The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Grom Social Enterprises, Inc. (the “Company”,
“Grom” “we”, “us” or “our”), a Florida corporation f/k/a Illumination America, Inc. (“Illumination”),
is a media, technology and entertainment company that focuses on (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. We conduct our business through our following subsidiaries:
| |
· |
Grom Social, Inc. (“Grom Social”), 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 (“TD Holdings”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited, a Hong Kong corporation (“Top Draw HK”), and (ii) Top Draw Animation, Inc., a Philippines corporation (“Top Draw Philippines”). The group’s principal activities are the production of animated films and television series. |
| |
· |
Grom Educational Services, Inc. (“GES”), 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. (“GNS”), 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 5, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and family entertainment properties and associated business opportunities. |
The Company owns 100% of each of Grom Social,
TD Holdings, GES and GNS, and 80% of Curiosity.
| 2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Going Concern
On a consolidated basis, the Company has incurred
significant operating losses since inception. Its financial statements do not include any adjustments that might result from the outcome
of this uncertainty. As of December 31, 2022, the Company had an accumulated deficit of $83.5 million. During the year ended December
31, 2022, the Company used approximately $7.0 million in cash from operating activities.
The 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, 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 consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
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 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 consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”)
and are expressed in United States dollars. For the years ended December 31, 2022 and 2021, the consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries Grom Social, TD Holdings, GES, and GNS. The Company recognizes noncontrolling
interest related to its 80% 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 consolidated statements
of operations and comprehensive loss. All intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates relate to revenue recognition, valuation of accounts receivable and inventories,
purchase price allocation of acquired businesses, impairment of long-lived assets and goodwill, valuation of financial instruments, valuation
of derivative liabilities, pension plan obligations related to the Company's defined benefit pension plan, stock-based compensation, income
taxes, and contingencies. The Company bases its estimates on historical experience, known or expected trends and various other assumptions
that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results
of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates.
Segment and Related
Information
The Company operates
as a single segment. The Company’s chief operating decision maker is its Chief Executive Officer, who manages operations for purposes
of allocating resources.
Business Combinations
We generally account for business combinations
using the acquisition method of accounting. The method requires the acquirer to recognize the assets acquired, liabilities assumed, and
any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Any transaction costs
are expenses as incurred. The results of operations of businesses acquired by the Company have been included in the consolidated income
statement since their respective date of acquisition.
Revenue Recognition
The guidance provided in Accounting Standards
Codification (“ASC”) Topic 606 (“ASC 606”) requires entities to use a five-step model to recognize revenue by allocating
the consideration from contracts to performance obligations on a relative standalone selling price basis. Revenue is recognized when a
customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive
in exchange for those goods or services. The standard also requires disclosures regarding the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers.
Animation Revenue
For years ended December 31, 2022 and 2021, the
Company recorded a total of $4,931,776 and $5,602,466, respectively, of animation revenue from contracts with customers.
Animation revenue is primarily generated from
contracts with customers for preproduction and production services related to the development of animated movies and television series.
Preproduction activities include producing storyboards, location design, model and props design, background color and color styling. Production
focuses on library creation, digital asset management, background layout scene assembly, posing, animation and after effects. The Company
provides services under fixed-price contracts. Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined
price. To the extent actual costs vary from estimated costs, the Company’s profit may increase, decrease, or result in a loss.
The Company identifies a contract under ASC 606
once (i) it is approved by all parties, (ii) the rights of the parties are identified, (iii) the payment terms are identified, (iv) the
contract has commercial substance, and (v) collectability of consideration is probable.
The Company evaluates the services promised in
each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The
services in the Company’s contracts are distinct from one another as the referring parties typically can direct all, limited, or
single portions of the various preproduction and production activities required to create and design and entire episode to us and we therefore
have a history of developing standalone selling prices for all of these distinct components. Accordingly, our contracts are typically
accounted for as containing multiple performance obligations.
The Company determines the transaction price for
each contract based on the consideration it expects to receive for the distinct services being provided under the contract.
The Company recognizes revenue as performance
obligations are satisfied and the customer obtains control of the services. In determining when performance obligations are satisfied,
the Company considers factors such as contract terms, payment terms and whether there is an alternative future use of the product or service.
Substantially all of the Company’s revenue is recognized over time as it performs under the contract due to the contractual terms
present in each contract which irrevocably transfer control of the work product to the customer as the services are performed.
For performance obligations recognized over time,
revenue is recognized based on the extent of progress made towards completion of the performance obligation. The Company uses the input
method to measure of progress because it best depicts the transfer of control to the customer as the Company incurs costs against its
contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured
based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. The input method requires
management to make estimates and assumptions that affect the reported amounts of contract assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the
total estimated amount of costs that will be incurred for a project or job.
Web Filtering Revenue
For years ended December 31, 2022 and 2021, the
Company recorded a total of $482,861 and $594,996, respectively, of web filtering revenue from contracts with customers.
Web filtering revenue from subscription sales
is recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases a computer appliance and a software
and support service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale.
The Company immediately recognizes revenue attributable to the computer appliance as it is non-refundable and control passes to the customer.
The advanced billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue
on a straight-line basis over the subscription period.
Produced and Licensed Content Revenue
For years ended December 31, 2022 and 2021, the
Company recorded a total of $0 and $98,301, respectively, of produced and licensed content revenue from contracts with customers.
Produced and licensed content revenues are generated
from the licensing of internally-produced films and television programs.
Licensed internally-produced films and television
programming, each individual film or episode delivered represents a separate performance obligation and revenues are recognized when the
episode is made available to the licensee for exhibition. For license agreements containing multiple deliverables, revenues are allocated
based on the relative standalone selling price of each film or episode of a television series, which is based on licenses for comparable
films or series within the marketplace. Agreements to license programming are often long term, with collection terms ranging from one to five years.
The advanced billing component for licensed content
is initially recorded as deferred revenue and subsequently recognized as revenue upon completion of the performance obligation in accordance
with the terms of licensing agreement.
Other Revenue
For years ended December 31, 2022 and 2021, the
Company recorded a total of $11,864 and $2,159, respectively, in other revenue.
Other revenue corresponds to ecommerce sales,
publishing revenue, and subscription and advertising revenue from the Grom Social mobile application.
All revenue recognized in the 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 consolidated statements of operations:
| Schedule of disaggregated revenue | |
| | |
| |
| | |
Year Ended December 31, 2022 | | |
Year Ended December 31, 2021 | |
| | |
| | |
| |
| Animation | |
$ | 4,931,776 | | |
$ | 5,602,466 | |
| Web Filtering | |
| 482,861 | | |
| 594,996 | |
| Produced and Licensed Content | |
| – | | |
| 98,301 | |
| Other | |
| 11,864 | | |
| 2,159 | |
| Total Sales | |
$ | 5,426,501 | | |
$ | 6,297,922 | |
Contract Assets and Liabilities
Animation revenue contracts vary with movie contracts
typically allowing for progress billings over the contract term while other episodic development activities are typically billable upon
delivery of the performance obligation for an episode. These episodic activities typically create unbilled contract assets between episode
delivery dates while movies can create contract assets or liabilities based on the progress of activities versus the arranged billing
schedule. Revenues from web filtering contracts are all billed in advance and therefore represent contract liabilities until fully recognized
on a ratable basis over the contract life.
