, net of issuance costs | ||||||||
| Proceeds from issuance of convertible notes | ||||||||
| Repayments of convertible notes | ( | ) | ( | ) | ||||
| Repayments of loans payable | ( | ) | ||||||
| Repayments of related party payables | ( | ) | ||||||
| Settlement of derivative liabilities | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rates on cash and cash equivalents | ||||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Common stock issued to reduce dividends payable to Series C preferred stockholders | $ | $ | ||||||
| Common stock warrants issued in connection with convertible promissory notes | $ | $ | ||||||
| Conversion of note principal and accrued interest into common stock | $ | $ | ||||||
| Dividends payable to Series C preferred stockholders | $ | $ | ||||||
| Operating lease right-of-use assets obtained in exchange for lease liabilities | $ | $ | ||||||
The accompanying notes are an integral part of the condensed 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” or “Grom”), was incorporated in the State of Florida under the name “Illumination America, Inc.” Grom is a media, technology and entertainment company that focuses on (i) delivering content to children under the age of 13 years in a safe secure platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of Kids & Family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content.
The Company conducts its business through the following subsidiaries:
| · | Grom Social, Inc. (“Grom Social”), incorporated in the State of Florida on March 5, 2012, operates Grom’s social media network designed for children under the age of 13 years. | |
| · | TD Holdings Limited (“TD Holdings”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited, a Hong Kong corporation, (“Top Draw HK”), and (ii) Top Draw Animation, Inc., a Philippines corporation, (“Top Draw Philippines”). The group’s principal activity is the production of animated films and television series. | |
| · | Grom Educational Services, Inc. (“GES”), incorporated in the State of Florida on January 17, 2017, operates Grom’s web filtering services provided to schools and government agencies. | |
| · | Grom Nutritional Services, Inc. (“GNS”), incorporated in the State of Florida on April 19, 2017, intends to market and distribute nutritional supplements to children. GNS has been nonoperational since its inception. | |
| · | Curiosity Ink Media, LLC (“CIM”), organized in the State of Delaware on January 5, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and family entertainment properties and associated business opportunities. |
Grom owns 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of CIM.
| 2. | GOING CONCERN |
The condensed consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Based on current operating levels, the Company will need to raise additional funds by selling additional equity or incurring debt.
On a consolidated basis, the Company has incurred significant operating losses since its inception. As of June 30, 2023, the Company has an accumulated deficit of $ million. During the six months ended June 30, 2023, it used approximately $ million, respectively, in cash for operating activities.
| 11 |
The Company has funded its operations primarily through sales of its common stock in public markets, proceeds from the exercise of warrants to purchase common stock, and the sale of convertible notes. Future capital requirements will depend on many factors, including the (i) rate of revenue growth, (ii) expansion of sales and marketing activities, (iii) timing and extent of spending on content development efforts, and (iv) market acceptance of the Company’s content, products and services.
The Company’s management intends to raise additional funds through the issuance of equity securities or debt to enable the Company to meet its obligations for the twelve-month period. However, there can be no assurance that, in the event the Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations and/or raise additional capital could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months from the date of this report.
The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Impact of COVID-19
On January 30, 2020, the World Health Organization announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 significantly affected the United States and global economies.
The Company experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings and travel restrictions, which affected both the Company 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 86.9% of the Company’s total revenues on a consolidated basis, was forced to close its offices for significant periods of time from March 2020 through December 2021.
In response to the outbreak and business disruption, the Company instituted employee safety protocols to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices and production studio. The Company also implemented a range of actions aimed at temporarily reducing costs and preserving liquidity.
The Company has recalled artists and employees to return to the studio, which is currently operating at 41% seat capacity. Approximately 37% of the studio’s employees and contractors currently work from home.
While restrictions have eased, the virus may continue to mutate and 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 virus, government mandated shut downs, and its adverse effects, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. These effects could have a material adverse impact on the Company’s business, operations, financial condition and results of operations.
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Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conjunction with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted. For the three and six months ended June 30, 2023, the condensed consolidated financial statements include the accounts of the Company and its operating subsidiaries Grom Social, TD Holdings, GES, GNS, and Curiosity. The Company recognizes the noncontrolling interest related to its less-than-wholly-owned subsidiary, Curiosity, as equity in the consolidated financial statements separate from the parent entity’s equity. The net loss attributable to the noncontrolling interest is included in net loss in the condensed consolidated statements of operations and comprehensive loss.
