SEC Form 10-Q filed by Grom Social Enterprises Inc.
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 ☐ No
As of May 17, 2024, shares of the registrant’s common stock were outstanding.
GROM SOCIAL ENTERPRISES, INC.
Table of Contents
| Part I – FINANCIAL INFORMATION | Page | |
| Item 1. | Financial Statements | 4 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 39 |
| Item 4. | Controls and Procedures | 39 |
| Part II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 41 |
| Item 1A. | Risk Factors | 41 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 41 |
| Item 3. | Defaults upon Senior Securities | 41 |
| Item 4. | Mine Safety Disclosures | 41 |
| Item 5. | Other Information | 41 |
| Item 6. | Exhibits | 42 |
| 2 |
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
When used in this Quarterly Report, including the documents that we have incorporated by reference, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Discussions containing forward-looking statements may be found in the material set forth under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Quarterly Report.
Forward-looking statements are necessarily subjective, are based upon our current plans, intentions, objectives, goals, strategies, beliefs, projections and expectations, and involve known and unknown risks, uncertainties and other important factors.
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Any or all of our forward-looking statements in this report may turn out to be inaccurate. Important factors that may cause actual results, our performance or achievements, or industry results to differ materially from those contemplated by such forward-looking statements include, without limitation, those discussed under the caption “Risk Factors” in this Quarterly Report. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.
| 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Balance Sheets
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Operating lease right of use assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deferred financing costs | ||||||||
| 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 | ||||||||
| Loans payable – current | ||||||||
| Derivative liabilities | ||||||||
| Lease liabilities – current | ||||||||
| Total current liabilities | ||||||||
| Convertible notes payable, net of loan discounts | ||||||||
| Lease liabilities | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 20) | ||||||||
| Stockholders' Equity: | ||||||||
| Series A preferred stock, $ par value. shares authorized; zero shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Series B preferred stock, $ par value. shares authorized; zero shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Series C preferred stock, $ par value. shares authorized; shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Common stock, $ par value. shares authorized; and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Grom Social Enterprises, Inc. stockholders' equity | ||||||||
| Noncontrolling interests | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 4 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||
| 2024 | 2023 | |||||||
| Sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Depreciation and amortization | ||||||||
| Selling, general and administrative | ||||||||
| Professional fees | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Gain (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 | ||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | |||||||||||||||||||||
| Net loss | – | – | – | |||||||||||||||||||||
| Change in foreign currency translation | – | – | – | |||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | – | – | |||||||||||||||||||||
| Issuance of common stock in connection with sales made under public offerings | – | – | – | |||||||||||||||||||||
| Issuance of common stock in connection with the exercise of common stock purchase warrants | – | – | – | |||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | – | – | – | |||||||||||||||||||||
| Issuance of common stock purchase warrants as consideration for waiver of a financing covenant | – | |||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | |||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | |||||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | ||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | |||||||||||||||||||||
| Net income (loss) | – | – | – | |||||||||||||||||||||
| Change in foreign currency translation | – | – | – | |||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | – | – | |||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | – | – | – | |||||||||||||||||||||
| Issuance of common stock purchase warrants as consideration for equity line of credit | – | – | – | |||||||||||||||||||||
| Conversion of note principal and accrued interest into common stock | – | – | – | |||||||||||||||||||||
| Settlement of derivative liability | – | – | – | |||||||||||||||||||||
| Stock based compensation expense related to stock options | – | – | – | |||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | |||||||||||||||||||||
(continued)
| 6 |
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | |||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Loss | Interests | Equity | ||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Change in foreign currency translation | – | |||||||||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of common stock in connection with sales made under public offerings | ||||||||||||||||||||||||||||
| Issuance of common stock in connection with the exercise of common stock purchase warrants | ||||||||||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | ||||||||||||||||||||||||||||
| Issuance of common stock purchase warrants as consideration for waiver of a financing covenant | – | |||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | |||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Noncontrolling | Stockholders' | |||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Loss | Interests | Equity | ||||||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Net income (loss) | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Change in foreign currency translation | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Dividends declared for Series C preferred stock | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of common stock in exchange for consulting, professional and other services | ||||||||||||||||||||||||||||
| Issuance of common stock purchase warrants as consideration for equity line of credit | – | |||||||||||||||||||||||||||
| Conversion of note principal and accrued interest into common stock | ||||||||||||||||||||||||||||
| Settlement of derivative liability | – | |||||||||||||||||||||||||||
| Stock based compensation expense related to stock options | – | |||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 7 |
GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities of continuing operations: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of right-of-use assets | ||||||||
| Provision for credit losses | ||||||||
| Common stock issued for financing costs | ||||||||
| Common stock issued in exchange for fees and services | ||||||||
| Retirement benefit cost | ||||||||
| Stock based compensation | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Loss on settlement of derivative liability | ||||||||
| Unrealized (gain) loss on change in fair value of derivative liabilities | ( | ) | ||||||
| Unrealized (gain) loss on foreign exchange | ||||||||
| 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 provided by (used in) operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from the sale of property and equipment | ||||||||
| Net cash provided by (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 loans payable | ||||||||
| Repayments of convertible notes | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ||||||||
| Effect of exchange rates on cash and cash equivalents | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Common stock issued to reduce accounts payable and other accrued liabilities | $ | $ | ||||||
| Conversion of note principal and accrued interest into common stock | $ | $ | ||||||
| Dividends payable to Series C preferred stockholders | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 8 |
GROM SOCIAL ENTERPRISES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited)
| 1. | NATURE OF OPERATIONS |
Grom Social Enterprises, Inc. (the “Company” or “GROM”), a Florida corporation f/k/a Illumination America, Inc. (“ILLU”), is a media, technology and entertainment company. The Company is focused on (i) delivering content to children under the age of 13 years in a safe secure platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of Kids & Family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content.
The Company operates its business through the following five operating subsidiaries:
| · | Grom Social, Inc. (“GSOC”), incorporated in the State of Florida on March 5, 2012, operates the Company’s social media network designed for children under the age of 13 years. | |
| · | TD Holdings Limited (“TDH”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited (“TDAHK”), a Hong Kong corporation, and (ii) Top Draw Animation, Inc. “TDAM”), a Philippines corporation. The group’s principal service-based activities are the production of animated films and televisions series. | |
| · | Grom Educational Services, Inc. (“GEDU”), incorporated in the State of Florida on January 17, 2017, operates the Company’s web filtering services provided to schools and government agencies. | |
| · | Grom Nutritional Services, Inc. (“GNUT”), incorporated in the State of Florida on April 19, 2017, intends to market and distribute nutritional supplements to children. It has been nonoperational since its inception. | |
| · | Curiosity Ink Media, LLC (“CIM”), organized in the State of Delaware on January 9, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and family entertainment properties and associated business opportunities. |
The Company owns 100% of each of GSOC, TDH, GEDU and GNUT, and 80% of CIM.
The Company has three reportable business segments: Animation, which includes TDH; Original Content, which includes CIM; and Social & Technology, which includes GSOC and GEDU.
| 9 |
| 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 March 31, 2024, the Company has an accumulated deficit of $ million. During the three months ended March 31, 2024, it used approximately $.2 million in cash for operating activities.
The Company has funded its operations primarily through sales of its common stock in public markets, proceeds from the exercise of warrants to purchase common stock, and the sale of convertible notes. Future capital requirements will depend on many factors, including the (i) rate of revenue growth, (ii) expansion of sales and marketing activities, (iii) timing and extent of spending on content development efforts, and (iv) market acceptance of the Company’s content, products and services.
The Company’s management intends to raise additional funds through the issuance of equity securities or debt to enable the Company to meet its obligations for the twelve-month period. However, there can be no assurance that, in the event the Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations and/or raise additional capital could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months from the date of this report.
The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conjunction with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted. For the three months ended March 31, 2024, the condensed consolidated financial statements include the accounts of the Company and its operating subsidiaries GSOC, TDH, GEDU, GNUT, and CIM. The Company recognizes noncontrolling interest related to its less-than-wholly-owned subsidiary, CIM, as equity in the consolidated financial statements separate from the parent entity’s equity. The net loss attributable to noncontrolling interest is included in net loss in the condensed consolidated statements of operations and comprehensive loss.