Fair Value Measurements
FASB ASC 820, Fair Value Measurements and Disclosures
(“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used
to measure fair value:
| |
· |
Level 1: Quoted prices in active markets for identical assets or liabilities. |
| |
· |
Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable. |
| |
· |
Level 3: Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of December 31, 2022 and 2021. The Company uses the
market approach to measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets or liabilities. The respective carrying value of
certain balance sheet financial instruments approximates its fair value. These financial instruments include cash, trade receivables,
related party payables, accounts payable, accrued liabilities and short-term borrowings. Fair values were estimated to approximate carrying
values for these financial instruments since they are short term in nature, and they are receivable or payable on demand.
The estimated fair value of assets and liabilities
acquired in business combinations, reporting units and long-lived assets used in the related asset impairment tests, contingent consideration,
and derivatives utilize inputs classified as Level 3 in the fair value hierarchy.
The Company determines the fair value of contingent
consideration based on a probability-weighted discounted cash flow analysis. The fair value remeasurement is based on significant inputs
not observable in the market and thus represents a Level 3 measurement as defined in the fair value hierarchy. In each period, the Company
reassesses its current estimates of performance relative to the stated targets and adjusts the liability to fair value. Any such adjustments
are included as a component of Other Income (Expense) in the Consolidated Statements of Operations and Comprehensive Loss.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible and other promissory notes are reviewed to determine
whether they contain embedded derivative instruments that are required to be accounted for separately from the host contract and recorded
on the balance sheet at fair value. The fair value of derivative liabilities is required to be revalued at each reporting date, with corresponding
changes in fair value recorded in current period operating results.
Beneficial Conversion Features
In accordance with FASB ASC 470-20, Debt with
Conversion and Other Options the Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible
debt or preferred stock instruments that have conversion features at fixed rates that are in-the-money when issued. The BCF for the convertible
instruments is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional
paid-in capital. The intrinsic value is generally calculated at the commitment date as the difference between the conversion price and
the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into
which the security is convertible. If certain other securities are issued with the convertible security, the proceeds are allocated among
the different components. The portion of the proceeds allocated to the convertible security is divided by the contractual number of the
conversion shares to determine the effective conversion price, which is used to measure the BCF. The effective conversion price is used
to compute the intrinsic value. The value of the BCF is limited to the basis that is initially allocated to the convertible security.
Stock Purchase Warrants
The Company accounts for warrants issued to purchase
shares of its common stock as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
Cash and Cash Equivalents
The Company’s cash and cash equivalents
are exposed to concentration of credit risk. The Company maintains cash at various regulated financial institutions which, at times, may
be in excess of the federal depository insurance limit. The Company’s management regularly monitors these institutions and believes
that the potential for future loss is remote. The Company considers liquid investments with original or acquired maturities of three months
or less to be cash equivalents. At December 31, 2022 and 2021, the Company did not have any cash equivalents.
Accounts Receivable
Accounts receivable are customer obligations due
under normal trade terms which are recorded at net realizable value. The Company establishes an allowance for doubtful accounts based
on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing
the amount of the allowance. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations
and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers
were to deteriorate, resulting in their inability to make payments, a specific allowance will be required.
Recovery of bad debt amounts previously written
off is recorded as a reduction of bad debt expense in the period the payment is collected. If the Company’s actual collection experience
changes, revisions to its allowance may be required. After all attempts to collect a receivable have failed, the receivable is written
off against the allowance.
Accounts receivable includes unbilled accounts
receivable. Unbilled accounts receivable is a contract asset related to amounts that are unbilled due to agreed-upon contractual terms
in which billing occurs subsequent to revenue recognition. This situation typically occurs when the Company recognizes revenue for episodic
development activities performed but not yet billed. Episodic development activities are typically billable upon delivery.
Inventory
Inventory primarily 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.
At December 31, 2022 and 2021, the Company’s
inventory totaled $92,303 and $91,361, respectively, and was comprised of work-in-progress of $85,324 and $77,501, respectively, and finished
goods of $6,979 and $13,860, respectively.
Prepublication Costs
Prepublication costs include costs incurred to
create and develop the art, prepress, editorial, digital conversion and other content required for the creation of the master copy of
a book or other media. Prepublication costs are amortized on a straight-line basis over a two- to five-year period based on expected future
revenue. The Company regularly reviews the recoverability of the capitalized costs based on expected future revenues.
Produced and Licensed Content Costs
Produced and licensed content costs include capitalizable
direct costs, production overhead, interest and development costs and are stated at the lower of cost, less accumulated amortization,
or fair value. Marketing, distribution and general and administrative costs are expensed as incurred.
Film, television and direct to consumers through
streaming services production and residual costs are expensed over the product life cycle based upon the ratio of the current period’s
revenues to estimated remaining total revenues (Ultimate Revenues) for each production. For film productions and direct to consumer services,
Ultimate Revenues include revenues from all sources that will be earned within ten years from the date of the initial release. For television
series, Ultimate Revenues include revenues that will be earned within ten years from delivery of the first episode, or if still in production,
five years from delivery of the most recent episode, if later. Costs of film, television and direct to consumer productions are subject
to regular recoverability assessments, which compare the estimated fair values with the unamortized costs. The Company bases these fair
value measurements on the Company’s assumptions about how market participants would price the assets at the balance sheet date,
which may be different than the amounts ultimately realized in future periods. The amount by which the unamortized costs of film and television
productions exceed their estimated fair values is written off. Costs for projects that have been abandoned are written off. Projects that
have not been set for production within three years are also written off unless management has committed to a plan to proceed with the
project and is actively working on and funding the project.
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 website development costs at December 31, 2022 and 2021:
| Schedule of website development costs | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
December 31, 2022 | | |
December 31, 2021 | |
| | |
Gross Carrying Value | | |
Accumulated
Amortization | | |
Net Book
Value | | |
Gross Carrying Value | | |
Accumulated
Depreciation | | |
Net Book
Value | |
| Prepublication costs | |
$ | 165,524 | | |
$ | (1,482 | ) | |
$ | 164,042 | | |
$ | 152,286 | | |
$ | – | | |
$ | 152,286 | |
| Produced and licensed content costs | |
| 325,966 | | |
| – | | |
| 325,966 | | |
| 76,701 | | |
| – | | |
| 76,701 | |
| Capitalized website development costs | |
| 1,123,772 | | |
| (66,460 | ) | |
| 1,057,312 | | |
| 411,800 | | |
| – | | |
| 411,800 | |
| Total | |
$ | 1,615,262 | | |
$ | (67,942 | ) | |
$ | 1,547,320 | | |
$ | 640,787 | | |
$ | – | | |
$ | 640,787 | |
Property and Equipment
Property and equipment are stated at cost or fair
value if acquired as part of a business combination. Depreciation is computed by the straight-line method and is charged to operations
over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. The carrying amount and accumulated
depreciation of assets sold or retired are removed from the accounts in the year of disposal and any resulting gain or loss is included
in results of operations. The estimated useful lives of property and equipment are as follows:
| Property and equipment useful lives |
|
| Computers, software, and office equipment |
1 – 5 years |
| Capitalized website development cost |
3 years |
| Machinery and equipment |
3 – 5 years |
| Vehicles |
5 years |
| Furniture and fixtures |
5 – 10 years |
| Leasehold improvements |
Lesser of the lease term or estimated useful life |
Construction in process is not depreciated until
the construction is completed and the asset is placed into service.