These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments, which includes intercompany balances and transactions are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto at December 31, 2022, as presented in the Company’s Annual Report on Form 10-K filed on April 17, 2023 with the SEC.
Certain amounts for the prior year period have been reclassified to conform to current year’s presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The most significant estimates relate to revenue recognition, valuation of accounts receivable, goodwill and other long-lived assets, and contingencies. The Company bases its estimates on historical experience, known or expected trends and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
The Company computes net income (loss) per share in accordance with FASB ASC 260, Earnings per Share which requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period using the treasury stock method, and convertible preferred stock and convertible debt using the if-converted method. These potentially dilutive shares include shares from convertible notes and accrued interest, shares from convertible preferred stock, shares from vested stock options and shares from stock purchase warrants. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
Update to Significant Accounting Policies
There have been no new or material changes to the significant accounting policies discussed in the Company’s audited financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on April 17, 2023, that are of significance, or potential significance, to the Company.
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| 4. | REVENUES |
The Company recognizes revenue from contracts with customers in accordance with FASB ASC 606. The Company’s main types of revenue contracts consists of the following:
Animation Revenue
Animation revenue is primarily generated from contracts with customers for preproduction and production services related to the development of animated movies and television series. Preproduction activities include producing storyboards, location design, model and props design, background color and color styling. Production focuses on library creation, digital asset management, background layout scene assembly, posing, animation and aftereffects.
The Company provides services under fixed-price contracts. Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined price. To the extent actual costs vary from estimated costs, the Company’s profit may increase, decrease, or result in a loss.
Web Filtering Revenue
Web filtering revenue from subscription sales is recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases computer appliance and a software and support service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale. The Company immediately recognizes revenue attributable to the computer appliance as it is non-refundable and control passes to the customer. The advanced billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue on a straight-line basis over the subscription period.
Produced and Licensed Content Revenue
Produced and licensed content revenues are generated from the licensing of internally-produced films and television programs.
Licensed internally-produced films and television programming, each individual film or episode delivered represents a separate performance obligation and revenues are recognized when the episode is made available to the licensee for exhibition. For license agreements containing multiple deliverables, revenues are allocated based on the relative standalone selling price of each film or episode of a television series, which is based on licenses for comparable films or series within the marketplace. Agreements to license programming are often long term, with collection terms ranging from one to five years.
The advanced billing component for licensed content is initially recorded as deferred revenue and subsequently recognized as revenue upon completion of the performance obligation in accordance with the terms of licensing agreement.
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Publishing Revenue
The Company has engaged the services of a third-party entity to manage the printing, publishing and distribution of the Company’s publishing content. In accordance with the terms agreed with the third party, the Company’s revenue is recognized as 50% of revenue from sales per title after the third-party vendor earns back the costs to develop, author, publish, market, promote and distribute each title, inclusive of any royalties owed to rights holders, following a six months period in market to allow for returns.
Publishing revenues are eligible for recognition upon the completion of a six-month sales period to provide for any potential returns and notification from the third-party entity that it has earned back all of its related publishing costs.
Other Revenue
Other revenue corresponds to ecommerce sales, commercial services, and subscription and advertising revenue from the Grom Social mobile application.
The following table depicts the disaggregated revenue listed above within the Sales caption in the condensed consolidated statements of operations:
Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |||||||||||||
| Animation | $ | $ | $ | $ | ||||||||||||
| Web Filtering | ||||||||||||||||
| Publishing | ||||||||||||||||
| Other | ||||||||||||||||
| Total Sales | $ | $ | $ | $ | ||||||||||||
The following table sets forth the components of the Company’s accounts receivable and advanced payments and deferred revenues at June 30, 2023, and December 31, 2022:
June 30, 2023 | December 31, 2022 | |||||||
| Billed accounts receivable | $ | $ | ||||||
| Unbilled accounts receivable | ||||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total accounts receivable, net | $ | $ | ||||||
| Total advanced payments and deferred revenues | $ | $ | ||||||
During the three and six months ended June 30, 2023,
the Company had two and three customers, respectively, that accounted for
At June 30, 2023, the Company had two customers that
accounted for
Animation revenue contracts vary with movie contracts typically allowing for progress billings over the contract term while other episodic development activities are typically billable upon delivery of the performance obligation for an episode. These episodic activities typically create unbilled contract assets between episode delivery dates while movies can create contract assets or liabilities based on the progress of activities versus the arranged billing schedule. Revenues from web filtering contracts are all billed in advance and therefore represent contract liabilities until fully recognized on a ratable basis over the contract life.
