The accompanying notes are an integral part of
the condensed consolidated financial statements.
The accompanying notes are an integral part of
the condensed consolidated financial statements.
The accompanying notes are an integral part of
the condensed consolidated financial statements.
The accompanying notes are an integral part of
the condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial
Statements
Grom Social Enterprises, Inc. (the “Company”,
“Grom” “we”, “us” or “our”), a Florida corporation f/k/a Illumination America, Inc. (“Illumination”),
is a media, technology and entertainment company. The Company is focused on (i) delivering content to children under the age of 13 years
in a safe secure platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored
by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of kids & family entertainment properties
and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions
to block unwanted or inappropriate content.
The Company operates its business through the
following subsidiaries:
| |
· |
Grom Social, Inc. (“Grom Social”) was incorporated in the State of Florida on March 5, 2012. Grom Social operates the Company’s social media network designed for children under the age of 13 years. |
| |
· |
TD Holdings Limited (“TD Holdings”) was incorporated in Hong Kong on September 15, 2005. TD Holdings operates through its two subsidiary companies: (i) Top Draw Animation Hong Kong Limited (“TDAHK”), a Hong Kong corporation, and (ii) Top Draw Animation, Inc. (“Top Draw” or “TDA”), a Philippines corporation. The group’s principal service-based activities are the production of animated films and televisions series. |
| |
· |
Grom Educational Services, Inc. (“GES”) was incorporated in the State of Florida on January 17, 2017. GES operates the Company’s web filtering services provided to schools and government agencies. |
| |
· |
Grom Nutritional Services, Inc. (“GNS”) was incorporated in the State of Florida on April 19, 2017. GNS intends to market and distribute nutritional supplements to children. GNS has been nonoperational since its inception. |
| |
· |
Curiosity Ink Media, LLC (“Curiosity”) was incorporated in the State of Delaware on January 9, 2017. Curiosity creates, acquires and develops the commercial potential of kids & family entertainment properties and associated business opportunities. |
The Company owns 100% of each of Grom Social,
TD Holdings, GES and GNS, and 80% of Curiosity. The Company is headquartered in Boca Raton, Florida with offices in Los Angeles, California;
Salt Lake City, Utah; Norcross, Georgia; and Manila, Philippines.
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. To date, the Company has funded its operations primarily through sales of its common stock in public markets
and proceeds from the exercise of warrants to purchase common stock and the sale of convertible notes. Additionally, future capital requirements
will depend on many factors, including the rate of revenue growth, the selling price of the Company’s products and services, the
expansion of sales and marketing activities, the timing and extent of spending on content development efforts and the continuing market
acceptance of the Company’s products and services. 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.
Management of the Company intends to raise additional
funds through the issuance of equity securities or debt. It is probable that management will continue to obtain new sources of financing
that will enable the Company to meet its obligations for the twelve-month period. 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, raise additional capital and reduce discretionary spending could have a material adverse effect on the Company’s
ability to achieve its intended business objectives. As a result, the substantial doubt about the Company’s ability to continue
as a going concern has not been alleviated. The accompanying condensed consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
|
3. |
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES |
Impact of COVID-19
On January 30, 2020, the World Health Organization
announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March
11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 has and continues to significantly
affect the United States and global economies.
The Company has experienced significant disruptions
to its business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings
and travel restrictions, which affect both the Company’s and its service providers. The Company has significant operations in Manila,
Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result
of the Philippines government’s call to contain COVID-19, the Company’s animation studio, located in Manila, Philippines,
which accounts for approximately 88% of the Company’s total revenues on a consolidated basis, was forced to close its offices
for significant periods of time from March 2020 through December 2021.
In response to the outbreak and business disruption,
the Company has instituted employee safety protocols to contain the spread, including domestic and international travel restrictions,
work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices
and production studio. The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In
January 2022, the Company started to recall artist and employees to return to the studio which is currently operating at 50% seat capacity.
While restrictions have eased, the risk continues
as new variants are being discovered. The full extent of potential impacts on the Company’s business, financing activities and the
global economy will depend on future developments, which cannot be predicted due to the uncertain nature of the continued COVID-19 pandemic,
government mandated shut downs, and its adverse effects, including new information which may emerge concerning the severity of COVID-19
and the actions to contain COVID-19 or treat its impact, among others. These effects could have a material adverse impact on the Company’s
business, operations, financial condition and results of operations.
Basis of Presentation
The accompanying condensed consolidated financial
statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and in conjunction with the instructions to Form 10-Q of the Securities and Exchange
Commission (“SEC”). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements
have been condensed or omitted. For the three and nine months ended September 30, 2022, the condensed consolidated financial statements
include the accounts of the Company and its operating subsidiaries Grom Social, TD Holdings, GES, GNS, and Curiosity. The Company recognizes
noncontrolling interest related to its less-than-wholly-owned subsidiary, Curiosity, as equity in the consolidated financial statements
separate from the parent entity’s equity. The net income (loss) attributable to noncontrolling interest is included in net income
(loss) in the condensed consolidated statements of operations and comprehensive loss.
These condensed consolidated financial statements
include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results
of operations. All such adjustments, which includes intercompany balances and transactions are of a normal and recurring nature. Interim
results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto at December 31, 2021, as presented in the Company’s
Annual Report on Form 10-K filed on April 15, 2022 with the SEC.
Certain prior period statement of operations and
statement of cash flows captions and balances have been reclassified to conform with the current year presentation, including the allocation
of $79,810 and $252,343, respectively from depreciation and amortization and $95,899 and $303,214, respectively in certain fixed overhead
costs from selling, general, and administrative expenses previously presented under operating expenses to cost of goods sold during the
three and nine months ended September 30, 2021. In the statement of cash flow, the amortization of rights-of-use assets is presented as
an adjustment to reconcile net loss to cash used in operating activities and changes to operating lease liabilities are presented as a
change in operating assets and liabilities. These two reclassifications were previously presented as a net movement titled operating lease
right-of-use assets under changes in operating assets and liabilities. The changes do not have any financial impact on the Company’s
reported revenue, reported net loss, or cash flows from operations.
Use of Estimates
The Company makes estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially
from those estimates. The results of operations for the three months and nine months ended September 30, 2022, are not necessarily indicative
of the operating results for the full year.
Update to Significant Accounting Policies
The Company has changed its accounting policy
related to Publishing Revenue, refer to Revenues – Publishing Revenue note (Note 3) for the new significant accounting policy.
This change did not have a significant impact on our operations for the three and nine months ended September 30, 2022 and 2021.
Other than noted above, there have been no other
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, 2021 as filed with the SEC on April 15, 2022, that are of significance, or
potential significance, to the Company.
Recent Accounting Pronouncements –
Issued, not yet Adopted
There were no new accounting pronouncements issued
in the three and nine months ended September 30, 2022, which could impact the Company.
Recently Issued Accounting Pronouncements
Adopted
In May 2021, the FASB issued ASU 2021-04, Earnings
Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718),
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for
Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies
and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options
due to a lack of explicit guidance in the FASB Codification. ASU 2021-04 provides guidance on modifications or exchanges of freestanding
equity-classified written call options that are not within the scope of another Topic. Entities should treat a modification of the terms
or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after modification
or exchange, as an exchange of the original instrument for a new instrument. ASU 2021-04 provides further guidance on measuring the effect
of such modifications or exchanges, and also provides guidance on the recognition of such modifications or exchanges on the basis of the
substance of the transaction, in the same manner as if cash had been paid as consideration. ASU 2021-04 is effective for all entities
for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company adopted this ASU on January 1, 2022,
which did not result in a material impact to the condensed consolidated financial statements and disclosures.
The Company’s main types of revenue contracts
consist of the following categories, which are disaggregated from the condensed consolidated statements of operations.