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.
Intangible assets have either an
identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over
their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets consist of customer
relationships and non-compete agreements. Their useful lives range from 1.5
to 10
years. The Company’s indefinite-lived intangible assets consist of trade names and goodwill.
Goodwill and indefinite-lived assets are not amortized
but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company performs an annual impairment
assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate
that the fair value of the asset may be less than the carrying amount. The evaluation begins with a qualitative assessment to determine
whether a quantitative impairment test is necessary. If, after assessing qualitative factors, the Company determines it is more likely
than not that the fair value of the reporting unit is less than the carrying amount, then the quantitative goodwill impairment test is
performed.
The quantitative goodwill impairment test used
to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. The fair value
of the reporting unit represents the price a market participant would be willing to pay in a potential sale of the reporting unit and
is determined by considering both the income approach and market approaches. The fair values calculated under the income approach and
market approaches are weighted based on circumstances surrounding the reporting unit. Under the income approach, the Company determines
fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors
that consider the timing and risk of cash flows. For the discount rate, the Company relies on the capital asset pricing model approach,
which includes an assessment of the risk-free interest rate, the rate of return from publicly traded stocks, the Company’s risk
relative to the overall market, the Company’s size and industry and other Company-specific risks. Other significant assumptions
used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital
requirements. The market approaches use key multiples from guideline businesses that are comparable and are traded on a public market.
If the fair value of the reporting unit is greater
than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any impairment
identified is included within "goodwill impairment" in the consolidated statements of operations.
Determining the fair value of a reporting unit
is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans,
and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions made for purposes
of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions and estimates could cause
the Company to perform an impairment test prior to scheduled annual impairment tests.
The Company performed its annual fair value assessment
at December 31, 2022 on its subsidiaries with material goodwill and intangible asset amounts on their respective balance sheets and determined
that an impairment charge of $11,340,115 was necessary. See Note 9 – Goodwill and Intangible Assets for more information.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its
long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. The long-lived asset
is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying value of the assets, the
assets are written down to the estimated fair value.
The Company evaluated the recoverability of its
long-lived assets on December 31, 2022, respectively on its subsidiaries with material amounts on their respective balance sheets and
determined that no impairment exists.
Income Taxes
The Company accounts for income taxes under FASB
ASC 740, Accounting for Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ASC 740-10-05, Accounting
for Uncertainty in Income Taxes prescribes a recognition threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
The amount recognized is measured as the largest
amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company assesses the validity
of its conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might
cause it to change its judgment regarding the likelihood of a tax position’s sustainability under audit.
Right of Use Assets and Lease Liabilities
FASB ASU No. 2016-02, “Leases” (ASC
842) requires lessees to recognize almost all leases on the balance sheet as a right of use (“ROU”) asset and a lease liability
and requires leases to be classified as either an operating or a finance type lease. The standard excludes leases of intangible assets
or inventory, and permits the exclusion of leases with an original lease term of less than one year.
Under ASC 842, the Company determines if an arrangement
is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease
payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement.
As most of the Company's leases do not provide an implicit rate, the Company estimated the incremental borrowing rate in determining the
present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any
lease incentives received. The Company lease terms may include options to extend or terminate the lease when it is reasonably certain
that the Company will exercise such options.
Operating leases are included in operating lease
right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current on the Company's consolidated balance
sheets.
Foreign Currency Translation
The functional and reporting currency of TD Holdings
and TDAHK is the Hong Kong Dollar. The functional and reporting currency of Top Draw is the Philippine Peso. Management applies the guidance
within FASB ASC 830, Foreign Currency Matters for transactions that occur in foreign currencies. Monetary assets denominated in
foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Average monthly rates are used to translate
revenues and expenses.
Transactions denominated in currencies other than
the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective
periods.
Assets and liabilities of the Company’s
operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates.
Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded at the historical
rate when the transaction occurred. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate
component of stockholders' equity in the statement of stockholders' equity.
Differences may arise in the amount of bad debt
expense, depreciation expense and amortization expense reported in the Company's operating results as compared to the corresponding change
in the allowance for doubtful accounts, accumulated depreciation, and accumulated amortization, respectively, due to foreign currency
translation. These translation adjustments are reflected in accumulated other comprehensive income, a separate component of the Company's
stockholders' equity.
Comprehensive Gain or Loss
FASB ASC 220, Comprehensive Income establishes
standards for the reporting and display of comprehensive income and its components in the financial statements. At December 31, 2022 and
2021, the Company determined that it had items that represented components of comprehensive income (loss), which include accumulated foreign
currency translation adjustments, and, therefore, has included a statement of comprehensive income (loss) in the financial statements.
Advertising Expenses
Advertising costs are expensed as incurred and
included in selling, general and administrative expenses.
Interest
Cost associated with the refinancing or issuance
of debt, as well as debt discounts or premiums, are recorded as interest over the term of the related debt using the effective interest
method.
Shipping and Handling Costs
Shipping and handling costs related to the acquisition
of goods from vendors are included in the cost of sales.
Stock-Based Compensation
The Company calculates share-based compensation
expense for option awards (“Share-based Award(s)”) based on the estimated grant/issue date fair value using the Black-Scholes-Merton
option pricing model (“Black-Scholes Model”) and recognizes the expense on a straight-line basis over the vesting period.
It accounts for forfeitures as they occur. The Black-Scholes Model requires the use of a number of assumptions including volatility of
the stock price, the weighted average risk-free interest rate, and the vesting period in determining the fair value of Share-based Awards.
The expected term is based on the “simplified method”, due to the Company’s limited option exercise history. Under this
method, the term is estimated using the weighted average of the service vesting period and contractual term of the option award. As the
Company does not yet have sufficient history of its own volatility, the Company has identified several public entities of similar size,
complexities and industry and calculates historical volatility based on the volatilities of these companies. Although the Company believes
its assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about
future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to its assumptions could significantly
impact the amount of expense recorded in a given period.
The Company recognizes restricted stock unit expense
over the period of vesting or period that services will be provided. Compensation associated with shares of common stock issued or to
be issued to consultants and other non-employees is recognized over the expected service period beginning on the measurement date, which
is generally the time the Company and the service provider enter into a commitment whereby the Company agrees to grant shares in exchange
for the services to be provided.