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| 5. | INVENTORY |
Inventory consists of costs incurred to produce animated content for third party customers. Costs incurred to produce the animated content to customers, which include direct production costs, production overhead and supplies are recognized as work-in-progress inventory. As animated content is completed in accordance with the terms stated by the customer, inventory is classified as finished products and subsequently recognized as cost of services as animated content is accepted by and available to the customer. Carrying amounts of animated content are recorded at the lower of cost or net realizable value. Cost is determined using a weighted average cost method for direct production costs, productions overhead and supplies used for completing animation projects.
As of June 30, 2023 and December 31, 2022, the Company’s
inventory totaled $
| 6. | PROPERTY AND EQUIPMENT |
The following table sets forth the components of the Company’s property and equipment at June 30, 2023 and December 31, 2022:
| June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Cost | Accumulated Depreciation | Net Book Value | Cost | Accumulated Depreciation | Net Book Value | |||||||||||||||||||
| Capital assets subject to depreciation: | ||||||||||||||||||||||||
| Computers, software and office equipment | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Machinery and equipment | ( | ) | ( | ) | ||||||||||||||||||||
| Vehicles | ( | ) | ( | ) | ||||||||||||||||||||
| Furniture and fixtures | ( | ) | ( | ) | ||||||||||||||||||||
| Leasehold improvements | ( | ) | ( | ) | ||||||||||||||||||||
| Total fixed assets | ( | ) | ( | ) | ||||||||||||||||||||
| Capital assets not subject to depreciation: | ||||||||||||||||||||||||
| Construction in progress | ||||||||||||||||||||||||
| Total fixed assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
For the three months ended June 30, 2023 and 2022,
the Company recorded depreciation expense of $
| 7. | OTHER ASSETS |
The following table sets forth the components of the Company’s other assets at June 30, 2023 and December 31, 2022:
| June 30, 2023 | December 31, 2022 | |||||||
| Capitalized website development costs | $ | $ | ||||||
| Prepublication costs | ||||||||
| Produced and licensed content costs | ||||||||
| Deposits | ||||||||
| Other noncurrent assets | ||||||||
| Total other assets | $ | $ | ||||||
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Capitalized Website Development Costs
The Company capitalizes certain costs associated with the development of its Santa.com website after the preliminary project stage is complete and until the website is ready for its intended use. Planning and operating costs are expensed as incurred. Capitalization begins when the preliminary project stage is complete, project plan is defined, functionalities are determined and internal and external resources are identified. Qualified costs incurred during the operating stage of our software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs that cannot be separated between maintenance of, and minor upgrades and enhancements to the websites are expensed as incurred.
Capitalized website costs are amortized on a straight-line basis over their estimated useful life of three years beginning with the time when it is ready for intended use. Amounts amortized are presented through cost of sales. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Prepublication Costs
Prepublication costs include costs incurred to create and develop the art, prepress, editorial, digital conversion and other content required for the creation of the master copy of a book or other media. Prepublication costs are amortized on a straight-line basis over a two- to five-year period based on expected future revenue. The Company regularly reviews the recoverability of the capitalized costs based on expected future revenues.
Produced and Licensed Content Costs
Produced and licensed content costs include capitalizable direct costs, production overhead, interest and development costs and are stated at the lower of cost, less accumulated amortization, or fair value. Marketing, distribution and general and administrative costs are expensed as incurred.
Film, television and direct to consumers through streaming services production and residual costs are expensed over the product life cycle based upon the ratio of the current period’s revenues to estimated remaining total revenues (Ultimate Revenues) for each production. For film productions and direct to consumer services, Ultimate Revenues include revenues from all sources that will be earned within ten years from the date of the initial release. For television series, Ultimate Revenues include revenues that will be earned within ten years from delivery of the first episode, or if still in production, five years from delivery of the most recent episode, if later. Costs of film, television and direct to consumer productions are subject to regular recoverability assessments, which compare the estimated fair values with the unamortized costs. The Company bases these fair value measurements on the Company’s assumptions about how market participants would price the assets at the balance sheet date, which may be different than the amounts ultimately realized in future periods. The amount by which the unamortized costs of film and television productions exceed their estimated fair values is written off. Costs for projects that have been abandoned are written off. Projects that have not been set for production within three years are also written off unless management has committed to a plan to proceed with the project and is actively working on and funding the project.