These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary for a fair presentation of financial position and results of operations. All such adjustments, which include intercompany balances and transactions are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto at December 31, 2023, as presented in the Company’s Annual Report on Form 10-K filed on April 16, 2024 with the SEC.
Certain amounts for the prior year period have been reclassified to conform to current period’s presentation.
| 10 |
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The most significant estimates relate to revenue recognition, valuation of accounts receivable, goodwill and other long-lived assets, and contingencies. The Company bases its estimates on historical experience, known or expected trends and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Update to Significant Accounting Policies
There have been no new or material changes to the significant accounting policies discussed in the Company’s audited financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC on April 16, 2024, that are of significance, or potential significance, to the Company.
| 4. | ACCOUNTS RECEIVABLE |
The following table sets forth the components of the Company’s accounts receivable at March 31, 2024, and December 31, 2023:
March 31, 2024 | December 31, 2023 | |||||||
| Billed accounts receivable | $ | $ | ||||||
| Unbilled accounts receivable | ||||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total accounts receivable, net | $ | $ | ||||||
During
the three months ended March 31, 2024, the Company had two customers that accounted for
At
March 31, 2024, the Company had one customer that accounted for
| 11 |
| 5. | INVENTORY |
Inventory primarily consists of costs incurred to produce animated content for third party customers. Costs incurred to produce the animated content for customers, which include direct production costs, production overhead and supplies are recognized as work-in-progress inventory. As animated content is completed in accordance with the terms stated by the customer, inventory is classified as finished products and subsequently recognized as cost of services as animated content is accepted by and available to the customer. Carrying amounts of animated content are recorded at the lower of cost or net realizable value. Cost is determined using a weighted average cost method for direct production costs, productions overhead and supplies used for completing animation projects.
As of March 31, 2024 and December 31, 2023, the
Company’s inventory totaled $
| 6. | LEASES |
The Company has entered into operating leases primarily for office space. These leases have original terms which range from two years to six years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment. During the three months ended March 31, 2024, the Company did not record any additional right of use (“ROU”) assets or lease liabilities related to new operating leases.
The future minimum payment obligations at March 31, 2024 for operating leases are as follows:
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
These operating leases are listed as separate line items on the Company's condensed 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 condensed consolidated balance sheets.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating right-of-use assets and related lease liabilities are as follows:
| Three Months Ended March 31, 2024 | ||||
| Cash paid for operating lease liabilities | $ | |||
| Weighted-average remaining lease term in years | ||||
| Weighted-average discount rate | ||||
For the three months ended March 31, 2024 and
2023, the Company recorded rent expenses related to lease obligations of $
| 12 |
| 7. | PROPERTY AND EQUIPMENT |
The following table sets forth the components of the Company’s property and equipment at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Cost | Accumulated Depreciation | Net Book Value | Cost | Accumulated Depreciation | Net Book Value | |||||||||||||||||||
| Capital assets subject to depreciation: | ||||||||||||||||||||||||
| Computers and office equipment | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Machinery and equipment | ( | ) | ( | ) | ||||||||||||||||||||
| Vehicles | ( | ) | ( | ) | ||||||||||||||||||||
| Furniture and fixtures | ( | ) | ( | ) | ||||||||||||||||||||
| Leasehold improvements | ( | ) | ( | ) | ||||||||||||||||||||
| Total fixed assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
For the three months ended March 31, 2024 and
2023, the Company recorded depreciation expense of $
| 8. | GOODWILL AND INTANGIBLE ASSETS |
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
At March 31, 2024 and December 31, 2023, the carrying
amount of the Company’s goodwill was $
The following table sets forth the changes in the carrying amount of goodwill by reportable segment for the periods ended March 31, 2024 and December 31, 2023:
| Animation | Original Content | Consolidated | ||||||||
| Balance, January 1, 2023 | $ | $ | $ | |||||||
| Impairment charge | ( | ) | ( | ) | ( | |||||
| Balance, December 31, 2023 | ||||||||||
| Impairment charge | ||||||||||
| Balance, March 31, 2024 | $ | $ | $ | |||||||
| 13 |
The following table sets forth the components of the Company’s intangible assets at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||
| Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Licensing agreement | ( | ) | ( | ) | ||||||||||||||||||||||||
| Subtotal | ( | ) | ( | ) | ||||||||||||||||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||||||||||||||
| Books and stories content | – | – | ||||||||||||||||||||||||||
| Trade names | – | – | ||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
For the three months ended March 31, 2024 and
2023, 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 2024 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total remaining intangible assets subject to amortization | $ | |||
| 9. | DEFERRED FINANCING COSTS |
The Company accounts for issuance costs related to its equity line of credit as a deferred asset on the condensed consolidated balance sheets, which is amortized over the life of the equity line of credit and recognized as interest expense on the consolidated statements of operations
At March 31, 2024, the carrying amount of the
Company’s deferred financing costs were $
Refer to Note 16 – Stockholders’ Equity for additional information.
| 14 |
| 10. | OTHER ASSETS |
The following table sets forth the components of the Company’s other assets at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Capitalized prepublication costs | $ | $ | ||||||
| Capitalized produced and licensed content costs | ||||||||
| Capitalized website development costs | ||||||||
| Deposits | ||||||||
| Total other assets | $ | $ | ||||||
Capitalized 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.
Capitalized 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.
| 15 |
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.
The following tables set forth the components of the Company’s capitalized costs at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Book Value | Gross Carrying Value | Accumulated Depreciation | Net Book Value | |||||||||||||||||||
| Capitalized prepublication costs | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Capitalized produced and licensed content costs | ||||||||||||||||||||||||
| Capitalized website development costs | ( | ) | ( | ) | ||||||||||||||||||||
| Total capitalized costs | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
For the three months ended March 31, 2024 and
2023, the Company recorded amortization expense of $
| 11. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
Accounts, or trade, payables are recognized initially
at the transaction price and subsequently measured at the undiscounted amount of cash or other consideration expected to be paid. At March
31, 2024 and December 31, 2023, the aggregate accounts payable were $
Accrued expenses are recognized based on the expected amount required to settle the obligation or liability.
The following table sets forth the components of the Company’s accrued liabilities at March 31, 2024 and December 31, 2023:
March 31, 2024 | December 31, 2023 | |||||||
| Executive and employee compensation | $ | $ | ||||||
| Interest on convertible notes and promissory notes | ||||||||
| Other accrued expenses and liabilities | ||||||||
| Total accrued liabilities | $ | $ | ||||||
| 16 |
| 12. | RELATED PARTY TRANSACTIONS AND PAYABLES |
At March 31, 2024 and December 31, 2023, the aggregate
related party payables were $
Darren Marks’s Family
The Company has engaged the family of Darren Marks, its Chief Executive Officer, to assist in the development of the Grom Social mobile application. These individuals create and produce original short form content focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special events. Sarah Marks, the wife of Mr. Marks, and Zach Marks, Luke Marks, Caroline Marks, Jack Marks, Dawson Marks and Victoria Marks, each Mr. Marks’s children, are, or have been, by the Company employed or independently contracted.
As of March 31, 2024, Zach Marks was employed
by GSOC as its Founder and Content Creator and receives an annual salary of $
During
the three months ended March 31, 2024 and 2023, the Marks family was paid a total of $
Liabilities Due to Officers and/or Directors
On July 13, 2018, our director, Thomas Rutherford,
loaned the Company $
| 17 |
| 13. | DEBT |
The following tables set forth the components of the Company’s convertible notes as of March 31, 2024 and December 31, 2023:
March 31, 2024 | December 31, 2023 | |||||||
| 9% Secured Convertible Note with Original Issuance Discounts (Generating Alpha) | $ | $ | ||||||
| 10% Secured 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 | $ | $ | ||||||
9% Secured Convertible Note with Original Issuance Discounts (First Alpha Note)
On November 9, 2023, the Company entered into
a Securities Purchase Agreement (the “Alpha SPA”) with Generating Alpha Ltd. (“Alpha”) pursuant to which the Company
agreed to sell two convertible promissory notes of the Company, with each note having an initial principal amount of $
The note in the aggregate principal amount of
$
The First Alpha Note is convertible at the discretion of Alpha into shares of the Company’s common stock at a price of $. Alpha may choose the alternate conversion price equal to 85% of the average of the three lowest trading prices during the previous ten trading day period ending on the latest complete trading day prior to notice of conversion.