Basic and Diluted Net Income (Loss) Per
Share
The Company computes net income (loss) per share
in accordance with FASB ASC 260, Earnings per Share which requires presentation of both basic and diluted earnings per share (“EPS”)
on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator)
by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential
shares of common stock outstanding during the period using the treasury stock method, and convertible preferred stock and convertible
debt using the if-converted method. These potentially dilutive shares include 5,507 shares from convertible notes, 161,143 shares from
convertible preferred stock, 9,568 shares from vested stock options and 4,101,827 shares from stock purchase warrants. In computing diluted
EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock
options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
Recent Accounting Pronouncements
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements
that have been issued that might have a material impact on its financial position or results of operations except as noted below:
In June 2016, the FASB issued Accounting Standards
Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 replaces the “incurred
loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit
losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The new model, referred
to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured
at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity
securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities.
For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except
that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies
the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements
regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October 16, 2019,
the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company, delaying
the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Early adoption
is permitted for interim and annual reporting periods. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on
its consolidated financial statements but does not expect that the adoption of this standard will have a material impact.
On November 15, 2019, the FASB issued ASU 2019-10,
which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for
certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 amends the
effective date for ASU 2017-04 to fiscal years beginning after December 15, 2022, and interim periods therein. The Company adopted this
ASU on January 1, 2022, which did not result in a material impact to the consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740) which enhances and simplifies various aspects of the income tax accounting guidance, including requirements
such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments,
and interim-period accounting for enacted changes in tax law. The amendment wase effective for public companies with fiscal years beginning
after December 15, 2020. The Company adopted this ASU on January 1, 2021, which did not result in a material impact to the consolidated
financial statements and disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt
– Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity
(Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with
characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU2020-06
amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early
adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal
years. The Company is evaluating the impact of this guidance on its consolidated financial statements.
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. Management is evaluating the effect of
the adoption of ASU 2021-04 on the consolidated financial statements. 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 consolidated financial statements and disclosures.
| 3. |
ACCOUNTS RECEIVABLE, NET |
The following table sets forth the components
of the Company’s accounts receivable at December 31, 2022 and 2021:
| Schedule of accounts receivable | |
| | |
| |
| | |
December 31, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Billed accounts receivable | |
$ | 607,524 | | |
$ | 822,536 | |
| Unbilled accounts receivable | |
| 592,932 | | |
| 187,751 | |
| Allowance for doubtful accounts | |
| (38,226 | ) | |
| (41,708 | ) |
| Total accounts receivable, net | |
$ | 1,162,230 | | |
$ | 968,579 | |
During the year ended December 31, 2022, the Company
had three customers that accounted for 84.5% of revenues and two customers that accounted for 73.6% of accounts receivable. During the
year ended December 31, 2021, the Company had four customers that accounted for 69.1% of revenues and two customers that accounted for
61.3% of accounts receivable.
| 4. |
PREPAID EXPENSES AND OTHER CURRENT ASSETS |
The following table sets forth the components
of the Company’s prepaid expenses and other current assets at December 31, 2022 and 2021:
| Schedule of prepaid expenses and other current assets | |
| | | |
| | |
| | |
December 31, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Prepaid rent | |
$ | 14,850 | | |
$ | 32,139 | |
| Vendor advances | |
| 5,365 | | |
| 6,631 | |
| Prepaid service agreements | |
| 410,373 | | |
| 139,670 | |
| Employee advance and other payroll related items | |
| 66,428 | | |
| 192,339 | |
| Other prepaid expenses and current assets | |
| 108,481 | | |
| 86,799 | |
| Total prepaid expenses and other current assets | |
$ | 605,497 | | |
$ | 457,578 | |
Prepaid expenses and other assets represent advances
or prepayments made in the normal course and in which the economic benefit is expected to be realized within twelve months.
| 5. |
PROPERTY AND EQUIPMENT |
The following table sets forth the components of the Company’s
property and equipment at December 31, 2022 and 2021:
| Schedule of property and equipment | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
December 31, 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 | |
$ | 2,774,308 | | |
$ | (2,651,872 | ) | |
$ | 122,436 | | |
$ | 2,698,172 | | |
$ | (2,399,978 | ) | |
$ | 298,194 | |
| Machinery and equipment | |
| 189,641 | | |
| (182,180 | ) | |
| 7,461 | | |
| 183,618 | | |
| (162,647 | ) | |
| 20,971 | |
| Vehicles | |
| 41,112 | | |
| (35,504 | ) | |
| 5,608 | | |
| 101,674 | | |
| (76,497 | ) | |
| 25,177 | |
| Furniture and fixtures | |
| 409,996 | | |
| (391,783 | ) | |
| 18,213 | | |
| 401,862 | | |
| (365,075 | ) | |
| 36,787 | |
| Leasehold improvements | |
| 1,172,501 | | |
| (1,065,148 | ) | |
| 107,353 | | |
| 1,086,518 | | |
| (955,547 | ) | |
| 130,971 | |
| Total fixed assets | |
| 4,587,558 | | |
| (4,326,487 | ) | |
| 261,071 | | |
| 4,471,844 | | |
| (3,959,744 | ) | |
| 512,100 | |
| Capital assets not subject to depreciation: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Construction in progress | |
| 24,605 | | |
| – | | |
| 24,605 | | |
| 65,888 | | |
| – | | |
| 65,888 | |
| Total fixed assets | |
$ | 4,612,163 | | |
$ | (4,326,487 | ) | |
$ | 285,676 | | |
$ | 4,537,732 | | |
$ | (3,959,744 | ) | |
$ | 577,988 | |
For the years ended December 31, 2022 and 2021,
the Company recorded depreciation expense of $347,727 and $426,654 respectively.
The following table sets forth the components
of the Company’s other assets at December 31, 2022 and 2021:
| Schedule Of Other Assets | |
| | | |
| | |
| | |
December 31, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Capitalized website development costs | |
$ | 1,057,312 | | |
$ | 411,799 | |
| Prepublication costs | |
| 164,042 | | |
| 152,286 | |
| Produced and licensed content costs | |
| 325,966 | | |
| 76,701 | |
| Deposits | |
| 72,027 | | |
| 76,052 | |
| Other noncurrent assets | |
| 7,731 | | |
| 4,321 | |
| Total other assets | |
$ | 1,627,078 | | |
$ | 721,160 | |
Other noncurrent assets are comprised solely of
guarantee deposits at TDA which are refundable upon termination of contract or delivery of subject matter of the contract. These are initially
recorded at cost which is the fair value at the time of the transaction and are subsequently measured at amortized cost
The Company has entered into operating
leases primarily for office space. These leases have terms which range from two years to six years, and often include one or
more options to renew or in the case of equipment rental, to purchase the equipment. During the year ended December 31, 2022, $798,075
of right of use assets and leases liabilities were added related to new operating leases.