The following tables set forth the components of the Company’s capitalized costs at June 30, 2023 and December 31, 2022:
| June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Book Value | Gross Carrying Value | Accumulated Depreciation | Net Book Value | |||||||||||||||||||
| Prepublication costs | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Produced and licensed content costs | ||||||||||||||||||||||||
| Capitalized website development costs | ( | ) | ( | ) | ||||||||||||||||||||
| Total capitalized costs | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
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For the three months ended June 30, 2023 and 2022,
the Company recorded amortization expense of $
| 8. | LEASES |
The Company has entered into operating leases primarily
for office space. These leases have terms which range from two years to six years, and often include one or more options to renew or in
the case of equipment rental, to purchase the equipment. During the six months ended June 30, 2023, the Company did
The following table presents the future minimum payment obligations and aggregate present value of lease liabilities for operating leases as of June 30, 2023:
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total future lease payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
These operating leases are listed as separate line items on the Company's Consolidated Balance Sheets and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's Consolidated Balance Sheets.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating right-of-use assets and related lease liabilities are as follows:
| Six Months Ended June 30, 2023 | ||||
| Cash paid for operating lease liabilities | $ | |||
| Weighted-average remaining lease term in years | ||||
| Weighted-average discount rate | ||||
For the three months ended June 30, 2023 and 2022, the Company recorded
rent expenses related to lease obligations of $
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| 9. | GOODWILL AND INTANGIBLE ASSETS |
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
The following table sets forth the changes in the carrying amount of the Company’s goodwill as of June 30, 2023 and December 31, 2022:
| Schedule of goodwill | ||||
| Balance, January 1, 2022 | $ | |||
| Measurement Period Adjustment | ( | ) | ||
| Impairment charge | ( | ) | ||
| Balance, December 31, 2022 | ||||
| Impairments and other adjustments | ||||
| Balance, June 30, 2023 | $ |
At December 31, 2022, the Company performed its
annual impairment tests as prescribed by ASC 350 on the carrying value of its goodwill and recorded aggregate impairment charges of $
During the year ended December 31, 2022, the
Company finalized the purchase price allocation, during the permissible measurement period, and obtained new fair value information
for certain identifiable intangible assets related to its acquisition of Curiosity. The revised purchase price allocation decreased
goodwill by $
The following table summarizes the individually identifiable intangible assets subsequently recognized:
| Summary of changes in intangible assets | ||||
| Licensing agreements | $ | |||
| Books and stories content | ||||
| Total identifiable intangible assets | $ |
At June 30, 2023 and December
31, 2022, the carrying amount of the Company’s goodwill was $
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The following table sets forth the components of the Company’s intangible assets at June 30, 2023 and December 31, 2022:
| June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
| Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Licensing agreement | ( | ) | ( | ) | ||||||||||||||||||||||||
| Subtotal | ( | ) | ( | ) | ||||||||||||||||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||||||||||||||
| Books and stories content | – | – | ||||||||||||||||||||||||||
| Trade names | – | – | ||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
For the three months ended June 30, 2023 and 2022,
the Company recorded amortization expense of $
The following table provides information regarding estimated remaining amortization expense for intangible assets subject to amortization for each of the following years ending December 31:
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total remaining intangible assets subject to amortization | $ | |||
| 10. | ACCRUED LIABILITIES |
The following table sets forth the components of the Company’s accrued liabilities at June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
December 31, 2022 |
|||||||
| Executive and employee compensation | $ | $ | ||||||
| Interest on convertible notes and promissory notes | ||||||||
| Other accrued expenses and liabilities | ||||||||
| Total accrued liabilities | $ | $ | ||||||
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| 11. | RELATED PARTY TRANSACTIONS AND PAYABLES |
Darren Marks’s Family
The Company has engaged the family of Darren Marks, its Chief Executive Officer, to assist in the development of the Grom Social website and mobile application. These individuals create and produce original short form content focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special events. Sarah Marks, the wife of Mr. Marks, and Zach Marks, Luke Marks, Jack Marks, Dawson Marks, Caroline Marks and Victoria Marks, each Mr. Marks’s children, are, or have been, employed by or independently contracted with the Company.