Animation Revenue
Animation revenue is primarily generated from
contracts with customers for preproduction and production services related to the development of animated movies and television series.
Preproduction activities include producing storyboards, location design, model and props design, background color and color styling. Production
focuses on library creation, digital asset management, background layout scene assembly, posing, animation and after effects. The Company
provides services under fixed-price contracts. Under these fixed-price contracts, the Company agrees to perform a specified scope of work
for a pre-determined price. To the extent actual costs vary from estimated costs, the Company’s profit may increase, decrease, or
result in a loss.
Web Filtering Revenue
Web filtering revenue is subscription based and
recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases computer hardware and a software and support
service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale. The Company
immediately recognizes revenue attributable to the computer hardware as it is non-refundable and control passes to the customer. The advanced
billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue on a straight-line
basis over the subscription period.
Produced and Licensed Content Revenue
Produced and licensed content revenue is generated
from the licensing of internally-produced films and episodic television programs.
Each individual film or television series
episode delivered represents a separate performance obligation, and revenues are recognized when the film or episode is made
available to the licensee for exhibition. For license agreements containing multiple deliverables, revenues are allocated based on
the relative standalone selling price of each film or episode of a television series, which is based on licenses for comparable
films or series within the marketplace. Agreements to license programming are often long term, with collection terms ranging from
one to five years.
The advanced billing component for licensed content
is initially recorded as deferred revenue and subsequently recognized as revenue upon completion of the performance obligation in accordance
with the terms of licensing agreement.
Publishing Revenue
The Company has engaged the services of a third-party
entity to manage the printing, publishing and distribution of the Company’s publishing content. In accordance with the terms agreed
with the third party, the Company’s revenue is recognized as 50% of revenue from sales per title after the third-party vendor earns
back the costs to develop, author, publish, market, promote and distribute each title, inclusive of any royalties owed to rights holders,
following a six months period in market to allow for returns.
Publishing revenues are eligible for recognition
upon the completion of a six-month sales period to provide for any potential returns and notification from the third-party entity that
it has earned back all of its related publishing costs.
Other Revenue
Other revenue corresponds to subscription and advertising revenue from
the Grom Social mobile application.
All revenue recognized in the condensed consolidated
statements of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregated revenue
listed above within the Sales caption in the condensed consolidated statements of operations:
| Schedule of disaggregated revenue | |
| | |
| | |
| | |
| |
| | |
Three Months Ended September 30, 2022 | | |
Three Months Ended September 30, 2021 | | |
Nine Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2021 | |
| | |
| | |
| | |
| | |
| |
| Animation | |
$ | 1,419,153 | | |
$ | 1,383,196 | | |
$ | 3,493,732 | | |
$ | 4,373,409 | |
| Web Filtering | |
| 63,234 | | |
| 130,928 | | |
| 358,950 | | |
| 403,676 | |
| Produced and Licensed Content | |
| – | | |
| – | | |
| – | | |
| – | |
| Publishing | |
| 2,321 | | |
| – | | |
| 2,321 | | |
| – | |
| Other | |
| 250 | | |
| 568 | | |
| 662 | | |
| 1,442 | |
| Total Sales | |
$ | 1,484,958 | | |
$ | 1,514,692 | | |
$ | 3,855,665 | | |
$ | 4,778,527 | |
The following table sets forth the components
of the Company’s accounts receivable and advanced payments and deferred revenues at September 30, 2022, and December 31, 2021:
| Schedule of accounts receivable | |
| | |
| |
| | |
September 30, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Billed accounts receivable | |
$ | 507,784 | | |
$ | 822,536 | |
| Unbilled accounts receivable | |
| 563,570 | | |
| 187,751 | |
| Allowance for doubtful accounts | |
| (36,273 | ) | |
| (41,708 | ) |
| Total accounts receivable, net | |
$ | 1,035,081 | | |
$ | 968,579 | |
| Total advanced payments and deferred revenues | |
$ | 615,316 | | |
$ | 404,428 | |
During the three and nine months ended September
30, 2022, the Company had four customers that accounted for 81.8% and 71.4%, respectively, of total revenues. During the three and nine
months ended September 30, 2021, the Company had four customers that account for 81.7% and 76.5%, respectively, of total revenues.
As of September 30, 2022 and December 31,
2021, the Company had one and two customers, respectively that accounted for 18.9%
and 61.3%,
respectively, of accounts receivable.
Animation revenue contracts vary with movie contracts
typically allowing for progress billings over the contract term while other episodic development activities are typically billable upon
delivery of the performance obligation for an episode. These episodic activities typically create unbilled contract assets between episode
delivery dates while movies can create contract assets or liabilities based on the progress of activities versus the arranged billing
schedule. Revenues from web filtering contracts are all billed in advance and therefore represent contract liabilities until fully recognized
on a ratable basis over the contract life.
Inventory consists of costs incurred to produce
animated content for third party customers. Costs incurred to produce the animated content to customers, which include direct production
costs, production overhead and supplies are recognized as work-in-progress inventory. As animated content is completed in accordance with
the terms stated by the customer, inventory is classified as finished products and subsequently recognized as cost of services as animated
content is accepted by and available to the customer. Carrying amounts of animated content are recorded at the lower of cost or net realizable
value. Cost is determined using a weighted average cost method for direct production costs, productions overhead and supplies used for
completing animation projects.
As of September 30, 2022 and December 31, 2021,
the Company’s inventory totaled $103,594 and $91,361, respectively, and was comprised of work-in-progress of $90,394 and $77,501,
respectively, and finished goods of $13,200 and $13,860, respectively.
| 5. |
PROPERTY AND EQUIPMENT |
The following table sets forth the components
of the Company’s property and equipment at September 30, 2022 and December 31, 2021:
| Schedule of property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 30, 2022 |
|
|
December 31, 2021 |
|
| |
|
Cost |
|
|
Accumulated Depreciation |
|
|
Net Book Value |
|
|
Cost |
|
|
Accumulated Depreciation |
|
|
Net Book Value |
|
| Capital assets subject to depreciation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Computers, software and office equipment |
|
$ |
2,363,546 |
|
|
$ |
(2,219,765 |
) |
|
$ |
143,781 |
|
|
$ |
2,698,172 |
|
|
$ |
(2,399,978 |
) |
|
$ |
298,194 |
|
| Machinery and equipment |
|
|
164,509 |
|
|
|
(153,903 |
) |
|
|
10,606 |
|
|
|
183,618 |
|
|
|
(162,647 |
) |
|
|
20,971 |
|
| Vehicles |
|
|
35,390 |
|
|
|
(30,533 |
) |
|
|
4,857 |
|
|
|
101,674 |
|
|
|
(76,497 |
) |
|
|
25,177 |
|
| Furniture and fixtures |
|
|
355,786 |
|
|
|
(334,478 |
) |
|
|
21,308 |
|
|
|
401,862 |
|
|
|
(365,075 |
) |
|
|
36,787 |
|
| Leasehold improvements |
|
|
1,010,155 |
|
|
|
(900,049 |
) |
|
|
110,106 |
|
|
|
1,086,518 |
|
|
|
(955,547 |
) |
|
|
130,971 |
|
| Total fixed assets |
|
|
3,929,386 |
|
|
|
(3,638,728 |
) |
|
|
290,658 |
|
|
|
4,471,844 |
|
|
|
(3,959,744 |
) |
|
|
512,100 |
|
| Capital assets not subject to depreciation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Construction in progress |
|
|
21,973 |
|
|
|
- |
|
|
|
21,973 |
|
|
|
65,888 |
|
|
|
– |
|
|
|
65,888 |
|
| Total fixed assets |
|
$ |
3,951,359 |
|
|
$ |
(3,638,728 |
) |
|
$ |
312,631 |
|
|
$ |
4,537,732 |
|
|
$ |
(3,959,744 |
) |
|
$ |
577,988 |
|
For the three months ended September 30, 2022
and 2021, the Company recorded depreciation expense of $75,337 and $97,139, respectively. For the nine months ended September 30, 2022
and 2021, the Company recorded depreciation expense of $248,384 and $330,679, respectively.