In connection with the purchase and sale of the
notes, the Company agreed to issue to Alpha warrants to acquire a total of
On November 20, 2023, the Company entered into
a first amendment agreement (the “Amendment”) to the Alpha SPA. Pursuant to the Amendment, the Alpha SPA was amended by replacing
the first closing warrant for
| 18 |
On December 21, 2023, the Company received approximately
$
On March 11, 2024, the Company entered into a second amendment agreement (the “Second Amendment”) to the Alpha SPA pursuant to which (1) the exercise price of each of the Warrant A and the Warrant C (as described in the Alpha SPA) has been amended from $1.78 per share of common stock to $0.001 per share, and (2) the Company shall promptly effect a reverse stock split in the event that the closing price of its common stock falls below $0.25 per share for a period of five consecutive trading days.
In connection with the Second Amendment, the Company also entered into an amendment (the “First Note Amendment”) to the Convertible Promissory Note originally dated November 9, 2023 (together with the First Note Amendment, the “Note”) with the Investor, pursuant to which Section 1.1(a) of the Note was amended to add that in no event shall the Conversion Price (as defined in the Note) be less than $0.25.
At March 31, 2024, the principal balance
of these notes was $
10% Secured Convertible Notes with Original Issuance Discounts (“OID Notes”)
During the year ended December 31, 2017, the Company
issued a series of secured, convertible notes with original issuance discounts to accredited investors. The notes were issued with original
issuance discounts of 10.0%, bear interest at a rate of 10% per annum (payable semiannually in cash), and carry a two-year term with a
fixed conversion price of $14,976.00. As of March 31, 2024, 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 $9,600.00. As of March 31, 2024, the remaining principal balance of these notes was $
At March 31, 2024, the aggregate principal
balance of these notes was $
12% Senior Secured Convertible Notes (“TDH Secured Notes”)
On March 16, 2020, the Company sold an aggregate
$
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.
At March 31, 2024, the principal balance of these
notes was $
| 19 |
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 $1,920.00 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 $1,920.00.
At March 31, 2024, the principal balance of these
notes was $
Future Minimum Principal Payments
The remaining principal repayments based upon the maturity dates of the Company’s borrowings for each of the next five years are as follows:
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total future minimum principal payments | $ | |||
| 14. | DERIVATIVE LIABILITIES |
On December 21, 2023, the Company sold a note
to Generating Alpha Ltd. in the aggregate principal amount of $
The Company assessed the alternate conversion
price and determined that it represented a derivative liability with a fair value of $
| 20 |
On March 11, 2024, the Company entered into an amendment to the First Alpha Note originally dated November 9, 2023 with the investor, pursuant to which the Note was amended to add that in no event shall the conversion price be less than $0.25. The addition of a floor price to the alternative conversion price settled the derivative liability as it eliminated the uncertainty surrounding the issuance of an indeterminable number of shares under the terms of the First Alpha Note.
The fair values of derivative liability were calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:
| Assumptions used for derivative liability | May 11, | March 8, | January 19, | December 31, | ||||||||||||
| 2024 | 2024 | 2024 | 2023 | |||||||||||||
| Stock price | ||||||||||||||||
| Strike price | ||||||||||||||||
| Risk-free rate | ||||||||||||||||
| Annualized volatility | ||||||||||||||||
| Forecast horizon in years | ||||||||||||||||
| Alternative Conversion Price | ||||||||||||||||
| Implied Discount Rate | ||||||||||||||||
The derivative was re-measured at each conversion date and at the date of the amendment on March 11, 2024, resulting in the reclassification of the $175,814 derivative liability to additional paid-in capital.
| 15. | FAIR VALUE MEASUREMENTS |
Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, non on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, include the Company’s own credit risk.
The Company applied FASB Accounting Standards Codification (“ASC”) 820 – Fair Value Measurement, which provides guidance for using fair value to measure assets and liabilities by defining fair value and establishing the framework for measuring fair value. ASC 820 applies to financial and nonfinancial instruments that are measured and reported on a fair value basis. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair value hierarchy requires the use of observable market data when available and consists of the following levels:
| · | Level 1 – Unadjusted inputs based on quoted markets for identical assets or liabilities. | |
| · | Level 2 – Observable inputs, either direct or indirect, not including Level 1 measurements, corroborated by market data or based upon quoted prices in non-active markets | |
| · | Level 3 – Unobservable inputs that reflect management’s best assumptions of what market participants would use in valuing the asset or liability. |
Contingent Consideration
The fair value of the Company’s contingent consideration payable was based on the Company’s evaluation as to the probability and amount of any earn-out that could have ultimately been payable. The Company utilizes a third-party valuation firm to assist in the calculation of the contingent consideration at the acquisition date. The Company evaluates the forecast of the acquired entity and the probability of earn-out provisions being achieved when it evaluates the contingent consideration recorded at initial acquisition date and at each subsequent reporting period. The fair value of contingent consideration is measured at each reporting period and adjusted as necessary. The Company evaluates the terms in contingent consideration arrangements provided to former owners of acquired companies who become employees of the Company to determine if such amounts are part of the purchase price of the acquired entity or compensation. Because the fair value measurements relating to the contingent consideration liabilities are subject to management judgment, measurement uncertainty is inherent in the valuation of the contingent consideration liabilities as of the reporting date.
| 21 |
Derivative Liabilities
The fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer to Note 14 (“Derivative Liability”), for a further discussion of the measurement of fair value of the derivatives and their underlying assumptions.
The fair value of the Company’s financial instruments carried at fair value at March 31, 2024 and December 31, 2023 are as follows:
| Financial instruments at fair value | ||||||||||||||||
| March 31, 2024 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent Purchase Consideration | $ | $ | $ | $ | ||||||||||||
| Derivative Liabilities | ||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent Purchase Consideration | $ | $ | $ | $ | ||||||||||||
| Derivative Liabilities | ||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||||
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities during the three months ended March 31, 2024 and 2023:
| Summary of changes of fair value | ||||||||||||||||||||||||
| Level 3 Financial Liabilities for the Three Months Ended March 31, 2024 | ||||||||||||||||||||||||
Balance 2024 | Realized (Gains) Losses | Additions | Settlements | Unrealized (Gains) Losses | Balance March 31, 2024 | |||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| Contingent Purchase Consideration | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Derivative Liabilities | ||||||||||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Level 3 Financial Liabilities for the Three Months Ended March 31, 2023 | ||||||||||||||||||||||||
Balance 2023 | Realized (Gains) Losses | Additions | Settlements | Unrealized (Gains) Losses | Balance March 31, 2023 | |||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| Contingent Purchase Consideration | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Derivative Liabilities | ||||||||||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 22 |
| 16. | EMPLOYEE BENEFIT PLAN |
The Company’s subsidiary, TDAM, has an unfunded, non-contributory defined benefit plan covering its permanent employees.
Under the existing regulatory framework, the Company is required to pay eligible employees at least the minimum regulatory benefit upon retirement, which provides a retirement benefit equal to 22.5 days’ pay for every year of credited service, subject to age and service requirements. The regulatory benefit is paid in a lump sum upon retirement. The existing regulatory framework does not require minimum funding of the plan.
Retirement benefit expenses and liabilities are determined in accordance with an actuarial study made for the plan utilizing the net interest approach which disaggregates the defined benefit cost into the following components: service costs (cost of services received); net interest (financing effect of paying for benefits in advance or in arrears); and remeasurements (period-to-period fluctuations in the amounts of defined benefit obligations and plan assets).
Under the net interest approach, service cost and net interest on the defined benefit liability (asset) are both recognized in the statement of operations, while remeasurements of the defined benefit liability (asset) are recognized in other comprehensive income. Remeasurements recognized in other comprehensive income shall not be reclassified to profit or loss in a subsequent period.