The Company leases approximately 2,100 square
feet of office space in Boca Raton, Florida at the rate of $4,000 per month pursuant to a three-year lease which was renewed for six months
and expired in March 2022. The Florida office space is the location of the Company’s corporate headquarters and administrative staff.
In January 2022, the Company signed a new lease agreement to extend the term until March 2024. The total legally binding minimum lease
payments for this lease are approximately $94,898.
In September 2021, the Company signed a new
lease to secure approximately 1,300 square feet of office space in Manila. The initial term of the lease is 72 months from the
commencement date, January 1, 2022. The Company has the option to renew the lease term for an additional 12 months. The renewal
option is not included in the future minimum lease payments used in determining the ROU liability as management is not reasonably
certain to execute the option. The total legally binding minimum lease payments for this lease are approximately $270,293.
In October 2021, the Company signed a new lease
to secure 1,720 square feet of office space in Los Angeles. The initial term of the lease is 24 months from the commencement date, November
29, 2021 and no renewal option. The total legally binding minimum lease payments for this lease are approximately $117,607.
In August and September 2022, the Company signed
new lease agreements to extend approximately 25,300 square feet of office space in Manila. The lease agreements expire in December 2027.
The total legally binding minimum lease payments for these leases are approximately $1,044,644.
The future minimum payment obligations at December
31, 2022 for operating leases are as follows:
| Schedule of future minimum lease payment |
|
|
|
|
| 2023 |
|
$ |
377,045 |
|
| 2024 |
|
|
273,690 |
|
| 2025 |
|
|
274,921 |
|
| 2026 |
|
|
223,320 |
|
| 2027 |
|
|
234,488 |
|
| Thereafter |
|
|
– |
|
| Total |
|
$ |
1,383,464 |
|
These operating leases are listed as separate
line items on the Company's Consolidated Balance Sheets and represent the Company’s right to use the underlying asset for the lease
term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's Consolidated Balance
Sheets.
Because the rate implicit in each lease is not
readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating right-of-use assets
and related lease liabilities were as follows:
| Schedule of operating right-of-use assets | |
| |
| | |
Year Ended
December 31, 2022 | |
| Cash paid for operating lease liabilities | |
$ | 458,048 | |
| Weighted-average remaining lease term (in years) | |
| 3.47 | |
| Weighted-average discount rate | |
| 10% | |
Total rent expense related to lease obligations, reflected in general
and administrative costs line items on the consolidated income statements, for the years ended December 31, 2022 and 2021, were $398,754
and $380,297, respectively.
The following table presents the amortization of the Company’s
lease liabilities under ASC 842 at December 31, 2022:
| Schedule of amortization of lease liabilities |
|
|
|
|
| 2023 |
|
$ |
269,681 |
|
| 2024 |
|
$ |
193,294 |
|
| 2025 |
|
$ |
213,854 |
|
| 2026 |
|
$ |
183,639 |
|
| 2027 |
|
$ |
213,171 |
|
| Thereafter |
|
$ |
– |
|
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 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, its co-founders, and current chief content officer and chief creative
officer, respectively.
The Note is convertible into shares of common
stock of the Company at a conversion price of $98.40 per share, or 29,574 shares, 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 total
$14,271,969 was recorded in connection to 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 consideration paid | |
| |
| 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 year ended December 31, 2022, the
Company finalized the purchase price allocation, during the permissible measurement period, and obtained new fair value information
for certain identifiable intangible assets related to its acquisition of Curiosity. The revised purchase price allocation decreased
goodwill by $468,426
and increased intangible assets by $468,426.
Additionally, the Company recorded amortization expense of $24,641
related to intangible assets subject to amortization during the year ended December 31, 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 year ended December 31, 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 year ended December 31, 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 consolidated financial statements as of and for the year ended December 31, 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.
The following table sets forth the changes in
the carrying amount of the Company’s goodwill for the years ended December 31, 2022 and 2021:
| Schedule of goodwill | |
| |
| Balance, January 1, 2021 | |
$ | 8,380,504 | |
| Acquisition of Curiosity | |
| 14,271,969 | |
| Impairment charge | |
| (276,448 | ) |
| Balance, December 31, 2021 | |
| 22,376,025 | |
| Measurement Period Adjustment | |
| (468,426 | ) |
| Impairment charge | |
| (11,340,115 | ) |
| Balance, December 31, 2022 | |
$ | 10,567,484 | |
At December 31, 2022, the Company performed its
annual impairment tests as prescribed by ASC 350 on the carrying value of its goodwill and recorded aggregate impairment charges of $11,340,115;
of which $6,202,888 was attributed to its TD Holdings Ltd animation business acquired in 2016, and $5,137,227 was attributed to its Curiosity
Ink Media original content business acquired in 2021. The determination was made as the result of the Company’s qualitative assessment
of each business unit, including the decline in animation revenues and delay in monetization of original content properties.
At December 31, 2021, the Company performed its
annual impairment tests as prescribed by ASC 350 on the carrying value of its goodwill and recorded an impairment charge totaling $276,448;
all of which was attributed to the assets of its NetSpective Webfilter business acquired in 2017. The determination was made as the result
of the Company’s qualitative assessment of its webfiltering business, including a multi-year decline in sales revenue and the unexpected
loss of certain renewal customer accounts.
At December 31, 2022 and 2021, the carrying amount
of the Company’s goodwill was $10,567,484 and $22,376,025, respectively.
The following table sets forth the components
of the Company’s intangible assets at December 31, 2022 and 2021:
| Schedule of intangible assets | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
December 31, 2022 | | |
December 31, 2021 | |
| | |
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 | | |
| (992,083 | ) | |
| 534,199 | | |
| 1,600,286 | | |
| (876,457 | ) | |
| (37,002 | ) | |
| 686,827 | |
| Mobile software applications | |
| 2.00 | | |
| – | | |
| – | | |
| – | | |
| 282,500 | | |
| (282,500 | ) | |
| – | | |
| – | |
| NetSpective webfiltering software | |
| 2.00 | | |
| – | | |
| – | | |
| – | | |
| 1,134,435 | | |
| (1,134,435 | ) | |
| – | | |
| – | |
| Noncompete agreements | |
| 1.50 | | |
| – | | |
| – | | |
| – | | |
| 846,638 | | |
| (846,638 | ) | |
| – | | |
| – | |
| Licensing agreement | |
| 19.60 | | |
| 341,728 | | |
| (24,641 | ) | |
| 317,087 | | |
| – | | |
| – | | |
| – | | |
| – | |
| Subtotal | |
| | | |
| 1,868,010 | | |
| (1,016,724 | ) | |
| 851,286 | | |
| 3,863,859 | | |
| (3,140,030 | ) | |
| (37,002 | ) | |
| 686,827 | |
| Intangible assets not subject to amortization: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Books and stories content | |
| | | |
| 126,698 | | |
| – | | |
| 126,698 | | |
| – | | |
| – | | |
| – | | |
| – | |
| Trade names | |
| | | |
| 4,386,247 | | |
| – | | |
| 4,386,247 | | |
| 4,455,595 | | |
| – | | |
| (69,348 | ) | |
| 4,386,247 | |
| Total intangible assets | |
| | | |
| 6,380,955 | | |
| (1,016,724 | ) | |
| 5,364,231 | | |
| 8,319,454 | | |
| (3,140,030 | ) | |
| (106,350 | ) | |
| 5,073,074 | |
For the years ended December 31, 2022 and 2021,
the Company recorded amortization expense for intangible assets subject to amortization of $170,022 and $386,916, respectively.