The following table sets forth the components
of the Company’s other assets at September 30, 2022 and December 31, 2021:
| Schedule Of Other Assets |
|
|
|
|
|
|
| |
|
September 30,
2022 |
|
|
December 31,
2021 |
|
| |
|
|
|
|
|
|
| Capitalized website development costs |
|
|
916,118 |
|
|
|
411,800 |
|
| Prepublication costs |
|
|
160,083 |
|
|
|
152,286 |
|
| Produced and licensed content costs |
|
|
296,441 |
|
|
|
76,701 |
|
| Deposits |
|
|
65,475 |
|
|
|
76,052 |
|
| Other noncurrent assets |
|
|
- |
|
|
|
4,321 |
|
| Total other assets |
|
|
1,438,117 |
|
|
|
721,160 |
|
For the three and nine months ended September
30, 2022, the Company recorded amortization expense of $704
and $1,203, respectively. Amortization
expense related to the publication of an individual property during the three and nine months ended September 30, 2022. No amortization
expense has been recognized for either capitalized website development costs or produced and licensed content costs as these properties
were still in development at September 30, 2022.
The Company has entered into operating leases
primarily for office space. These leases have terms which range from two years to six years, and often include one or more options to
renew or in the case of equipment rental, to purchase the equipment.
In January 2022, the Company signed a new lease
agreement to extend the term until March 2024 of the Company’s office space in Boca Raton, Florida. The total legally binding minimum
lease payments for this agreement is approximately $94,898.
Based on the present value of the lease payments
for the remaining lease term of the Company's existing leases, the Company recognized $384,117 in noncurrent right of use (“ROU”)
assets, $201,592 in current lease liabilities and $160,828 in noncurrent lease liabilities from operating leases as of September 30, 2022.
Because the rate implicit in each lease is not
readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating
ROU assets and related lease liabilities are as follows:
| Schedule of operating right-of-use assets |
|
|
|
| |
|
Nine Months Ended
September 30, 2022 |
|
| Cash paid for operating lease liabilities |
|
$ |
344,721 |
|
| Weighted-average remaining lease term |
|
|
1.0 |
|
| Weighted-average discount rate |
|
|
10% |
|
For the three months ended September 30, 2022
and 2021, the Company recorded rent expenses related to lease obligations of $109,829 and $90,993, respectively. For the nine months ended
September 30, 2022 and 2021, the Company recorded rent expenses related to lease obligations of $330,462 and $272,980, respectively. Rent
expenses related to lease obligations are allocated between cost of goods sold and selling, general and administrative expenses in the
Company’s condensed consolidated statement of operations.
The following table presents the future minimum
payment obligations and aggregate present value of lease liabilities for operating leases as of September 30, 2022:
| Schedule of amortization of lease liabilities |
|
|
|
| Remainder of 2022 |
|
$ |
101,990 |
|
| 2023 |
|
|
114,411 |
|
| 2024 |
|
|
50,235 |
|
| 2025 |
|
|
40,291 |
|
| 2026 |
|
|
42,306 |
|
| Thereafter |
|
|
44,421 |
|
| Total future lease payments |
|
|
393,654 |
|
| Less: Imputed interest |
|
|
(31,234 |
) |
| Present value of lease liabilities |
|
$ |
362,420 |
|
Acquisition of Curiosity Ink Media, LLC
On July 29, 2021, the Company entered into a
membership interest purchase agreement (the “Purchase Agreement”) with Curiosity Ink Media LLC, a Delaware limited
liability company (“Curiosity”) and the holders of all of Curiosity’s outstanding membership interests (the
“Sellers”), for the purchase of 80%
of Curiosity’s outstanding membership interests (the “Purchased Interests”) from the Sellers (the
“Acquisition”).
On August 19, 2021, pursuant to the terms of the
Purchase Agreement, the Company consummated the Acquisition and acquired the Purchased Interests in consideration for the issuance to
the Sellers of an aggregate of 1,771,883 shares of the Company’s common stock to the Sellers, pro rata to their membership interests
immediately prior to the closing of the Acquisition. The shares were valued at $2.82 per share which represents to the 20-day volume-weighted
average price of the Company’s common stock on August 19, 2021.
Pursuant to the Purchase Agreement, the Company
also paid $400,000
and issued an 8%
eighteen-month convertible promissory note in the principal amount $278,000
(the “Note”) to pay-down and refinance certain outstanding loans and advances previously made to Curiosity by Russell
Hicks and Brett Watts.
The Note is convertible into shares of common
stock of the Company at a conversion price of $3.28 per share but may not be converted if, after giving effect to such conversion, the
noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The Note may
be prepaid at any time, in whole or in part. The Note is subordinate to the Company’s senior indebtedness.
The Sellers also have the ability to earn up to
$17,500,000 (payable 50% in cash and 50% in stock) upon the achievement of certain performance milestones as of December 31, 2025.
In addition to the tangible assets, goodwill
totaling $14,271,969
was recorded in connection with the acquisition. Goodwill was calculated as the excess of the consideration transferred over the net
assets recognized and represents potential future economic benefits arising from other assets acquired that could not be
individually identified and separately recognized. Goodwill is not expected to be deductible for tax purposes.
| Schedule Of Components Of Income Tax Expense Benefit |
|
|
|
| Consideration Paid: |
|
|
|
| Cash consideration |
|
$ |
400,000 |
|
| Common stock issued |
|
|
5,421,962 |
|
| Convertible notes |
|
|
278,000 |
|
| Contingent purchase consideration |
|
|
5,586,493 |
|
| Total consideration |
|
$ |
11,686,455 |
|
The amounts in the table below represent the allocation
of the purchase price. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the
acquisition date:
| Schedule of Recognized Identified Assets Acquired and Liabilities Assumed |
|
|
|
| Cash and cash equivalents |
|
$ |
26,408 |
|
| Inventory |
|
|
65,734 |
|
| Produced and licensed content cost |
|
|
187,920 |
|
| Goodwill and intangible assets |
|
|
14,271,969 |
|
| Accounts payable |
|
|
(113,462 |
) |
| Noncontrolling interest |
|
|
(2,752,114 |
) |
| Total identifiable assets acquired, and liabilities assumed |
|
$ |
11,686,455 |
|
During the quarter ended June 30, 2022, the Company
finalized the purchase price allocation, during the permissible measurement period, and obtained new fair value information for certain
identifiable intangible assets related to its acquisition of Curiosity. The revised purchase price allocation decreased goodwill by $468,426
and increased intangible assets by $468,426.
Additionally, the Company recorded amortization expense of $15,944
related to intangible assets subject to amortization during the quarter ended June 30, 2022 (of which $7,247 corresponded to the
year ended December 31, 2021). See Note 9 – Goodwill and Intangible Assets for more detail. These adjustments did not have a significant
impact on the Company’s operations for the three and nine months ended September 30, 2022. The following table summarizes the individually
identifiable intangible assets recognized:
| Schedule of identifiable intangible assets |
|
|
|
| Licensing agreements |
|
$ |
341,728 |
|
| Books and stories content |
|
|
126,698 |
|
| Total identifiable intangible assets |
|
$ |
468,426 |
|
The Company’s results of operations include
results of operations for Curiosity for the three and nine months ended September 30, 2022. No pro forma information is presented for
the Company’s results of operations as if the acquisition of Curiosity had occurred on January 1, 2021 as results of its operations
are not considered material to the condensed consolidated financial statements as of and for the three and nine months ended September
30, 2021.
| 9. |
GOODWILL AND INTANGIBLE ASSETS |
Goodwill represents the future economic benefit
arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the
Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers. At September
30, 2022 and December 31, 2021, the carrying amount of the Company’s goodwill was $21,907,599 and $22,376,025, respectively.