The amount of the defined benefit liability reported under other noncurrent liabilities in the consolidated balance sheet is determined as follows:
| March 31, 2024 | December 31, 2023 | |||||||
| 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:
| March 31, 2024 | March 31, 2023 | |||||||
| Current service cost | $ | $ | ||||||
| Net interest expense | ||||||||
| Total | $ | $ | ||||||
The change in the accumulated benefit cost in the consolidated balance sheet for the three months ended March 31, 2024 is as follows:
| 2024 | ||||
| Balance, January 1 | $ | |||
| Foreign currency translation | ( | ) | ||
| Expense recognized in other comprehensive income | ||||
| Remeasurement on actuarial gain (loss) recognized | ||||
| Contributions paid | ||||
| Balance, March 31 | $ | |||
The cumulative amount of actuarial gains recognized in other comprehensive income for the three months ended March 31, 2024 and 2023 is as follows:
| 2024 | 2023 | |||||||
| Balance, January 1 | $ | $ | ||||||
| Foreign currency translation | ( | ) | ||||||
| Actuarial gain (loss) | ( | ) | ||||||
| Balance, March 31 | ( | ) | ||||||
| Tax effect | ( | ) | ||||||
| Cumulative actuarial gain (loss), net of tax | $ | ( | ) | $ | ||||
The assumptions used to determine retirement benefits for the three months ended March 31, 2024 are as follows:
| March 31, 2024 | ||||
| Discount rate | ||||
| Salary increase rate | ||||
| 23 |
| 17. | INCOME TAXES |
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon currently known facts and circumstances and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
As of March 31, 2024, the Company had federal, state and foreign net operating loss carryforwards. The federal and state NOL's may be subject to limitation under IRS Sec. 382, the analysis of which is not yet complete. The Company has established a full valuation allowance against the US federal, state and foreign NOL carryforwards as well as its other US and foreign deferred tax assets based on an assessment that it is more likely than not that the deferred tax assets will not be realized in future years.
The Company’s interim effective tax rate,
inclusive of discrete items, for the three months ended March 31, 2024 was
| 18. | STOCKHOLDERS’ EQUITY |
Preferred Stock
The Company is authorized to issue shares of preferred stock, par value of $ per share.
Series A Preferred Stock
On February 22, 2019, the Company designated shares of its preferred stock as 10% Series A convertible preferred stock, par value $ per share (“Series A Stock”).
As of March 31, 2024 and December 31, 2023, the Company had 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”).
As of March 31, 2024 and December 31, 2023, the Company had shares of Series B Stock issued and outstanding, respectively.
| 24 |
Series C Preferred Stock
On May 20, 2021, the Company filed with the Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series C Stock designating 10,000,000 shares as Series C Preferred Stock (the “Series C Stock”). The Series C Stock ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.
The holder may, at any time after the 6-month anniversary of the issuance of the shares of Series C Preferred Stock, convert such shares into common stock at a conversion rate of 1,152.00 per share. In addition, the Company may, at any time after the issuance of the shares, convert any or all of the outstanding shares of Series C Preferred Stock at a conversion rate of $1,152.00 per share.
Each share of Series C Stock entitles the holder to 1.5625 votes for each share of Series C Stock. The consent of the holders of at least two-thirds of the shares of Series C Stock is required for the amendment to any of the terms of the Series C Stock, to create any additional class of stock unless the stock ranks junior to the Series C Stock, to make any distribution or dividend on any securities ranking junior to the Series C Stock, to merge or sell all or substantially all of the assets of the Company or acquire another business or effectuate any liquidation of the Company.
Cumulative dividends accrue on each share of Series C Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in arrears quarterly commencing 90 days from issuance. The dividend shall be payable in shares of common stock (a “PIK Dividend”) and are be due and payable on the date on which such PIK Dividend was declared.
Upon a liquidation, dissolution or winding up of the Company, the holders of the Series C Stock are entitled to $1.00 per share plus all accrued and unpaid dividends. No distribution may be made to holders of shares of capital stock ranking junior to the Series C Stock upon a liquidation until Series C stockholders receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series C Stock, may elect to deem a merger, reorganization or consolidation of the Company into or with another corporation, not affiliated with said majority, or other similar transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of in exchange for property, rights or securities distributed to holders thereof by the acquiring person, firm or other entity, or the sale of all or substantially all of the assets of the Company.
As of March 31, 2024 and December 31, 2023, the Company had hares of Series C Stock issued and outstanding, respectively.
For the three months ended March 31, 2024, the
Company declared cumulative dividends totaling $
Common Stock
The Company is authorized to issue shares of common stock, par value of $ per share and had and shares of common stock issued and outstanding as of March 31, 2024 and December 31, 2023, respectively.
| 25 |
Reverse Stock Split
On June 23, 2023, the Board and shareholders approved
the granting of authority to the Board to amend the Company’s articles of incorporation to effect a reverse stock split of the issued
and outstanding shares of its common stock, by a ratio of no less than 1-for-2 and no more than 1-for-20, with the exact ratio to be determined
by the Board in its sole discretion, and with such reverse stock split to be effective at such time and date, if at all, as determined
by the Board in its sole discretion. On September 7, 2023, the Board effected a
The reverse stock split did not have any impact on the number of authorized shares of common stock, which remains at shares.
Equity Line of Credit
On March 11, 2024, the Company entered into
a Securities Purchase Agreement (the “March 2024 SPA”) with Generating Alpha pursuant to which it has agreed to
issue and sell to Generating Alpha from time to time up to $
Pursuant to the March 2024 SPA, the Company
may require Generating Alpha to purchase shares of common stock by delivering put notices to Generating Alpha, subject to certain
conditions set forth therein, at a purchase price of 85% of the lowest traded price of its common stock during the 10 trading days
immediately preceding the date 10 business days after the date the put shares have been accepted and cleared by Generating
Alpha’s brokerage firm. The Company has agreed to issue to Generating Alpha as a commitment fee a Common Stock Purchase
Warrant (the “Warrant”) for
On the issuance date of the Company’s equity line of credit, the cost related to issuance of the common stock purchase warrants was recorded as a deferred asset. Refer to Stock Purchase Warrants below for additional information.
In connection with the March 2024 SPA, the Company entered into a Registration Rights Agreement (the “March 2024 Registration Rights Agreement”) with Generating Alpha, pursuant to which it has agreed to use its commercially reasonable efforts to file a registration statement (the “Registration Statement”) with the SEC on a date no later than sixty (60) days following the date thereof and to have the Registration Statement declared effective by the SEC within thirty (30) calendar days, but no more than ninety (90) calendar days, after it has filed the Registration Statement.
On April 24, 2024, the Company entered into an omnibus amendment agreement with Generating Alpha pursuant to which (1) the March 2024 SPA was amended to clarify that the calculation of the number of put shares issuable by the Company without any shareholder approval required by an exchange shall include all shares of common stock beneficially owned by Generating Alpha, and (2) the March 2024 Warrant was amended to remove its alternative cashless exercise feature.
Common Stock Issued in Exchange for Consulting, Professional and Other Services
During the three months ended March 31, 2024,
the Company issued shares of common stock with a fair market value of $
During the three months ended March 31, 2023,
the Company issued shares of common stock with a fair market value of $
Common Stock Issued in Connection with the Conversion of Note Principal and Accrued Interest
During the three months ended March 31 2024, the
Company issued shares of common stock upon the conversion of $
| 26 |
Stock Purchase Warrants
Stock purchase warrants are accounted for as equity in accordance with ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
The following table reflects all outstanding and exercisable warrants at March 31, 2024 and December 31, 2023. All warrants are exercisable for a period of three to five years from the date of issuance:
| Number of Warrants Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Yrs.) | ||||||||||
| Balance January 1, 2023 | $ | |||||||||||
| Warrants issued | ||||||||||||
| Warrants exercised | ( | ) | ||||||||||
| Warrants forfeited | ( | ) | ||||||||||
| December 31, 2023 | ||||||||||||
| Warrants issued | ||||||||||||
| Warrants exercised | ||||||||||||
| Warrants forfeited | ||||||||||||
| Balance March 31, 2024 | $ | |||||||||||
On March 11, 2024, in connection
with the Equity Line of Credit described above, the Company issued
The warrants were valued using the Black-Scholes
option pricing model with the following average assumptions: the Company’s stock price on the date of the issuance ($), an expected
dividend yield of %, a historical volatility of %, a risk-free interest rate of %, and an expected term of five years. The Company
recorded deferred financing costs of $
As of March 31, 2024, the total unamortized deferred
financing costs related to warrants was $
During the three months ended March 31, 2023,
the Company issued shares of common stock upon the exercise of prefunded warrants for gross proceeds of $
During the three months ended March 31, 2024,
the Company also issued shares of common stock upon the cashless exercise of
As of March 31, 2024, the outstanding stock purchase warrants had an aggregate intrinsic value of $.
| 27 |
Stock Options
The following table represents all outstanding and exercisable stock options as of March 31, 2024.
| Year Issued | Options Issued | Options Forfeited | Options Outstanding | Vested Options | Weighted Average Exercise Price | Weighted Average Remaining Life (Yrs.) | ||||||||||||||||||
| 2021 | ||||||||||||||||||||||||
| Total | $ | |||||||||||||||||||||||
During the three months ended March 31, 2024 and 2023, the Company recorded $ and $, respectively, in stock-based compensation costs related to stock options which is reported under selling, general & administrative expenses in the Company’s condensed consolidated statements of operations.