As of June 30, 2023, Zach and Luke Marks were employed by Grom Social as its Founder and Content Creator, and Content Coordinator, respectively, and receive annual salaries of $103,000 and $30,000, respectively.
For the three months ended June 30, 2023 and 2022,
the Marks family was paid a total of $
Compensation for services provided by the Marks family is expected to continue for the foreseeable future.
Liabilities Due to Executive Officers and Directors
On July 11, 2018, our director Dr. Thomas Rutherford
loaned the Company $
As of June 30, 2023 and December 31, 2022, the aggregate
related party payables balance was $
| 12. | CONVERTIBLE NOTES |
The following tables set forth the components of the Company’s convertible notes as of June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
December 31, 2022 |
|||||||
| 8% Unsecured Convertible Note (Curiosity) | $ | $ | ||||||
| 12% Senior Convertible Notes with Original Issuance Discounts (OID Notes) | ||||||||
| 12% Senior Secured Convertible Notes (TDH Secured Notes) | ||||||||
| 12% Senior Secured Convertible Notes (Additional Secured Notes) | ||||||||
| Loan discounts | ( |
) | ( |
) | ||||
| Total convertible notes, net | ||||||||
| Less: current portion of convertible notes, net | ( |
) | ( |
) | ||||
| Convertible notes, net | $ | $ | ||||||
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8% Unsecured Convertible Notes – Curiosity
On July 29, 2021, the Company entered into a membership
interest purchase agreement with Curiosity and the holders of all of Curiosity’s outstanding membership interests, for the purchase
of 80% of Curiosity’s outstanding membership interests from the sellers. Pursuant to the purchase agreement, the Company issued
8% eighteen-month convertible promissory notes in the aggregate principal amount $
As of June 30, 2023, the principal balance of the
Curiosity note was $
10% Senior Secured Convertible Note with Original Issuance Discount (L1)
On September 14, 2021, the Company entered into a
securities purchase agreement (the “Purchase Agreement”) with L1 Capital Global Master Fund (“L1”) pursuant to
which it issued (i) a 10% original issue discount senior secured convertible note in the principal amount of $
On October 20, 2021, the Company and L1 entered into
an amended and restated purchase agreement which increased the amount of the Second Tranche Financing from $1,500,000 to $
During the year ended December 31, 2022, the Company issued an aggregate
shares of common stock to L1 upon the conversion of $
As of June 30, 2023, the principal balance was $
10% Senior Secured Convertible Note with Original Issuance Discount (L1– Second Tranche)
On January 20, 2022 (the “Second Tranche Closing”),
the Company and L1 Capital closed on the Second Tranche of the offering, resulting in the issuance of (i) a $
During the year ended December 31, 2022, the Company
issued an aggregate shares of common stock and repaid $
As of June 30, 2023, the principal balance was $
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10% Secured Convertible Notes with Original Issuance Discounts (“OID Notes”)
During the year ended December 31, 2017, the Company
issued a series of secured, convertible notes with original issuance discounts to accredited investors. The notes were issued with original
issuance discounts of 10.0%, bear interest at a rate of 10% per annum (payable semiannually in cash), and carry a two-year term with a
fixed conversion price of $748.80. As of June 30, 2023, the remaining principal balance of these notes was $
During the year ended December 31, 2018, the Company
issued a series of secured, convertible notes with original issuance discounts to accredited investors. The notes were issued with original
issuance discounts of 20.0%, bear interest at a rate of 10% per annum (payable semiannually in cash), and carry a two-year term with a
fixed conversion price of $480.00. As of June 30, 2023, the remaining principal balance of these notes was $
As of June 30, 2023, the principal balance of these
notes was $
12% Senior Secured Convertible Notes (“TDH Secured Notes”)
On March 16, 2020, the Company sold (the “TDH
Secured Notes Offering”) an aggregate $
The TDH Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $96.00 per share.
The Company’s obligations under the TDH Secured Notes, are secured by Grom Holdings’ shares of stock of TDH, and of its wholly owned subsidiary, TDAHK. The TDH Secured Notes rank equally and ratably on a pari passu basis with (i) the other TDH Secured Notes and (ii) the Original TDH Notes issued by the Company pursuant to TDH Share Sale Agreement.