At December 31, 2021, the Company performed its
annual impairment tests as prescribed by ASC 350 on the carrying value of its intangible assets and recorded an impairment charge totaling
$106,350; all of which was attributed to the assets of its NetSpective Webfilter business acquired in 2017.
The following table provides information regarding
estimated amortization expense for intangible assets subject to amortization for each of the following years ending December 31:
| Schedule of amortization | |
| |
| 2023 | |
$ | 170,022 | |
| 2024 | |
| 170,022 | |
| 2025 | |
| 170,022 | |
| 2026 | |
| 93,708 | |
| 2027 | |
| 17,394 | |
| Thereafter | |
| 230,118 | |
| Total | |
$ | 851,286 | |
| 10. |
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
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. 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 December 31, 2022 and 2021:
| Schedule accrued liabilities | |
| | |
| |
| | |
December 31, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Executive and employee compensation | |
$ | 102,151 | | |
$ | 238,669 | |
| Interest on convertible promissory notes | |
| 84,292 | | |
| 31,997 | |
| Other accrued expenses and liabilities | |
| 192,511 | | |
| 129,663 | |
| Total accrued liabilities | |
$ | 378,954 | | |
$ | 400,329 | |
| 11. |
RELATED PARTY PAYABLES AND ACTIVITY |
At December 31, 2022 and 2021, the aggregate related
party payables were $50,000 and $50,000, respectively.
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 have created over 1,450
hours of original short form content. Sarah Marks, the wife of Darren Marks, our President and Chief Executive Officer, Zach Marks, Luke
Marks, Jack Marks, Dawson Marks, Caroline Marks and Victoria Marks, each Darren Marks’s children, are, or have been, by the Company
employed or independently contracted.
During the years ended December 31, 2022 and 2021,
the Marks family was paid a total of $76,094 and $36,026, respectively.
Compensation for services provided by the Marks
family is expected to continue for the foreseeable future. Each member of the Marks family is actively involved in the creation of content
for the mobile app, including numerous videos focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and
special events.
Liabilities Due to Officers and/or Directors
On July 13, 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.
| 12. |
EMPLOYEE
BENEFIT PLAN |
The Company’s subsidiary, Top Draw Animation,
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:
| Defined benefit liability |
|
|
|
|
|
|
| |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
| |
|
|
|
|
|
|
| Benefit obligation |
|
$ |
434,974 |
|
|
$ |
390,833 |
|
| Plan assets |
|
|
– |
|
|
|
– |
|
| Total |
|
$ |
434,974 |
|
|
$ |
390,833 |
|
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:
| Components of accumulated benefit cost |
|
|
|
|
|
|
| |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
| |
|
|
|
|
|
|
| Current service cost |
|
$ |
86,357 |
|
|
$ |
23,549 |
|
| Net interest expense |
|
|
12,785 |
|
|
|
14,164 |
|
| Total |
|
$ |
99,142 |
|
|
$ |
37,713 |
|
The change in the accumulated benefit cost in
the consolidated balance sheet are as follows:
| Schedule of accumulated benefit cost |
|
December 31,
2022 |
|
|
December 31,
2021 |
|
| |
|
|
|
|
|
|
| Balance, beginning of year |
|
$ |
390,833 |
|
|
$ |
470,414 |
|
| Foreign currency translation |
|
|
(29,641 |
) |
|
|
(20,252 |
) |
| Expense recognized in other comprehensive income |
|
|
99,142 |
|
|
|
37,713 |
|
| Remeasurement on actuarial gain (loss) recognized |
|
|
24,552 |
|
|
|
(87,094 |
) |
| Contributions paid |
|
|
(49,912 |
) |
|
|
(9,948 |
) |
| Balance, end of year |
|
$ |
434,974 |
|
|
$ |
390,833 |
|
The cumulative amount of actuarial gains recognized
in other comprehensive income is as follows:
| Schedule of actuarial gains |
|
December 31,
2022 |
|
|
December 31,
2021 |
|
| |
|
|
|
|
|
|
| Balance, beginning of year |
|
$ |
60,518 |
|
|
$ |
(28,415 |
) |
| Foreign currency translation |
|
|
(803 |
) |
|
|
1,839 |
|
| Actuarial gain (loss) |
|
|
(24,552 |
) |
|
|
87,094 |
|
| Balance, end of year |
|
|
35,163 |
|
|
|
60,518 |
|
| Tax effect |
|
|
(8,802 |
) |
|
|
(12,439 |
) |
| Cumulative actuarial gain (loss), net of tax |
|
$ |
26,261 |
|
|
$ |
48,079 |
|
The assumptions used to determine retirement benefits
for the years ended December 31 are as follows:
| Assumption used to determine retirement benefits |
|
|
|
|
|
|
| |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
| |
|
|
|
|
|
|
| Discount rate |
|
|
7.17% |
|
|
|
5.04% |
|
| Salary increase rate |
|
|
2.00% |
|
|
|
2.00% |
|
The average duration of the accrued retirement
benefit cost as at December 31, 2022 and 2021 is 7.3 years and 7.4 years, respectively.
Convertible Notes
The following tables set forth the components
of the Company’s convertible notes at December 31, 2022 and 2021:
| Schedule of convertible debt | |
| | |
| |
| | |
December 31,
2022 | | |
December 31,
2021 | |
| 8% Unsecured Convertible Notes (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% Secured Convertible Notes with Original Issuance Discounts (OID Notes) | |
| 75,000 | | |
| 75,000 | |
| 12% Senior Secured Convertible Notes (TDH Secured Notes) | |
| 204,907 | | |
| 330,039 | |
| 12% Senior Secured Convertible Notes (Additional Secured Notes) | |
| 38,932 | | |
| 63,099 | |
| Loan discounts | |
| (25,164 | ) | |
| (1,550,540 | ) |
| Total convertible notes, net | |
| 571,664 | | |
| 3,320,598 | |
| Less: current portion of convertible notes, net | |
| (503,465 | ) | |
| (2,604,346 | ) |
| Convertible notes, net | |
$ | 68,199 | | |
$ | 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 $98.40 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.
At December 31, 2022 and 2021, the principal balance
of the Curiosity notes was $278,000.