The following table sets forth the components
of the Company’s intangible assets at September 30, 2022 and December 31, 2021:
| Schedule of intangible assets | |
| | |
| | |
| |
|
| | |
| | |
| | |
| | |
| |
| | |
Current Year Period | | |
Prior Year End | |
| | |
Amortization Period (Years) | | |
Gross Carrying Amount | |
Accumulated Amortization | |
|
Net Book Value | | |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Accumulated Impairment | | |
Net Book Value | |
| Intangible assets subject to amortization: | |
| | | |
| | | |
| | |
|
| | | |
| | | |
| | | |
| | | |
| | |
| Customer relationships | |
| 10.00 | | |
$ | 1,526,282 | | |
$ | (953,926 | ) |
|
$ | 572,356 | | |
$ | 1,600,286 | | |
$ | (876,457 | ) | |
$ | (37,002 | ) | |
$ | 686,827 | |
| Mobile software applications | |
| 2.00 | | |
| – | | |
| – | |
|
| – | | |
| 282,500 | | |
| (282,500 | ) | |
| – | | |
| – | |
| NetSpective web-filtering software | |
| 2.00 | | |
| – | | |
| – | |
|
| – | | |
| 1,134,435 | | |
| (1,134,435 | ) | |
| – | | |
| – | |
| Noncompete agreements | |
| 1.50 | | |
| – | | |
| – | |
|
| – | | |
| 846,638 | | |
| (846,638 | ) | |
| – | | |
| – | |
| Licensing agreement | |
| 19.60 | | |
| 341,728 | | |
| (20,292 | ) |
|
| 321,436 | | |
| – | | |
| – | | |
| – | | |
| – | |
| Subtotal | |
| | | |
| 1,868,010 | | |
| (974,218 | ) |
|
| 893,792 | | |
| 3,863,859 | | |
| (3,140,030 | ) | |
| (37,002 | ) | |
| 686,827 | |
| Intangible assets not subject to amortization: | |
| | | |
| | | |
| | |
|
| | | |
| | | |
| | | |
| | | |
| | |
| Trade names | |
| – | | |
| 4,386,247 | | |
| – | |
|
| 4,386,247 | | |
| 4,455,595 | | |
| – | | |
| (69,348 | ) | |
| 4,386,247 | |
| Books and stories content | |
| – | | |
| 126,698 | | |
| – | |
|
| 126,698 | | |
| – | | |
| – | | |
| – | | |
| – | |
| Total intangible assets | |
| | | |
$ | 6,380,955 | | |
$ | (974,218 | ) |
|
$ | 5,406,737 | | |
$ | 8,319,454 | | |
$ | (3,140,030 | ) | |
$ | (106,350 | ) | |
$ | 5,073,074 | |
For the three months ended September 30, 2022
and 2021, the Company recorded amortization expense of $42,505 and $99,729, respectively. For the nine months ended September 30, 2022
and 2021, the Company recorded amortization expense of $134,764 and $290,187, respectively.
The following table provides information
regarding estimated remaining amortization expense for intangible assets subject to amortization for the remainder of 2022 and each
of the following years ending December 31:
| Schedule of amortization | |
| |
| Remainder of 2022 | |
$ | 42,505 | |
| 2023 | |
| 170,022 | |
| 2024 | |
| 170,022 | |
| 2025 | |
| 170,022 | |
| 2026 | |
| 93,708 | |
| Thereafter | |
| 247,513 | |
| Total remaining intangible assets subject to amortization | |
$ | 893,792 | |
The following table sets forth the components
of the Company’s accrued liabilities at September 30, 2022 and December 31, 2021:
| Accrued Liabilities | |
| | |
| |
| | |
September 30, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Executive and employee compensation | |
$ | 187,211 | | |
$ | 238,669 | |
| Interest on convertible notes and promissory notes | |
| 78,425 | | |
| 31,997 | |
| Other accrued expenses and liabilities | |
| 138,337 | | |
| 129,663 | |
| Total accrued liabilities | |
$ | 403,973 | | |
$ | 400,329 | |
| 11. |
RELATED PARTY TRANSACTIONS AND PAYABLES |
Darren Marks’s Family
The Company has engaged the family of Darren Marks,
its Chief Executive Officer, to assist in the development of the Grom Social mobile application. These individuals create
and produce original short form content focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special
events. Sarah Marks, the wife of Mr. Marks, and Zach Marks, Luke Marks, Jack Marks, Dawson Marks, Caroline Marks and Victoria Marks, each
Mr. Marks’s children, are, or have been, employed by or independently contracted with the Company.
For the three months ended September 30, 2022
and 2021, the Marks family was paid a total of $7,500, respectively. For the nine months ended September 30, 2022 and 2021, the Marks
family was paid a total of $22,500, respectively.
Effective January 1, 2021, the Company entered
into a marketing agreement with Caroline Marks, daughter of Mr. Marks, for a period of 60 months in exchange for 52,084 shares of the
Company’s common stock. On March 2, 2022, the Board of Directors of the Company approved the issuance the shares of common stock
at a fair market value of $53,647. Caroline serves as an ambassador for the Grom Social mobile app with her own profile and Grom TV channel.
Compensation for services provided by the Marks
family is expected to continue for the foreseeable future.
Liabilities Due to Executive Officers and Directors
On July 11, 2018, our director Dr. Thomas Rutherford
loaned the Company $50,000. The loan bears interest at a rate of 10% per annum and was due on August 11, 2018. No notice of default or
demand for payment has been received by the Company.
As of September 30, 2022 and December 31, 2021,
the aggregate related party payables balance was $50,000, respectively.
The following tables set forth the components
of the Company’s convertible notes as of September 30, 2022 and December 31, 2021:
| Schedule of convertible debt | |
| | |
| |
| | |
September 30, 2022 | | |
December 31,
2021 | |
| 8% Unsecured Convertible Note (Curiosity) | |
$ | 278,000 | | |
$ | 278,000 | |
| 10% Senior Secured Convertible Note with Original Issuance Discount (L1 Capital Global Master Fund or “L1”) | |
| – | | |
| 4,125,000 | |
| 10% Senior Secured Convertible Note with Original Issuance Discount (L1 – Second Tranche) | |
| 100,000 | | |
| – | |
| 12% Senior Convertible Notes with Original Issuance Discounts (OID Notes) | |
| 75,000 | | |
| 75,000 | |
| 12% Senior Secured Convertible Notes (TDH Secured Notes) | |
| 237,604 | | |
| 330,039 | |
| 12% Senior Secured Convertible Notes (Additional Secured Notes) | |
| 45,132 | | |
| 63,099 | |
| Loan discounts | |
| (38,055 | ) | |
| (1,550,540 | ) |
| Total convertible notes, net | |
| 697,681 | | |
| 3,320,598 | |
| Less: current portion of convertible notes, net | |
| (589,949 | ) | |
| (2,604,346 | ) |
| Convertible notes, net | |
$ | 107,732 | | |
$ | 716,252 | |
8% Unsecured Convertible Notes – Curiosity
On July 29, 2021, the Company entered into a membership
interest purchase agreement with Curiosity and the holders of all of Curiosity’s outstanding membership interests, for the purchase
of 80% of Curiosity’s outstanding membership interests from the sellers. Pursuant to the purchase agreement, the Company issued
8% eighteen-month convertible promissory notes in the aggregate principal amount $278,000 to pay-down and refinance certain outstanding
loans and advances previously made by certain of its principals. The notes are convertible into shares of common stock of the Company
at a conversion price of $3.28 per share but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates
would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The notes may be prepaid at any time, in whole
or in part. The notes are subordinate to the Company’s senior indebtedness.
As of September 30, 2022, the principal balance
of the Curiosity note was $278,000.