As of March 31, 2024, the total unrecognized cost of stock-based compensation related to stock options was $. This cost is expected to be recognized over a weighted average period of years.
As of March 31, 2024, the outstanding stock options had an aggregate intrinsic value of $.
| 19. | SEGMENT INFORMATION |
The Company has three reportable business segments: Animation, Original Content, and Social & Technology. Animation includes the business of TDH and its subsidiaries, a company primarily based in the Philippines which provides production services for animated films and television series to a diverse base of global content providers and publishers. Original Content includes the business of CIM, a company operating in Los Angeles, California and Salt Lake City, Utah which develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and family entertainment properties and associated business opportunities. Social & Technology includes the businesses of GSOC and GEDU, companies based in Boca Raton, Florida and Peachtree Corners, GA, respectively, which deliver content to children under the age of 13 years in a safe, secure platform that is COPPA compliant that can be monitored by parents or guardians, and provides protective web filtering solutions to block unwanted or inappropriate content, respectively.
The operating results of these business segments are regularly reviewed by the Company’s CODM who evaluates the performance of its business segments based primarily on revenue and operating profit or loss.
The Company’s determination, as described above, represents a change from previous years and, as such, the prior year’s segment information has been recast and disclosed herein to conform to the current year’s presentation.
The accounting policies of the reportable segments are the same as those described in Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements. The Company’s CODM reviews financial information presented on a consolidated basis, accompanied by disaggregated information by segment for purpose of evaluating financial performance.
| 28 |
Segment Results
The table below presents the results of operations by reportable segment for the three months ended March 31, 2024:
| Animation | Original Content | Social & Technology | Corporate | Consolidated | ||||||||||||||||
| Sales | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of goods sold | ||||||||||||||||||||
| Gross profit | ( | ) | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Selling, general and administrative | ||||||||||||||||||||
| Professional fees | ||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense) | ||||||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ||||||||||||||||
| Loss on settlement of 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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| 29 |
The table below presents the results of operations by reportable segment for the three months ended March 31, 2023:
| Animation | Original Content | Social & Technology | Corporate | Consolidated | ||||||||||||||||
| Sales | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of goods sold | ||||||||||||||||||||
| Gross profit | ||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Selling, general and administrative | ||||||||||||||||||||
| Professional fees | ||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense) | ||||||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Loss on settlement of 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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Corporate functions including (i) the compensation of the Company’s executive management, (ii) services provided to the segments in areas such as accounting, information technology, legal and human resources, and (iii) financing and other transactional activities are not allocated to the segments and are included in "Corporate" in the table above. Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.
Management does not use total assets by segment to evaluate segment performance or allocate resources. As such, total assets by segment are not disclosed.
Geographic Information
The tables below present revenue by country for the years ended March 31, 2024 and 2023. Revenue amounts are based upon the location of the business segment servicing the customer.
Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | |||||||
| United States | $ | $ | ||||||
| Philippines | ||||||||
| Total sales | $ | $ | ||||||
| 30 |
The table below presents property and equipment, net by country, based on the physical location of the assets, as of March 31, 2024 and December 31, 2023:
March 31, 2024 | December 31, 2023 | |||||||
| United States | $ | $ | ||||||
| Philippines | ||||||||
| Total property and equipment, net | $ | $ | ||||||
| 20. | COMMITMENTS AND CONTINGENCIES |
In the ordinary course of business, the Company and its subsidiaries are subject to various pending and potential legal actions, arbitration proceedings, claims, investigations, examinations, regulatory proceedings, information gathering requests, subpoenas, inquiries and matters relating to compliance with laws and regulations (collectively, legal proceedings).
Based on the Company’s current knowledge, and taking into consideration its legal expenses, the Company does not believe it is a party to, nor are any of its subsidiaries the subject of, any legal proceeding that would have a material adverse effect on the Company’s consolidated financial condition or liquidity.
See also Note 6 (“Leases”).
See also Note 17 (“Income Taxes”).
| 21. | SUBSEQUENT EVENTS |
April 2024 SPA for Convertible Promissory Note and Warrants with Generating Alpha
On April 1, 2024, the Company entered into a Securities Purchase Agreement (the “April 2024 SPA”) with Generating Alpha pursuant to which it has agreed to sell a convertible promissory note (the “April 2024 Note”), having an initial principal amount of $650,000, for a price of $520,000. In connection with the purchase and sale of the April 2024 Note, the Company has agreed to issue to Generating Alpha a common stock purchase warrant to acquire a total of 962,962 shares of its common stock. The transactions closed on April 4, 2024.
In connection with the April 2024 SPA, the Company entered into a Registration Rights Agreement, dated April 1, 2024 (the “April 2024 Registration Rights Agreement”), with Generating Alpha. The April 2024 Registration Rights Agreement provided that the Company shall file a registration statement covering the resale of all of the Registrable Securities (as defined in the April 2024 Registration Rights Agreement) with the SEC.
On April 24, 2024, the Company entered into a first amendment agreement (the “First Amendment”) to the April 2024 SPA with Generating Alpha pursuant to which it shall promptly effect a reverse stock split in the event that the closing price of its common stock falls below $0.25 per share for a period of five consecutive trading days.
In connection with the First Amendment, the Company entered into an amendment to the April 2024 Note with Generating Alpha pursuant to which in no event shall the conversion price be less than $0.17.
Amendment to the March 2024 SPA for Equity Line of Credit with Generating Alpha
On April 24, 2024, the Company entered into an omnibus amendment agreement with Generating Alpha pursuant to which (1) the March 2024 SPA was amended to clarify that the calculation of the number of put shares issuable by the Company without any shareholder approval required by an exchange shall include all shares of common stock beneficially owned by Generating Alpha, and (2) the March 2024 Warrant was amended to remove its alternative cashless exercise feature.
Issuance of Common Stock
On April 11, 2024, the Company issued 96,931 shares of common stock to an investor relations firm for services rendered.
| 31 |
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, 2023, which we filed with the Securities and Exchange Commission on April 16, 2024, that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.
The share and per share information in the following discussion reflects a reverse stock split of our outstanding common stock at a 1-for-20 ratio, effective as of September 7, 2023.
Overview
We were incorporated in the State of Florida on April 14, 2014 under the name Illumination America, Inc.
On August 17, 2017, we acquired Grom Holdings, Inc., a Delaware corporation (“GHLD”), pursuant to a share exchange agreement (the “Share Exchange Agreement”) entered into on May 15, 2017 (the “Share Exchange”). In connection with the Share Exchange, the Company acquired 100% of the outstanding shares of capital stock of GHLD from GHLD’s stockholders in exchange for an aggregate of 5,774 shares of common stock, par value $0.001 per share, of the Company. As a result of the Share Exchange, the stockholders of GHLD acquired approximately 92% of the Company’s then-issued and outstanding shares of common stock and GHLD became a wholly-owned subsidiary of the Company. In connection with the share exchange, on August 17, 2017, we changed our name to Grom Social Enterprises, Inc. (the “Company” or “GROM”).