8% Convertible Promissory Notes (Bridge
Notes)
On November 30, 2020, the Company entered into
a securities purchase agreement with EMA Financial, LLC (“EMA”) pursuant to which the Company issued to EMA a nine-month 8%
convertible promissory note in the principal amount of $260,000 (the “EMA Note”) for a $234,000 investment. The term of the
EMA Note may be extended by EMA up to an additional year. The EMA Note is convertible into common stock of the Company at any time after
180 days from issuance. The conversion price of the EMA Note is equal to the lower of: (i) $57.60 per share, or (ii) 70% of the lowest
trading price of the common stock during the ten consecutive trading days including and immediately preceding the conversion date.
On February 17, 2021, the terms of the EMA financing
were amended to (i) reduce the conversion rate to $38.40, and (ii) add a three-year warrant to purchase up to 2,708 shares of the Company’s
common stock, at an exercise price of $48.00 per share. On May 19, 2021, the terms of the EMA financing were further amended to (i) increase
the interest rate to 12%, and (ii) add a three-year warrant (the “EMA Warrant”) to purchase up to 1,295 shares of the Company’s
common stock, at an exercise price of $57.60 per share.
ASC 470-20 requires proceeds from the sale of
a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument
without the warrants and of the warrants themselves at the time of issuance. In connection with the EMA warrant issuance, the Company
allocated an aggregate fair value of $104,760 to the stock warrants and recorded a debt discount which will be amortized to interest expense
over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated
the fair value of the warrants at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price
on the date of grant ranging between $48.00 and $134.40, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest
rate of 0.19% and (iv) an expected volatility of the price of the underlying common stock ranging between 224.9% and 258.6%.
On May 24, 2021, EMA Warrant was amended to delete
the full-ratchet anti-dilution provision and the EMA Note was amended to delete the variable conversion price feature.
On June 2, 2021, the Company issued 333 shares
of common stock to EMA upon the conversion of $11,800 in note principal and $1,000 in conversion fees. On June 17, 2021, the Company issued
3,333 shares of common stock to EMA upon the conversion of $127,000 in note principal and $1,000 in conversion fees. On August 20, 2021,
the Company issued 3,633 shares of common stock to EMA upon the conversion of $121,200 in note principal and $17,292 in accrued interest
and conversion fees.
At December 31, 2022 and 2021, the principal balance
of the EMA Note was $0 and all associated loan discounts were fully amortized.
On December 17, 2020, the Company entered into
a note purchase agreement with Quick Capital, LLC (“Quick Capital”) pursuant to which the Company issued Quick Capital a
nine-month convertible promissory note in the principal amount of $113,587
(the “Quick Note”) for a $100,000
investment, which included an original issuance discount of 8% and a $4,500 credit for Quick Capital’s transaction expenses.
The Quick Note may be converted into shares of common stock at (i) a 30% discount to the lowest price per share of any debt or securities
offering by the Company if the Company’s common stock is listed on NASDAQ or NYSE within 90 days of the Quick Note issuance; (ii)
the lesser of (A) $38.40 or (B) a 30% discount to the average of the two lowest closing prices during the ten trading days prior to the
conversion date; (iii) $38.40 per share, upon an event of default as described in the Note.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its fair value was determined to be $12,621. This amount is
recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
In connection with the Quick Note issuance, the
Company also issued a three-year warrant to purchase up to an aggregate of 1,233 shares of the Company’s common stock at an exercise
price of $48.00 per share. ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to
the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time
of issuance. This resulted in the debt being recorded at a discount which will be amortized to interest expense over the term of the loan
using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of this
warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant
of $48.00, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate of 0.19% and (iv) an expected volatility
of the price of the underlying common stock of 224.3%. As a result, the Company allocated a fair value of $33,056 to the stock warrants.
On May 21, 2021, the Quick Note was amended to
replace the variable conversion price with a fixed conversion price of $38.40 per share and the Quick Warrant was amended to delete the
full-ratchet anti-dilution provision.
On June 21, 2021, the Company issued 9,667 shares
of common stock to Quick Capital upon the conversion of $27,487 in note principal and $65,313 in penalties and accrued interest. On June
28, 2021, the Company issued 8,969 shares of common stock to Quick Capital upon the conversion of $86,100 in note principal.
At December 31, 2022 and 2021, the principal balance
of the Quick Note was $0 and all associated loan discounts were fully amortized.
On February 9, 2021, the Company entered into
a securities purchase agreement with Auctus Fund, LLC (“Auctus”) pursuant to which the Company issued to Auctus a twelve-month
12% convertible promissory note in the principal amount of $500,000 (the “Auctus Note”). The note is convertible into shares
common stock at a conversion price of $57.60 per share. The Company received net proceeds of $428,000 after deducting fees and expenses
related to the transaction.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $155,875. This
amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
In connection with the note issuance, Auctus was
also issued a five-year warrant (the “Auctus Warrant”) to purchase up to an aggregate of 6,510 shares of the Company’s
common stock, at an exercise price of $57.60 per share. The Company estimated the fair value of this warrant at date of grant using the
Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $134.40, (ii) the contractual term
of the warrant of 5 years, (iii) a risk-free interest rate of 0.48% and (iv) an expected volatility of the price of the underlying common
stock of 259.2%. As a result, the Company allocated a fair value of $272,125 to the stock warrants and recorded debt discount to be amortized
as interest expense over the term of the related convertible note.
On May 25, 2021, Auctus Warrant was amended to
delete the full-ratchet anti-dilution provision.
On July 14, 2021, the Company issued 9,148 shares
of common stock to Auctus upon the conversion of $500,000 in note principal and $26,900 in accrued interest and conversion fees.
At December 31, 2022 and 2021, the principal balance
of the Auctus Note was $0 and all associated loan discounts were fully amortized.
On March 11, 2021, the Company entered into a
securities purchase agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”) pursuant to which the Company issued
to FirstFire a twelve-month 12% convertible promissory note in the principal amount of $300,000 (the “FirstFire Note”). The
first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. At any time after
180 days from the date of issuance, FirstFire may convert any amount due under the note into shares of the Company’s common stock
at a conversion price of $57.60 per share. The Company received net proceeds of $238,500 after deducting fees and expenses related to
the transaction.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $93,220. This
amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
In connection with the issuance of the note, FirstFire
was also issued a five-year warrant (the “FirstFire Warrant”) to purchase up to an aggregate of 3,906 shares of the Company’s
common stock, at an exercise price of $57.60 per share. The Company estimated the fair value of this warrant at date of grant using the
Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $124.80, (ii) the contractual term
of the warrant of 5 years, (iii) a risk-free interest rate of 0.78% and (iv) an expected volatility of the price of the underlying common
stock of 258.6%. As a result, the Company allocated a fair value of $145,280 to the stock warrants and recorded debt discount to be amortized
as interest expense over the term of the related convertible note.
On May 20, 2021, the FirstFire Note was amended
to replace the variable conversion feature price with a fixed conversion price of $57.60 and the FirstFire Warrant was amended to delete
the full ratchet anti-dilution provision.
On June 17, 2021, the Company issued 5,833 shares
of common stock to FirstFire upon the conversion of $300,000 in note principal and $36,000 in accrued interest.