If the Company sells the animation studio located in Manila, Philippines, which is currently owned by TDH through TDAHK (the “Animation Studio”), for more than $12,000,000, and so long as any amount of principal is outstanding under the TDH Secured Notes, the Company will pay the TDH Secured Notes holders from the proceeds of the sale (i) all amounts of principal outstanding under the TDH Secured Notes, (ii) such amount of interest which would be due and payable assuming the TDH Secured Notes were held to maturity (minus any amounts of interest previously paid hereunder), and (iii) an additional 10% of the amount of principal outstanding under the TDH Secured Notes within five days of the closing of such sale.
In connection with the issuance of the TDH Secured
Notes, the Company issued to each TDH Secured Note holder shares of common stock equal to 20% of the principal amount of such holder’s
TDH Secured Note, divided by $96.00. Accordingly, an aggregate of shares of common stock were issued to the TDH Secured Note holders
on March 16, 2020. These shares were valued at $
As of June 30, 2023, the principal balance of
these notes was $
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12% Senior Secured Convertible Notes (Additional Secured Notes)
On March 16, 2020, the Company issued to seven accredited
investors (the “Additional Secured Note Lenders”) an aggregate of $
Interest on the Additional Secured Notes accrues on
the outstanding principal amount at the rate of 12% per annum. Principal and interest on the Additional Secured Notes are payable monthly,
on an amortized basis over 48 months, with the last payment due on
The Additional Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $96.00 per share.
In connection with the issuance of the Additional
Secured Notes, the Company issued to each Additional Secured Note Lender shares of common stock equal to 20% of the principal amount of
such holder’s Additional Secured Note, divided by $96.00. Accordingly, an aggregate of shares of common stock were issued.
These shares were valued at $
As of June 30, 2023, the principal balance of these
notes was $
Future Minimum Principal Payments
The remaining future principal repayments based upon the maturity dates of the Company’s borrowings for each of the next five years are as follows:
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 and thereafter | ||||
| Total Convertible notes principal amount payable. | $ |
| 13. | EMPLOYEE BENEFIT PLAN |
The Company’s subsidiary, Top Draw Animation, Inc., has an unfunded, non-contributory defined benefit plan covering its permanent employees.
Under the existing regulatory framework, the Company is required to pay eligible employees at least the minimum regulatory benefit upon retirement, which provides a retirement benefit equal to 22.5 days’ pay for every year of credited service, subject to age and service requirements. The regulatory benefit is paid in a lump sum upon retirement. The existing regulatory framework does not require minimum funding of the plan.
| 24 |
Retirement benefit expenses and liabilities are determined in accordance with an actuarial study made for the plan utilizing the net interest approach which disaggregates the defined benefit cost into the following components: service costs (cost of services received); net interest (financing effect of paying for benefits in advance or in arrears); and remeasurements (period-to-period fluctuations in the amounts of defined benefit obligations and plan assets).
Under the net interest approach, service cost and net interest on the defined benefit liability (asset) are both recognized in the statement of operations, while remeasurements of the defined benefit liability (asset) are recognized in other comprehensive income. Remeasurements recognized in other comprehensive income shall not be reclassified to profit or loss in a subsequent period.
The amount of the defined benefit liability reported under other noncurrent liabilities in the Company’s Consolidated Balance Sheet is determined as follows:
| June 30, 2023 | December 31, 2022 | |||||||
| Benefit obligation | $ | $ | ||||||
| Plan assets | ||||||||
| Total | $ | $ | ||||||
The components of the accumulated benefit cost to be recognized under selling, general and administrative expense in consolidated statement of operations are the service cost (current service cost, past service cost or credit and settlement gains or losses) and net interest expense on the net defined benefit liability:
| June 30, 2023 | June 30, 2022 | |||||||
| Current service cost | $ | $ | ||||||
| Net interest expense | ||||||||
| Total | $ | $ | ||||||
The change in the accumulated benefit cost in the Company’s Condensed Consolidated Balance Sheet for the six months ended June 30, 2023 is as follows:
| 2023 | ||||
| Balance, January 1 | $ | |||
| Foreign currency translation | ||||
| Expense recognized in other comprehensive income | ||||
| Remeasurement on actuarial gain (loss) recognized | ( |
) | ||
| Contributions paid | ( |
) | ||
| Balance, June 30 | $ | |||
| 25 |
The cumulative amount of actuarial gains recognized in other comprehensive income for the six months ended June 30, 2023 and 2022 is as follows:
| 2023 | 2022 | |||||||
| Balance, January 1 | $ | ( |
) | |||||