We are a media, technology and entertainment company that focuses on (i) delivering content to children under the age of 13 years in a safe secure platform that is compliant with Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of Kids & Family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content. We operate our business through the following subsidiaries:
| · | Grom Social, Inc. (“GSOC”), incorporated in the State of Florida on March 5, 2012, operates our social media network designed for children under the age of 13 years. | |
| · | TD Holdings Limited (“TDH”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited (“TDAHK”), a Hong Kong corporation, and (ii) Top Draw Animation, Inc. (“TDAM”), a Philippines corporation. The group’s principal activities are the production of animated films and televisions series. | |
| · | Grom Educational Services, Inc. (“GEDU”), incorporated in the State of Florida on January 17, 2017, operates our web filtering services provided to schools and government agencies. | |
| · | Grom Nutritional Services, Inc. (“GNUT”), incorporated in the State of Florida on April 19, 2017, intends to market and distribute nutritional supplements to children. It has been nonoperational since its inception. | |
| · | Curiosity Ink Media, LLC (“CIM”), organized in the State of Delaware on January 9, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and family entertainment properties and associated business opportunities. |
| 32 |
We own 100% of each of GSOC, TDH, GEDU and GNUT, and 80% of CIM. We are headquartered in Boca Raton, Florida with offices in Los Angeles, California; Salt Lake City, Utah; Peachtree Corners, Georgia; and Manila, Philippines.
We have three reportable business segments: Animation, which includes TDH; Original Content, which includes CIM; and Social & Technology, which includes GSOC and GEDU.
Recent Developments
Reverse Stock Split
On June 23, 2023, our Board and shareholders approved the granting of authority to the Board to amend our articles of incorporation to effect a reverse stock split of the issued and outstanding shares of our common stock, by a ratio of no less than 1-for-2 and no more than 1-for-20, with the exact ratio to be determined by the Board in its sole discretion, and with such reverse stock split to be effective at such time and date, if at all, as determined by the Board in its sole discretion. On September 7, 2023, our Board effected a 1-for-20 reverse stock split in connection with the continued listing of our common stock on Nasdaq.
The reverse stock split did not have any impact on the number of authorized shares of common stock, which remains at 500,000,000 shares.
November 2023 SPA for Convertible Promissory Note and Warrants with Generating Alpha and Amendments
On November 9, 2023, we entered into a Securities Purchase Agreement (as amended on November 20, 2023 and March 11, 2024, the “November 2023 SPA”) with Generating Alpha Ltd. (“Generating Alpha”) pursuant to which we have agreed to sell two convertible promissory notes, with each note having an initial principal amount of $4,000,000, for a price of $3,640,000 per note. In connection with the purchase and sale of the notes, we have agreed to issue to Generating Alpha warrants to acquire a total of 3,028,146 shares of our common stock.
On December 21, 2023, we consummated a private placement offering (the “December 2023 Offering”) pursuant to the November 2023 SPA, as amended on November 20, 2023, with Generating Alpha for the purchase of (1) a convertible promissory note, dated December 21, 2023 and amended on March 11, 2024 (the “December 2023 Note”), having an initial principal amount of $4,000,000, (2) a common stock purchase warrant to purchase up to an aggregate of 757,036 shares of common stock at an exercise price of $1.78 per share of common stock (the “Warrant A”), and (3) a common stock purchase warrant to purchase up to an aggregate of 757,036 shares of common stock at an exercise price of $0.001 per share of common stock (the “Warrant B”, together with the Warrant A, the “December 2023 Offering Warrants”). The purchase price of the December 2023 Note was $3,640,000. The aggregate gross proceeds of the December 2023 Offering were approximately $3.6 million, before deducting fees to the placement agent and other expenses payable by us.
In connection with the November 2023 SPA, we entered into a Registration Rights Agreement, dated December 21, 2023 (the “December 2023 Registration Rights Agreement”), with Generating Alpha. The December 2023 Registration Rights Agreement provided that we shall file a registration statement covering the resale of all of the Registrable Securities (as defined in the December 2023 Registration Rights Agreement) with the SEC.
On March 11, 2024, we entered into a second amendment agreement (the “Second Amendment”) to the November 2023 SPA with Generating Alpha, pursuant to which (1) the exercise price of each of the Warrant A and the Warrant C (as described in the November 2023 SPA) has been amended from $1.78 per share of common stock to $0.001 per share, and (2) we shall promptly effect a reverse stock split in the event that the closing price of our common stock falls below $0.25 per share for a period of five consecutive trading days.
In connection with the Second Amendment, we entered into an amendment to the December 2023 Note with Generating Alpha, pursuant to which in no event shall the conversion price be less than $0.25.
| 33 |
Notice of Delisting of Failure to Satisfy a Continued Listing Rule or Standard
On February 29, 2024, we received a deficiency letter (the “Letter”) from the Staff indicating that unless we request a hearing before the Nasdaq Hearings Panel (the “Panel”) by March 7, 2024, our securities will be delisted from the Nasdaq Capital Market based upon our non-compliance with the Minimum Bid Requirement as set forth in Nasdaq Listing Rule 5550(a)(2). The Letter specified that we are not in compliance with the Minimum Bid Requirement for continued listing on the Nasdaq Capital Market (Nasdaq Listing Rule 5550(a)(2)), as the bid price for our listed securities closed at less than $1 per share for the previous 30 consecutive business days. Pursuant to Nasdaq Listing Rule 5810(c)(3)(A)(iv), as we previously implemented two reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to one, we are not eligible for any compliance period specified in Nasdaq Listing Rule 5810(c)(3)(A).
On March 6, 2024, we requested a hearing before the Panel to appeal the determination made by the Staff, and Nasdaq has scheduled the hearing for May 2, 2024. Accordingly, the suspension of our securities has been stayed, pending the Panel’s decision.
On April 15, 2023 we received a letter from the Panel that based on our written appeal, Nasdaq has granted an extension until August 27, 2024 provided that we effect a reverse stock split no later than August 13, 2024 to regain compliance with the Minimum Bid Requirement.
Non-Binding Letter of Intent with Arctic7
On March 5, 2024, we signed a non-binding letter of intent to acquire Arctic7, Inc. (“Arctic7”), an emerging gaming industry service provider, through issuance of shares of our common stock. Arctic7 is currently engaged in the business of providing full game development, co-development, transmedia and virtual production services to its customers and partners.
March 2024 SPA for Equity Line of Credit with Generating Alpha
On March 11, 2024, we entered into a Securities Purchase Agreement (the “March 2024 SPA”) with Generating Alpha pursuant to which we have agreed to issue and sell to Generating Alpha from time to time up to $25 million of common stock.
Pursuant to the March 2024 SPA, we may require Generating Alpha to purchase shares of common stock by delivering put notices to Generating Alpha, subject to certain conditions set forth therein, at a purchase price of 85% of the lowest traded price of our common stock during the 10 trading days immediately preceding the date 10 business days after the date the put shares have been accepted and cleared by Generating Alpha’s brokerage firm. We have agreed to issue to Generating Alpha as a commitment fee a Common Stock Purchase Warrant (the “Warrant”) for 2,314,814 shares of common stock with an exercise price of $0.001 per share.
In connection with the March 2024 SPA, we entered into a Registration Rights Agreement (the “March 2024 Registration Rights Agreement”) with Generating Alpha, pursuant to which we have agreed to use our commercially reasonable efforts to file a registration statement (the “Registration Statement”) with the SEC on a date no later than sixty (60) days following the date thereof and to have the Registration Statement declared effective by the SEC within thirty (30) calendar days, but no more than ninety (90) calendar days, after we have filed the Registration Statement.
On April 24, 2024, we entered into an omnibus amendment agreement with Generating Alpha pursuant to which (1) the March 2024 SPA was amended to clarify that the calculation of the number of put shares issuable by us without any shareholder approval required by an exchange shall include all shares of common stock beneficially owned by Generating Alpha, and (2) the March 2024 Warrant was amended to remove its alternative cashless exercise feature.
| 34 |
April 2024 SPA for Convertible Promissory Note and Warrants with Generating Alpha
On April 1, 2024, we entered into a Securities Purchase Agreement (the “April 2024 SPA”) with Generating Alpha pursuant to which we have agreed to sell a convertible promissory note (the “April 2024 Note”), having an initial principal amount of $650,000, for a price of $520,000. In connection with the purchase and sale of the April 2024 Note, we have agreed to issue to Generating Alpha a common stock purchase warrant to acquire a total of 962,962 shares of our common stock. The transactions closed on April 4, 2024.