10% Senior Secured Convertible Note with
Original Issuance Discount (L1)
On September 14, 2021, the Company entered into
a securities purchase agreement (the “Purchase Agreement”) with L1 Capital Global Master Fund (“L1”) pursuant
to which it issued (i) a 10% original issue discount senior secured convertible note in the principal amount of $4,400,000 to L1 (the
“L1 Note”) and (ii) a 5 five-year warrant to purchase 813,278 shares of the Company’s common stock at an exercise
price of $4.20 per share (“Warrant Shares”) in exchange for $3,960,000 (the “First Tranche Financing”). The Purchase
Agreement also provided, subject to shareholder approval, for the issuance, subject to certain conditions, of an additional $1,500,000
of notes and warrants to purchase 277,777 shares of common stock (the “Second Tranche Financing”) on the same terms.
The L1 Note is convertible by L1 into common stock
of the Company at a price of $4.20 per share, or approximately 1,047,619 shares. It is repayable in equal monthly installments of
$275,000 with certain deferments or an acceleration of up to three months' payments. The Company may repay the L1 Note in cash or shares
of common stock at a price equal to the lesser of the then conversion price or 95% of the lowest daily VWAP during the ten consecutive
trading days immediately preceding the monthly payment date, but in no event less than $1.92. In the event that VWAP drops below $1.92,
the Company will have the right to pay at such VWAP with any shortfall paid in cash. The L1 Note is senior to all other Company indebtedness
and the Company’s obligations under the note are secured by all of the assets of the Company’s subsidiaries.
The Company estimated the fair value of the warrant
at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $2.70,
(ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.79% and (iv) an expected volatility of
the price of the underlying common stock of 299.8%. As a result, the Company allocated a fair value of $1,200,434 to the stock
warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.
On October 20, 2021, the Company and L1 entered
into an amended and restated purchase agreement which increased the amount of the Second Tranche Financing from $1,500,000 to $6,000,000
and provides (i) for an amended and restated 10% original issue discount senior secured convertible note to be issued in exchange for
the L1 Note pursuant to the Purchase Agreement and (ii) for the issuance of a five-year warrant to purchase 1,041,194 shares of the Company’s
common stock at an exercise price of $4.20 per share.
In the event the principal amount of the L1 Note
issued in the First Tranche Financing, when aggregated with the L1 Note to be issued in the Second Tranche Financing, exceeds 25% of the
market capitalization of the Company’s common stock as reported by Bloomberg L.P, then the principal amount to be issued in the
Second Tranche Financing will be limited to 25%, in the aggregate of both L1 Notes, unless waived in the sole discretion of the Purchaser.
During the three months ended March 31, 2022,
the Company issued an aggregate 5,757,365 shares of common stock to L1 upon the conversion of $4,125,000 of outstanding principal. As
of September 30, 2022, the principal balance was $0 and all associated loan discounts were fully amortized.
10% Senior Secured Convertible Note with
Original Issuance Discount (L1– Second Tranche)
On January 20, 2022 (the “Second Tranche
Closing”), the Company and L1 Capital closed on the Second Tranche of the offering, resulting in the issuance of (i) a $1,750,000
10% Original Issue Discount Senior Secured Convertible Note, due July 20, 2023, (the “Second Tranche Note”); and (ii) a five
year warrant to purchase 303,682 shares of Common Stock of the Company at an exercise price of $4.20 per share (the “Second Tranche
Warrants”), in exchange for consideration of $1,575,000 (i.e. the face amount less the 10% Original Issue Discount of $175,000).
In connection with the Second Tranche Closing,
the Company paid to EF Hutton a fee of $126,000.
The Second Tranche Note is convertible into common
stock of the Company at a rate of $4.20 per share (the “Conversion Price”) into 416,667 shares of common stock (the “Second
Tranche Conversion Shares”) and, is repayable in equal monthly installments of $111,563 commencing on the date that the SEC declares
a registration statement with respect to the resale of such shares effective, with all remaining amounts due on July 20, 2023. The Second
Tranche Note is repayable by payment of cash, or, at the discretion of the Company and if the below listed “Equity Conditions”
are met, by issuance of shares of the common stock at a price of 95% of the lowest daily VWAP during the ten-trading day period prior
to the respective monthly redemption dates (with a floor of $1.92) multiplied by 102% of the amount due on such date. In the event that
the ten-trading day VWAP drops below $1.92 the Company will have the right to pay in stock at such ten-trading day VWAP with any shortfall
paid in cash. The Conversion Price may be adjusted in the event of dilutive issuances but in no event to less than $0.54 (the “Monthly
Conversion Price”).
The Company’s right to make monthly payments
in stock in lieu of cash for the Second Tranche Note is conditioned on certain conditions (the “Equity Conditions”). The Equity
Conditions required to be met each month in order to redeem the Second Tranche Note with stock in lieu of a monthly cash payment, among
other conditions set forth therein, include without limitation, that a registration statement be in effect with respect to the resale
of the shares issuable upon conversion or redemption of the Second Tranche Note (or, that an exemption under Rule 144 is available), that
no default be in effect, that the average daily trading volume of the Company’s common stock would have to be at least $550,000
during the five trading days prior to the respective monthly redemption and that the outstanding principal amounts of the First Tranche
Note and Second Tranche Note combined, shall not exceed 30% of the market capitalization of the Company’s common stock as reported
on Bloomberg L.P., which percentage is subject to increase by L1 Capital at its sole discretion.
Other provisions of the Second Tranche Note, which
is similar in terms to the First Tranche Note, include that the Second Tranche Note Conversion Price is subject to full anti-dilution
price protections in the event of financings that are below the Conversion Price with a floor of $0.54.
In the event of an Event of Default as defined
in the notes, if the stock price is below the Conversion Price at the time of default and only for so long as a default is continuing,
the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the
default is cured the default conversion rate elevates back to the normal Conversion Price
As part of the Second Tranche Closing, the Company
issued Second Tranche Warrants exercisable for five years from the date of issuance, at $4.20 per share which carry the same anti-dilution
protection as the Second Tranche Notes, subject to the same adjustment floor. The Second Tranche Warrants are exercisable via cashless
exercise only for so long as no registration statement covering resale of the shares is in effect.
The Second Tranche Note continues to be subject
to (i) the repayment and performance guarantees by the subsidiaries of the Company pursuant to a subsidiary guaranty and, (ii) the Security
Agreement pursuant to which the L1 Capital was granted a security interest in all of the assets of the Company and certain of its subsidiaries,
each as entered into in connection with the First Tranche closing on September 14, 2021.
During the nine months ended September 30, 2022,
the Company issued an aggregate 3,055,556 shares of common stock and repaid $1,074,069 in cash to L1 upon the conversion of $1,650,000
of outstanding principal. As of September 30, 2022, the principal balance of these notes was $100,000 and remaining balance on the associated
loan discounts was $7,685.
10% Secured Convertible Notes with Original
Issuance Discounts (“OID Notes”)
On August 6, 2020, the Company entered into debt
exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of 647,954 shares of the Company’s
Series B preferred stock (“Series B Stock”) were issued to noteholders for an aggregate of $411,223 of outstanding principal
and accrued and unpaid interest.
On November 30, 2020, the Company entered into
a debt exchange agreement with the remaining holder of these 10% convertible notes pursuant to which an aggregate of 158,000 shares of
Series B Stock were issued to the noteholder for an aggregate of $111,250 of outstanding principal and accrued and unpaid interest. The
Company recognized an extinguishment loss of $46,750 as a result of the exchange.
On July 19, 2021, the Company repaid $6,329 of
outstanding principal and accrued and unpaid interest to a 10% secured convertible noteholder.
As of September 30, 2022, the principal balance
of these notes was $75,000 and all associated loan discounts were fully amortized. No notices of default or demands for payment have been
received by the Company.