In connection with the April 2024 SPA, we entered into a Registration Rights Agreement, dated April 1, 2024 (the “April 2024 Registration Rights Agreement”), with Generating Alpha. The April 2024 Registration Rights Agreement provided that we shall file a registration statement covering the resale of all of the Registrable Securities (as defined in the April 2024 Registration Rights Agreement) with the SEC.
EF Hutton LLC acted as placement agent for the financing.
On April 24, 2024, we entered into a first amendment agreement (the “First Amendment”) to the April 2024 SPA with Generating Alpha pursuant to which we shall promptly effect a reverse stock split in the event that the closing price of our common stock falls below $0.25 per share for a period of five consecutive trading days.
In connection with the First Amendment, we entered into an amendment to the April 2024 Note with Generating Alpha pursuant to which in no event shall the conversion price be less than $0.17.
Results of Operations
Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023
The following table sets forth our results of operations for the specified periods, as well as changes between periods and as a percentage of revenue for those same periods:
| 2024 | 2023 | Year over Year Comparison | ||||||||||||||||||||||
| Amount | % Revenue | Amount | % Revenue | Amount | % Change | |||||||||||||||||||
| Sales | $ | 874,232 | 100.0% | $ | 1,199,643 | 100.0% | $ | (325,411 | ) | -27.1% | ||||||||||||||
| Cost of goods sold | 611,895 | 70.0% | 659,506 | 55.0% | (47,611 | ) | -7.2% | |||||||||||||||||
| Gross profit | 262,337 | 30.0% | 540,137 | 45.0% | (277,800 | ) | -51.4% | |||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Depreciation and amortization | 142,634 | 16.3% | 153,190 | 12.8% | (10,556 | ) | -6.9% | |||||||||||||||||
| Selling, general and administrative | 1,535,844 | 175.7% | 1,875,360 | 156.3% | (339,516 | ) | -18.1% | |||||||||||||||||
| Professional fees | 344,876 | 39.4% | 276,920 | 23.1% | 67,956 | 24.5% | ||||||||||||||||||
| Total operating expenses | 2,023,354 | 231.4% | 2,305,470 | 192.2% | (282,116 | ) | -12.2% | |||||||||||||||||
| Loss from operations | (1,761,017 | ) | -201.4% | (1,765,333 | ) | -147.2% | 4,316 | -0.2% | ||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Interest expense, net | (3,413,520 | ) | -390.5% | (480,778 | ) | -40.1% | (2,932,742 | ) | 610.0% | |||||||||||||||
| Gain (loss) on settlement of derivative liabilities | (7,734 | ) | -0.9% | – | 0.0% | (7,734 | ) | -100.0% | ||||||||||||||||
| Unrealized gain on change in fair value of derivative liabilities | 1,142,314 | 130.7% | – | 0.0% | 1,142,314 | 100.0% | ||||||||||||||||||
| Other gains (losses) | (22,730 | ) | -2.6% | 15,786 | 1.3% | (38,516 | ) | -244.0% | ||||||||||||||||
| Total other income (expense) | (2,301,670 | ) | -263.3% | (464,992 | ) | -38.8% | (1,836,678 | ) | 395.0% | |||||||||||||||
| Loss before income taxes | (4,062,687 | ) | -464.7% | (2,230,325 | ) | -185.9% | (1,832,362 | ) | 82.2% | |||||||||||||||
| Provision for income taxes (benefit) | – | 0.0% | – | 0.0% | – | 0.0% | ||||||||||||||||||
| Net loss | (4,062,687 | ) | -464.7% | (2,230,325 | ) | -185.9% | (1,832,362 | ) | 82.2% | |||||||||||||||
| Loss attributable to noncontrolling interests | (101,351 | ) | -11.6% | (86,030 | ) | -7.2% | (15,321 | ) | 17.8% | |||||||||||||||
| Net loss attributable to Grom Social Enterprises, Inc. stockholders | (3,961,336 | ) | -453.1% | (2,144,295 | ) | -178.7% | (1,817,041 | ) | 84.7% | |||||||||||||||
| Dividends to Series C preferred stockholders | 184,866 | 21.1% | 185,636 | 15.5% | (770 | ) | -0.4% | |||||||||||||||||
| Net loss attributable to Grom Social Enterprises, Inc. common stockholders | $ | (4,146,202 | ) | -474.3% | $ | (2,329,931 | ) | -194.2% | $ | (1,816,271 | ) | 78.0% | ||||||||||||
| 35 |
Revenue
Revenue for the three months ended March 31, 2024 was $874,232, compared to revenue of $1,199,643 during the three months ended March 31, 2023, representing a decrease of $325,411 or 27.1%.
Three Months Ended March 31, | Period over Period Comparison | |||||||||||||||
| 2024 | 2023 | Amount | % Change | |||||||||||||
| Animation | $ | 761,505 | $ | 1,057,669 | $ | (296,164 | ) | -28.0% | ||||||||
| Original content | 45,064 | 50,863 | (5,799 | ) | -11.4% | |||||||||||
| Social and technology | 67,663 | 91,111 | (23,448 | ) | -25.7% | |||||||||||
| Total revenue | $ | 874,232 | $ | 1,199,643 | $ | (325,411 | ) | -27.1% | ||||||||
Animation revenue for the three months ended March 31, 2024 was $761,505, compared to animation revenue of $1,057,669 during the three months ended March 31, 2024, representing a decrease of $296,194 or 28.0%. The decrease in animation revenue is primarily attributable to a smaller number of animation projects currently in production as compared to the prior year period.
Original content revenue for the three months ended March 31, 2024 was $45,064, compared to original content revenue of $50,863 during the three months ended March 31, 2023, representing a decrease of $5,799 or 11.4%. The decrease in original content revenue is attributable to the reduction in sales of our published products in comparison to the prior year period.
Social and technology revenue for the three months ended March 31, 2024 was $67,663, compared to social and technology revenue of $91,111 during the three months ended March 31, 2023, representing a decrease of $23,448 or 25.7%. The decrease is primarily due to a decline in sales and the timing or loss of multi-year contract renewals from our web filtering solutions.
Gross Profit
Our gross profits vary significantly by subsidiary. In recent years, our animation business has realized gross profits between 25% and 35%, while our web filtering business has realized gross profits between 90% and 95%. Our gross profits may vary from period to period due to the nature of the business of each segment, and the timing and volume of customer contracts and projects. Current gross profit percentages may not be indicative of future gross profit performance.
Gross profit for the three months ended March 31, 2024 and 2023 were $262,337, or 30.0%, and $540,137, or 45.0%, respectively. The decrease in gross profit is primarily attributable to lower animation revenue levels.
| 36 |
Operating Expenses
Operating expenses for the three months ended March 31, 2024 were $2,023,354, compared to operating expenses of $2,305,470 during the three months ended March 31, 2023, representing a decrease of $282,116 or 12.2%. The decrease is primarily attributable to a decrease in selling, general and administrative costs during the three months ended March 31, 2024 as described below.
Depreciation and amortization included in operating expenses was $142,634 for the three months ended March 31, 2024, compared to $153,190 for the three months ended March 31, 2023, representing a decrease of $10,556 or 6.9%. These costs are comprised of the depreciation of property and equipment, the amortization of intangible assets, and the amortization of capitalized costs from the development of our Santa.com ecommerce website and prepublication costs from our graphic novels and other published content.
Selling, general and administrative (“SG&A”) are comprised of selling, marketing and promotional expenses, compensation and benefits, insurance, investor relations, rent and related facility costs, research and development, and other general expenses. SG&A expenses were $1,535,844 for the three months ended March 31, 2024, compared to $1,875,360 for the three months ended March 31, 2023, representing a decrease of $339,516 or 18.1%. The increase is largely attributable to reduced employment and benefit costs from a decrease in headcount realized during the three months ended March 31, 2024.
Professional fees are comprised of accounting and compliance services, legal services, and certain other advisory and consultancy fees. Professional fees were $344,876 for the three months ended March 31, 2024, compared to $276,920 for the three months ended March 31, 2023, representing an increase of $67,956 or 24.5%. The increase is largely attributable to an increase in professional services utilized by TDH for various matters during the three months ended March 31, 2024.