12% Senior Secured Convertible Notes (“TDH
Secured Notes”)
On March 16, 2020, the Company sold (the “TDH
Secured Notes Offering”) an aggregate $3,000,000 of its 12% senior secured convertible notes (the “TDH Secured Notes”),
to eleven accredited investors (the “TDH Secured Note Lenders”), pursuant to a subscription agreement with the TDH Secured
Note Lenders. Interest on the TDH Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and
interest on the TDH Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024.
Pursuant to the TDH Secured Notes, TD Holdings will pay amounts due under the TDH Secured Notes. Prepayment of amounts due under TDH Secured
Notes is subject to a prepayment penalty in an amount equal to 4% of the amount prepaid.
The TDH Secured Notes are convertible at the option
of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion
provided that the conversion price shall not be less than $3.20 per share.
The Company’s obligations under the TDH
Secured Notes, are secured by Grom Holdings’ shares of stock of TDH, and of its wholly owned subsidiary, TDAHK. The TDH Secured
Notes rank equally and ratably on a pari passu basis with (i) the other TDH Secured Notes and (ii) the Original TDH Notes issued by the
Company pursuant to TDH Share Sale Agreement.
If the Company sells the animation studio located
in Manila, Philippines, which is currently owned by TDH through TDAHK (the “Animation Studio”), for more than $12,000,000,
and so long as any amount of principal is outstanding under the TDH Secured Notes, the Company will pay the TDH Secured Notes holders
from the proceeds of the sale (i) all amounts of principal outstanding under the TDH Secured Notes, (ii) such amount of interest which
would be due and payable assuming the TDH Secured Notes were held to maturity (minus any amounts of interest previously paid hereunder),
and (iii) an additional 10% of the amount of principal outstanding under the TDH Secured Notes within five days of the closing of such
sale.
In connection with the issuance of the TDH Secured
Notes, the Company issued to each TDH Secured Note holder shares of common stock equal to 20% of the principal amount of such holder’s
TDH Secured Note, divided by $3.20. Accordingly, an aggregate of 187,500 shares of common stock were issued to the TDH Secured Note holders
on March 16, 2020. These shares were valued at $420,000, or $2.24 per share, which represents fair market value. The Company recorded
the value of these shares as a loan discount to be amortized as interest expense over the term of the notes.
On August 6, 2020, the Company entered into debt
exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 1,739,580 shares of the Company’s
Series B Stock were issued to noteholders for an aggregate of $1,101,000 of outstanding principal and accrued and unpaid interest. The
Company recognized an extinguishment loss of $598,042 as a result of the exchange.
On November 30, 2020, the Company entered into
a debt exchange agreement with another holder of these 12% TDH Secured Notes pursuant to which an aggregate of 158,000 shares of Series
B Stock were issued to the noteholder for an aggregate of $99,633 of outstanding principal and accrued and unpaid interest. The Company
recognized an extinguishment loss of $58,367 as a result of the exchange.
On February 17, 2021, the Company entered into
debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 2,106,825 shares of the
Company’s Series B Stock were issued to noteholders for an aggregate of $1,256,722 of outstanding principal and accrued and unpaid
interest. The Company recognized an extinguishment loss of $850,103 as a result of the exchange.
As of September 30, 2022, the principal balance
of these notes was $237,604 and the remaining balance on the associated loan discounts was $25,521.
12% Senior Secured Convertible Notes (Additional
Secured Notes)
On March 16, 2020, the Company issued to seven
accredited investors (the “Additional Secured Note Lenders”) an aggregate of $1,060,000 of its 12% senior secured convertible
notes (the “Additional Secured Notes”) in a private offering pursuant to a subscription agreement with substantially the same
terms as the TDH Secured Notes except that the Additional Secured Notes are secured by all of the assets of the Company other than the
shares and other assets of TDH and TDAHK, pursuant to a security agreement by and among the Company and the Additional Secured Note Lenders.
Interest on the Additional Secured Notes accrues
on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the Additional Secured Notes are payable monthly,
on an amortized basis over 48 months, with the last payment due on March 16, 2024. Prepayment of the amounts due under the Additional
Secured Notes is subject to a prepayment penalty of 4% of the amount prepaid.
The Additional Secured Notes are convertible at
the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding
conversion provided that the conversion price shall not be less than $3.20 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 $3.20. Accordingly, an aggregate of 66,250 shares of common stock were issued.
These shares were valued at $148,000, or $2.24 per share, which represents fair market value. The Company recorded the value of these
shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.
On August 6, 2020, the Company entered into debt
exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of 1,236,350 shares of the
Company’s Series B Stock were issued to noteholders for an aggregate of $782,500 of outstanding principal and accrued and unpaid
interest. The Company recognized an extinguishment loss of $424,375 as a result of the exchange.
On February 17, 2021, the Company entered into
debt exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of 288,350 shares of
the Company’s Series B Stock were issued to noteholders for an aggregate of $182,500 of outstanding principal and accrued and unpaid
interest. The Company recognized an extinguishment loss of $97,077 as a result of the exchange.
As of September 30, 2022, the principal balance
of these notes was $45,132 and the remaining balance on the associated loan discounts was $4,849.
Future Minimum Principal Payments
The remaining future principal repayments based
upon the maturity dates of the Company’s borrowings for each of the next five years are as follows:
| Schedule of future debt maturity payments |
|
|
|
| Remainder of 2022 |
|
$ |
441,897 |
|
| 2023 |
|
|
217,793 |
|
| 2024 |
|
|
76,046 |
|
| 2025 and thereafter |
|
|
– |
|
| Total |
|
$ |
735,736 |
|
On January 20, 2022, the Company closed a Second
Tranche transaction with L1 Capital, as described within Note 12 (“Convertible Notes”). The terms of the transaction included
a provision that in the event the stock price is below $0.54 (the “Conversion Price”) at the time for so long as stock price
continues below the Conversion Price, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior
trading days, provided, that if the stock prices elevate back to the normal Conversion Price. On May 9, 2022, stock price fell below $0.54
and the default provision was triggered.
As a result of the May 9, 2022 triggering event,
the Company recorded a derivative liability for $1,052,350 which represents the fair value transferred to the note holder from the down
round feature being triggered. The Company calculated the fair value of the derivative using a Monte Carlo simulation.
On June 28, 2022, L1 Capital converted $450,000
of the Second Tranche convertible note for 833,333 shares and a cash settlement of $295,539, resulting in a $39,624 loss on settlement
of derivative.
On July 11, 2022, L1 Capital converted $400,000
of the Second Tranche convertible note for 740,741 shares and a cash settlement of $245,993, resulting in a $12,436 loss on settlement
of derivative.
On July 25, 2022, L1 Capital converted $400,000
of the Second Tranche convertible note for 740,741 shares and a cash settlement of $242,548, resulting in a $1,420 loss on settlement
of derivative.
On August 11, 2022, L1 Capital converted $400,000
of the Second Tranche convertible note for 740,741 shares and a cash settlement of $289,989, resulting in a $66,274 loss on settlement
of derivative.
At September 30, 2022, the fair value of the derivative
was remeasured using the remaining maximum shares to be delivered resulting in an unrealized gain on change of derivative transaction
of $49,047 and remaining derivative liability of $48,988.
The fair value of derivative liability as of May
9, 2022 and September 30, 2022 was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:
| DERIVATIVE LIABILITY (Details - Assumptions) | |
| | |
| |
| | |
May 9, 2022 | | |
September 30,
2022 | |
| Stock price | |
$ | 0.57 | | |
$ | 0.33 | |
| Strike price | |
| 0.54 | | |
| 0.54 | |
| Risk-free rate | |
| 2.12% | | |
| 3.67% | |
| Annualized volatility | |
| 150% | | |
| 107% | |
| Forecast horizon in years | |
| 1.20 | | |
| 0.80 | |
| Alternative Conversion Discount | |
| 20.0% | | |
| 20.0% | |
| Maximum Shares to be Delivered | |
| 3,240,741 | | |
| 185,185 | |
Changes in the unobservable input values would
likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable
input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of
a change in the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood or in the volatility
assumptions would result in a higher (lower) fair value measurement.
| 14. |
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.
Derivative Liability
The fair value of the derivative liabilities is
classified as Level 3 within the Company’s fair value hierarchy. Please refer to Note 13 (“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 September 30, 2022 and December 31, 2021 are as follows:
| Schedule of financial
instruments | |
| | |
| | |
| | |
| |
| | |
September 30, 2022 | |
| | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Liabilities: | |
| | |
| | |
| | |
| |
| Derivative Liabilities | |
$ | 48,988 | | |
$ | – | | |
$ | – | | |
$ | 48,988 | |
| Contingent Purchase Consideration | |
| 5,586,493 | | |
| – | | |
| – | | |
| 5,586,493 | |
| Total Liabilities | |
$ | 5,635,481 | | |
$ | – | | |
$ | – | | |
$ | 5,635,481 | |
| | |
December 31, 2021 | |
| | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Liabilities: | |
| | |
| | |
| | |
| |
| Derivative Liabilities | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| Contingent Purchase Consideration | |
| 5,586,493 | | |
| – | | |
| – | | |
| 5,586,493 | |
| Total Liabilities | |
$ | 5,586,493 | | |
$ | – | | |
$ | – | | |
$ | 5,586,493 | |
The following table sets forth a summary of changes
in the fair value of the Company’s Level 3 financial liabilities during the three and nine months ended September 30, 2022:
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Schedule of changes
in the fair value financial liabilities | |
Level 3 Financial Liabilities for the Three Months Ended September 30, 2022 | |
| | |
Balance as of June 30, 2022 | | |
Realized (Gains) Losses | | |
Additions | | |
Settlements | | |
Unrealized (Gains) Losses | | |
Balance as of September 30, 2022 | |
| Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| |
| Derivative Liabilities | |
$ | 739,311 | | |
$ | 80,130 | | |
$ | – | | |
$ | (778,530 | ) | |
$ | 8,077 | | |
$ | 48,988 | |
| Contingent Purchase Consideration | |
| 5,586,493 | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 5,586,493 | |
| Total Liabilities | |
$ | 6,325,804 | | |
$ | 80,130 | | |
$ | – | | |
$ | (778,530 | ) | |
$ | 8,077 | | |
$ | 5,635,481 | |
| |
|
Level 3 Financial Liabilities for the Nine Months Ended September 30, 2022 |
|
| |
|
Balance as of December 31, 2021 |
|
|
Realized (Gains) Losses |
|
|
Additions |
|
|
Settlements |
|
|
Unrealized (Gains) Losses |
|
|
Balance as of September 30, 2022 |
|
| Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative Liabilities |
|
$ |
– |
|
|
$ |
119,754 |
|
|
$ |
1,052,350 |
|
|
$ |
(1,074,069 |
) |
|
$ |
(49,047 |
) |
|
$ |
48,988 |
|
| Contingent Purchase Consideration |
|
|
5,586,493 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
5,586,493 |
|
| Total Liabilities |
|
$ |
5,586,493 |
|
|
$ |
119,754 |
|
|
$ |
1,052,350 |
|
|
$ |
(1,074,069 |
) |
|
$ |
(49,047 |
) |
|
$ |
5,635,481 |
|
In calculating the provision for income taxes
on an interim basis, the Company uses an estimate of the annual effective tax rate based upon currently known facts and circumstances
and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory
tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company
in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in rates
or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The
accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained
or as the result of new judicial interpretations or regulatory or tax law changes.
The Company’s interim effective tax rate,
inclusive of discrete items, for the three and nine months ended September 30, 2022 and 2021 was 0%, respectively, due to recurrent net
losses for the periods presented.
Preferred Stock
The Company is authorized to issue 25,000,000
shares of preferred stock, par value of $0.001 per share.
Series A Preferred Stock
As of September 30, 2022 and December 31, 2021,
the Company had no shares of Series A Stock issued and outstanding.
Series B Preferred Stock
On February 17, 2021, the Company entered into
debt exchange agreements with holders of three of the Company’s convertible promissory notes in the aggregate amount of $1,700,905
of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders exchanged
the outstanding notes, and all amounts owed by the Company thereunder, for an aggregate of 2,564,175 shares of the Company’s Series
B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid in full and the notes were cancelled.
On February 17, 2021, the Company entered into
subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 300,000 shares
of Series B Stock for aggregate gross proceeds of $300,000.
On March 31, 2021, the Company entered into subscription
agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 650,000 shares of Series B
Stock for aggregate gross proceeds of $650,000.
On May 20, 2021, the Company entered into exchange
agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed
to exchange all of the issued and outstanding shares of Series B Stock for shares of the Company’s newly designated Series C Stock,
on a one for one basis. As a result of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059
shares of Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
As of September 30, 2022 and December 31, 2021,
the Company had no shares of Series B Stock issued and outstanding, respectively.
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 $1.92
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 $1.92 per share.
Each share of Series C Stock entitles the holder
to 1.5625 votes for each share of Series C Stock. The consent of the holders of at least two-thirds of the shares of Series C Stock is
required for the amendment to any of the terms of the Series C Stock, to create any additional class of stock unless the stock ranks junior
to the Series C Stock, to make any distribution or dividend on any securities ranking junior to the Series C Stock, to merge or sell all
or substantially all of the assets of the Company or acquire another business or effectuate any liquidation of the Company.
Cumulative dividends accrue on each share of Series
C Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in arrears quarterly commencing 90 days from
issuance. The dividend shall be payable in shares of common stock (a “PIK Dividend”) and are be due and payable on the date
on which such PIK Dividend was declared.
Upon a liquidation, dissolution or winding up
of the Company, the holders of the Series C Stock are entitled to $1.00 per share plus all accrued and unpaid dividends. No distribution
may be made to holders of shares of capital stock ranking junior to the Series C Stock upon a liquidation until Series C stockholders
receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series C Stock, may elect to deem a merger,
reorganization or consolidation of the Company into or with another corporation, not affiliated with said majority, or other similar transaction
or series of related transactions in which more than 50% of the voting power of the Company is disposed of in exchange for property, rights
or securities distributed to holders thereof by the acquiring person, firm or other entity, or the sale of all or substantially all of
the assets of the Company.
On May 20, 2021, the Company entered into exchange
agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed
to exchange all of the issued and outstanding shares of Series B Stock for shares of Series C Stock, on a one for one basis. As a result
of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059 shares of the Company’s
Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
On June 11, 2021, the Company entered into subscription
agreements with an accredited investor, pursuant to which the Company sold the investor an aggregate of 100,000 shares of Series C Stock
for aggregate gross proceeds of $100,000.
On September 10, 2021, the Company entered into
a debt exchange agreement with a holder of a 10% convertible note pursuant to which 85,250 shares of the Company’s Series C Stock
was issued for $85,250 of outstanding principal and accrued and unpaid interest.
On January 24, 2022, the Company issued 20,573
shares of common stock to a stockholder upon the conversion of 39,500 shares of Series C preferred stock.
On July 29, 2022, the Company issued 41,146 shares
of common stock to a stockholder upon the conversion of 79,000 shares of Series C preferred stock.
As of September 30, 2022 and December 31, 2021,
the Company had 9,281,759 and 9,400,259 shares of Series C Stock issued and outstanding, respectively.
For the three months and nine ended September
30, 2022, the Company declared cumulative dividends totaling $186,163 and $550,223, respectively, for amounts accrued on its Series C
Stock.