Other Income (Expense)
Net other expense for the three months ended March 31, 2024 was $2,301,670, compared to a net other expense of $464,992 for the three months ended March 31, 2023, representing an increase of $1,836,678 or 395.0%. The increase in other expense is primarily attributable to an increase in interest expense from the amortization and write off of debt discounts on convertible promissory notes due to conversions. The increase was offset in part by an unrealized gain on the change in fair value of $1,310,394 related to the convertible feature of the promissory notes.
Interest expense is comprised of interest accrued and paid on our convertible notes and recorded from the amortization of note discounts. Interest expense was $3,413,520 for the three months ended March 31, 2024, compared to $480,778 during the three months ended March 31, 2023, representing an increase of $2,932,742 or 610.0%. As noted above, the increase in interest expense is attributable to an increase in the amortization and write off of debt discounts on convertible promissory notes due to conversions In January 2023, we recognized $350,039 in interest expense for the warrants issued to L1 Capital in exchange for a waiver of certain financing covenants and provisions.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $4,146,202, or $1.47 per share, for the three months ended March 31, 2024, compared to a net loss attributable to common stockholders of $2,329,931, or $8.55 per share, during the three months ended March 31, 2023, representing an increase in net loss attributable to common stockholders of $1,816,271 or 78.0%.
| 37 |
Liquidity and Capital Resources
At March 31, 2024, we had cash and cash equivalents of $452,454.
Net cash used in operating activities for the three months ended March 31, 2024 was $2,245,591, compared to net cash used in operating activities of $2,172,556 during the three months ended March 31, 2023, representing an increase in net cash used of $73,035, primarily due to the change in our operating assets and liabilities and the reduction in our loss from operations.
Net cash used in investing activities for the three months ended March 31, 2024 was $3,741, compared to net cash used in investing activities of $10,505 during the three months ended March 31, 2023 representing a decrease in cash used of $6,764. This change is attributable to a decrease in the amount of our capital expenditures during the three months ended March 31, 2024.
Net cash provided by financing activities for the three months ended March 31, 2024 was $204,827, compared to net cash provided by financing activities of $2,420,579 for the three months ended March 31, 2023, representing a decrease in cash provided of $2,215,752. Our primary sources of cash from financing activities during the three months ended March 31, 2024 were attributable to $250,000 in loan proceeds received from accredited investors, as compared to $2,460,668 in proceeds from the sale of our common stock and exercise of common stock purchase warrants during the prior year period. These proceeds were offset, in part, by the repayment of convertible notes and loans payable of $45,173 during the three months ended March 31, 2024, as compared to repayments of convertible notes and loans for $40,089 during the three months ended March 31, 2023.
Going Concern
On a consolidated basis, we have incurred significant operating losses since our inception. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. As of March 31, 2024, we have an accumulated deficit of $100.9 million. During the three months ended March 31, 2024, we used approximately $2.2 million in cash for operating activities.
We have funded our operations primarily through sales of our common stock in public markets, proceeds from the exercise of warrants to purchase common stock, and sales of convertible notes. Future capital requirements will depend on many factors, including the (i) rate of revenue growth, (ii) expansion of sales and marketing activities, (iii) timing and extent of spending on content development efforts, and (iv) market acceptance of our content, products and services.
Our management intends to raise additional funds through the issuance of equity securities or debt to enable us to meet our obligations for the twelve-month period. However, there can be no assurance that, in the event we require additional financing, such financing will be available at terms acceptable to us, if at all. Failure to generate sufficient cash flows from operations and/or raise additional capital could have a material adverse effect on our ability to achieve our intended business objectives. These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
| 38 |
Critical Accounting Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position.
In the three months ended March 31, 2024, there were no significant changes to our critical accounting estimates from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company and are not required to provide this information.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of March 31, 2024, the end of the period covered by this Quarterly Report.
These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial, as appropriate officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2024.
The Company’s assessment identified certain material weaknesses which are set forth below:
Functional Controls and Segregation of Duties
Because of the Company’s limited resources, there are limited controls over information processing. Additionally, there is inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation, we will need to hire additional staff to provide greater segregation of duties.
Accordingly, as the result of identifying the above material weakness we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements may not be prevented or detected on a timely basis by the Company’s internal controls.
Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management continues to take actions to remedy these weaknesses, including the process of hiring additional staff to create the necessary segregation of duties to improve controls over information processing. Additionally, management has initiated the process of building a risk management framework with plans to embed the principles of this framework across all aspects of the business.
| 39 |
Remediation Plan
Management has implemented remediation steps to address the material weakness and to improve our internal control over financial reporting. Specifically, we (i) expanded and improved our review process for complex transactions and related accounting standards, including the identification of third-party professionals with whom to consult regarding the application of complex accounting matters, (ii) hired qualified personnel to improve the oversight of our accounting operations, and (iii) established new processes and policies. While we believe that these remediation actions will improve the effectiveness of our internal control over financial reporting, the material weakness identified will not be considered remediated until the controls operate for a sufficient period of time, and we cannot assure you that the measures we have taken to date, or any measures we may take in the future will be sufficient to remediate the material weakness we have identified or avoid potential future material weaknesses.
Changes in Internal Control over Financial Reporting
Other than as described above in our remediation plan, there were no changes in our internal controls over financial reporting during our first fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
| 40 |
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company's property is not the subject of any pending legal proceedings.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in “Risk Factors” in our Annual Report on Form 10-K, filed with the SEC on April 16, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Except as set forth below, there were no sales of equity securities sold during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.
On February 28, 2024, the Company issued 95,191 shares of common stock to a software development company for services provided to the Company.
The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe is exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
During the quarter
ended March 31, 2024, no director or officer of the Company
| 41 |
Item 6. Exhibits.
| Exhibit No. | Description | |
| 10.1 | Second Amendment to the November 2023 SPA, dated March 11, 2024, by and between Grom Social Enterprises, Inc. and Generating Alpha Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 15, 2024) | |
| 10.2 | First Amendment to Convertible Promissory Note, dated March 11, 2024, issued in connection with the November 2023 SPA by and between Grom Social Enterprises, Inc. and Generating Alpha Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 15, 2024) | |
| 10.3 | Securities Purchase Agreement, dated March 11, 2024, by and between Grom Social Enterprises, Inc. and Generating Alpha Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 15, 2024) | |
| 10.4 | Common Stock Purchase Warrant, dated March 11, 2024, of Grom Social Enterprises, Inc. issued to Generating Alpha Ltd. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on March 15, 2024) | |
| 10.5 | Registration Rights Agreement, dated March 11, 2024, by and between Grom Social Enterprises, Inc. and Generating Alpha Ltd. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on March 15, 2024) | |
| 10.6 | Securities Purchase Agreement, dated April 1, 2024, by and between Grom Social Enterprises, Inc. and Generating Alpha Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 5, 2024) | |
| 10.7 |
Form of $650,000 Principal Amount, 20% Original Issue Discount Note issued to Generating Alpha Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 5, 2024) | |
| 10.8 | Form of Common Stock Purchase Warrant issued to Generating Alpha Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 5, 2024) | |
| 10.9 | Form of Registration Rights Agreement by and between Grom Social Enterprises, Inc. and Generating Alpha Ltd. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on April 5, 2024) | |
| 10.10 | Omnibus Amendment Agreement, dated April 24, 2024, by and between Grom Social Enterprises, Inc. and Generating Alpha Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 24, 2024) | |
| 10.11 | First Amendment, dated April 24, 2024, to Securities Purchase Agreement, dated April 1, 2024, by and between Grom Social Enterprises, Inc. and Generating Alpha Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 24, 2024) | |
| 10.12 | First Amendment, dated April 24, 2024, to Convertible Promissory Note, dated April 4, 2024, by and between Grom Social Enterprises, Inc. and Generating Alpha Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 24, 2024) | |
| 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 |
| 42 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: May 20, 2024 | By: | /s/ Darren Marks |
| Darren Marks | ||
|
Chief Executive Officer and President (Principal Executive Officer) | ||
| Date: May 20, 2024 | By: | /s/ Jason Williams |
| Jason Williams | ||
| Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) |
| 43 |