Common Stock
The Company is authorized to issue 500,000,000
shares of common stock, par value of $0.001 per share and had 22,562,297 and 12,698,192 shares of common stock issued and outstanding
as of September 30, 2022 and December 31, 2021, respectively.
Reverse Stock Split
On April 7, 2021, the board of directors of the
Company approved, and on April 8, 2021, the Company’s shareholders approved, an increase to the range of the ratio for a reverse
stock split to a ratio of no less than 1-for-2 and no more than 1-for-50. On May 6, 2021, the board fixed the ratio for a reverse stock
split at 1-for-32 and, on May 7, 2021, the Company filed a certificate of amendment to its articles of incorporation with the Secretary
of State of the State of Florida to effect the reverse stock split which became effective as of May 13, 2021. The Company’s common
stock began being quoted on the OTCQB on a post-reverse split basis beginning on May 19, 2021.
Registered Offering
On June 21, 2021, the Company sold an aggregate
of 2,409.639 units (“Units”), at a price to the public of $4.15 per Unit (the “Offering”), each Unit consisting
of one share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price of $4.565 per
share (the “Warrants”), pursuant to an underwriting agreement, dated as of June 16, 2021 (the “Underwriting Agreement”),
between the Company and EF Hutton, division of Benchmark Investments, LLC, as representative (“EF Hutton”) of the several
underwriters named in the Underwriting Agreement. In addition, pursuant to the Underwriting Agreement, the Company granted EF Hutton a
45-day option (the “Over-Allotment Option”) to purchase up to 361,445 additional Units, to cover over-allotments in connection
with the Offering, which EF Hutton exercised with respect to Warrants exercisable for up to an additional 361,445 shares of common stock.
The Company received gross proceeds of approximately $10,000,000 in the Offering, before deducting underwriting discounts and commissions
and other offering expenses.
On July 15, 2021, EF Hutton exercised in full
the Over-Allotment Option with respect to all 361,445 additional shares of the Company’s common stock for total gross proceeds to
the Company of approximately $1,500,000 before deducting underwriting discounts and commissions and other offering expenses.
Common Stock Issued as Compensation Employees,
Officers and/or Directors
During the three and nine months ended September
30, 2021, the Company issued 157,943 shares of common stock with a fair market value of $426,446 to an officer as compensation.
Common Stock Issued in Exchange for Consulting,
Professional and Other Services
During the three and nine months ended September
30, 2022, the Company issued 60,000 and 178,490 shares of common stock, respectively, with a fair market value of $21,254 and $116,736,
respectively, to contractors for services rendered.
During the three and nine months ended September
30, 2021, the Company issued 86,522 and 150,943 shares of common stock, respectively, with a fair market value of $255,097 and $511,458,
respectively, to contractors for services rendered.
Common Stock Issued in Connection with the
Conversion of Convertible Note Principal and Accrued Interest
During the three and nine months ended September
30, 2022, the Company issued 2,222,223 and 8,812,921 shares of common stock, respectively, upon the conversion of $1,200,000 and $5,775,000,
respectively, in convertible note principal and accrued interest.
During the three and nine months ended September
30, 2021, the Company issued 383,405 shares of common stock, upon the conversion of $665,392, in convertible note principal and accrued
interest.
Common Stock Issued in Connection with Series
C Stock Dividends
During the three and nine months ended September
30, 2022, the Company issued 458,875 and 810,975 shares of common stock, respectively, valued at $187,216 and $833,739, respectively,
for cumulative dividends declared on its Series C Stock.
Common Stock Issued in Connection with the
Issuance of Convertible Promissory Notes
During the three and nine months ended September
30, 2021, the Company issued 4,464 and 17,746 shares of common stock, respectively, valued at $10,000 and $39,750, respectively, in connection
with the issuance of convertible notes.
Common Stock Issued in the Acquisition of
a Business
During the three and nine months ended September
30, 2021, the Company issued 1,771,883 shares of common stock valued at $5,000,000 in connection with the acquisition of a business.
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 September 30, 2022 and December 31, 2021. All warrants are exercisable for a period of three to five years from
the date of issuance:
| Schedule of warrants | |
| | |
| | |
| |
| | |
Number of Warrants Outstanding | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life (Yrs.) | |
| | |
| | |
| | |
| |
| Balance January 1, 2021 | |
| 229,628 | | |
$ | 7.34 | | |
| 1.66 | |
| Warrants issued | |
| 4,273,733 | | |
| 4.18 | | |
| | |
| Warrants exercised | |
| (249,480 | ) | |
| – | | |
| | |
| Warrants forfeited | |
| (6,711 | ) | |
| – | | |
| | |
| December 31, 2021 | |
| 4,247,170 | | |
$ | 4.40 | | |
| 1.75 | |
| Warrants issued | |
| 303,682 | | |
$ | 4.20 | | |
| | |
| Warrants exercised | |
| – | | |
| – | | |
| | |
| Warrants forfeited | |
| (154,687 | ) | |
| – | | |
| | |
| Balance September 30, 2022 | |
| 4,396,162 | | |
$ | 4.26 | | |
| 2.26 | |
As of September 30, 2022, the outstanding stock
purchase warrants had an aggregate intrinsic value of $0.
Stock Options
The following table represents all outstanding
and exercisable stock options as of September 30, 2022.
| Schedule of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Issued |
|
Options
Issued |
|
|
Options
Forfeited |
|
|
Options
Outstanding |
|
|
Vested
Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Life (Yrs.) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2013 |
|
|
241,730 |
|
|
|
(26,063 |
) |
|
|
215,667 |
|
|
|
215,667 |
|
|
$ |
7.68 |
|
|
|
0.97 |
|
| 2018 |
|
|
1,875 |
|
|
|
– |
|
|
|
1,875 |
|
|
|
1,875 |
|
|
|
24.96 |
|
|
|
0.58 |
|
| 2021 |
|
|
208,500 |
|
|
|
– |
|
|
|
208,500 |
|
|
|
208,500 |
|
|
|
2.98 |
|
|
|
3.83 |
|
| Total |
|
|
452,105 |
|
|
|
(26,063 |
) |
|
|
426,042 |
|
|
|
426,042 |
|
|
$ |
5.46 |
|
|
|
1.48 |
|
During the three and nine months ended September
30, 2022, the Company recorded $88,709 and $226,091, respectively, in stock-based compensation costs related to stock options.
During the three and nine months ended September
30, 2021, the Company recorded $33,698 in stock-based compensation costs related to stock options.
Stock-based compensation expense is reported in
selling, general and administrative on the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss. As of
September 30, 2022, there were $276,193 in total unrecognized stock-based compensation costs related to stock options. These costs are
expected to be recognized over a weighted average period of 1.42 years.
As of September 30, 2022, the outstanding stock
options had an aggregate intrinsic value of $0.
| 17. |
COMMITMENTS AND CONTINGENCIES |
In the ordinary course of business, the Company
and its subsidiaries are subject to various pending and potential legal actions, arbitration proceedings, claims, investigations, examinations,
regulatory proceedings, information gathering requests, subpoenas, inquiries and matters relating to compliance with laws and regulations
(collectively, legal proceedings).
Based on the Company’s current knowledge,
and taking into consideration its legal expenses, the Company does not believe it is a party to, nor are any of its subsidiaries the subject
of, any legal proceeding that would have a material adverse effect on the Company’s consolidated financial condition or liquidity.
See also Note 7 (“Leases”).
See also Note 8 (“Business Combination”)
See also Note 15 (“Income Taxes”).
In accordance with FASB ASC 855-10, Subsequent
Events, the Company has analyzed its operations subsequent to September 30, 2022 to the date these condensed consolidated financial
statements were issued, and has determined that it does not have any material subsequent events to disclose in these condensed consolidated
financial statements, except as follows:
On October 6, 2022, L1 Capital converted $100,000
from its Second Tranche convertible notes for 185,186 shares and a cash settlement of $72,832.