At December 31, 2022 and 2021, the principal balance
of the FirstFire Note was $0 and all associated loan discounts were fully amortized.
On April 16, 2021, the Company entered into a
securities purchase agreement with Labrys Fund, LP (“Labrys”), pursuant to which the Company issued to Labrys a one-year convertible
promissory note in the principal amount of $300,000 (the “Labrys Note”). The Labrys Note bears interest at a rate of 12% per
annum. The first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. Labrys
may convert any amount due under the Labrys Note into shares of the Company’s common stock at a conversion price of $57.60 per share.
The Company received net proceeds of $266,000, after deducting fees and expenses related to the transaction.
In connection with the issuance of the note, Labrys
was also issued a five-year warrant to purchase up to an aggregate of 3,906 shares of the Company’s common stock (the “Labrys
Warrant”), at an exercise price of $57.60 per share. The Company estimated the fair value of this warrant at date of grant using
the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $191.10, (ii) the contractual
term of the warrant of 5 years, (iii) a risk-free interest rate of 0.84% and (iv) an expected volatility of the price of the underlying
common stock of 251.2%. As a result, the Company allocated a fair value of $172,479 to the stock warrants and recorded debt discount to
be amortized as interest expense over the term of the related convertible note.
On May 22, 2021, the Labrys Warrant was amended
to delete the full-ratchet anti-dilution provision.
On June 17, 2021, the Company issued 5,833 shares
of common stock to Labrys upon the conversion of $300,000 in note principal and $36,000 in accrued interest.
At December 31, 2022 and 2021, the principal balance
of the Labrys Note was $0 and all associated loan discounts were fully amortized.
10% Unsecured Convertible Redeemable Note
– Variable Conversion Price
On March 1, 2020, the Company issued a convertible
redeemable note to an unrelated party in the principal amount of $100,000. The note accrues interest at a rate of 10% per annum, was due
on August 31, 2020 and is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount
from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its fair value was determined to be $44,129.
This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.
In connection with the note issuance, the Company
also issued a five-year warrant to purchase up to an aggregate of 521 shares of the Company’s common stock at an exercise price
of $96.00 per share. ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the
two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time
of issuance. This resulted in the debt being recorded at a discount which will be amortized to interest expense over the term of the loan
using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of this
warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant
of $96.00, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.89% and (iv) an expected volatility
of the price of the underlying common stock of 144.4%. As a result, the Company allocated a fair value of $30,935 to the stock warrants.
On April 14, 2021, the Company issued 2,083 shares
of common stock to the noteholder upon the conversion of $100,000 in note principal and $11,205 of accrued interest.
At December 31, 2022 and 2021, the principal balance
of this note was $0 and all associated loan discounts were fully amortized.
On November 20, 2020, the Company issued a convertible
redeemable note to an unrelated party in the principal amount of $165,000 less a $15,000 original issuance discount resulting in net cash
proceeds to the Company of $150,000. The note accrues interest at a rate of 10% per annum, is due on February 15, 2021 and is convertible
into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount from the lowest volume weighted average
price of the Company’s common stock in the preceding 20 trading days.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its fair value was determined to be $50,871. This amount is
recorded as a debt discount and is amortized as interest expense over the term of the note.
On February 17, 2021, the Company entered into
a debt exchange agreement with the holder of the convertible promissory note, in the aggregate amount of $169,000 of outstanding principal
and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreement, the holder exchanged the outstanding note, and
all amounts owed by the Company thereunder, for 169,000 shares of the Company’s 8% Series B convertible preferred stock. At the
time of the exchange, all amounts due under the note was deemed to be paid in full and the note was cancelled. No extinguishment gain
or loss was recognized as a result of the exchange.
At December 31, 2022 and 2021, the principal balance
of this note was $0 and all associated loan discounts were fully amortized.
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 27,109 shares of the Company’s common stock at an
exercise price of $126.00 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 9,259 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 $126.00 per share, or approximately 34,921 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 $57.60. In the event that VWAP drops below $57.60,
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 $81.00,
(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 34,706 shares of the Company’s
common stock at an exercise price of $126.00 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.
On November 30, 2021, the Company issued 4,329
shares of common stock to L1 upon the conversion of $275,000 in principal and $5,500 in financing costs for the repayment of monthly installments
required under the L1 Note.
During the three months ended March 31, 2022,
the Company issued an aggregate 191,912 shares of common stock to L1 upon the conversion of $4,125,000 of outstanding principal.
As of December 31, 2022 and 2021, the principal
balance of these notes was $0 and $4,125,000, respectively, and the remaining balance on the associated loan discounts was $0 and $1,504,552,
respectively.
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 10,123
shares of Common Stock of the Company at an exercise price of $126.00
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 $126.00 per share (the “Conversion Price”) into 13,889 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 $57.60) multiplied by 102% of the amount due on such date. In the event that
the ten-trading day VWAP drops below $57.60 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 $16.20 (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 $16.20.
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 $126.00 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 year ended December 31, 2022, the Company
issued an aggregate 108,025 shares of common stock and repaid $1,146,901 in cash to L1 upon the conversion of $1,750,000 of outstanding
principal.
As of December 31, 2022, the principal balance
of these notes was $0 and all associated loan discounts were fully amortized.
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. The Company recognized an extinguishment loss of $185,448 as a result of the exchange.
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.
At December 31, 2022 and 2021, 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 (Original TDH Notes)
On June 20, 2016, the Company issued $4,000,000
of senior secured promissory notes to the shareholders of TD Holdings (the “TDH Sellers”) in connection with a share sale
agreement pursuant to which the Company acquired 100% of the common stock of TD Holdings (“the TDH Share Sale Agreement”).
The notes bear interest at 5.0% per annum and are due on the earlier of (i) June 20, 2018 or (ii) the date on which the Company successfully
completes a qualified initial public offering as defined in the agreement. The notes are collateralized by all of the assets of TD Holdings.
First Amendment to the TDH Share Sale Agreement
On January 3, 2018, the Company entered into an
amendment to the TDH Share Sale Agreement (the “First Amendment”). Under the terms of the First Amendment:
| |
· |
The maturity date of the notes was extended from July 1, 2018 until July 1, 2019. |
| |
· |
The interest rate on the notes during for one-year extension period from July 2, 2018 to July 1, 2019 was increased to 10%. |
| |
· |
Interest is payable quarterly in arrears during the one-year extension period, instead of annually in arrears. The first such quarterly interest payment of $100,000 is due on September 30, 2018. |
| |
· |
Under the terms of the terms of TDH Share Sale Agreement, the TDH Sellers could earn up to an additional $5.0 million in contingent earnout payments. The original earnout period ended on December 31, 2018. The First Amendment extended the earnout period by one year to December 31, 2019. |
As consideration to enter into the First Amendment,
the Company issued 833 shares of its common stock valued at $480,000 to the TDH Sellers.
Second Amendment to the TDH Share Sale Agreement
On January 15, 2019, the Company entered into
a second amendment to the TDH Share Sale Agreement (the “Second Amendment”). Under the terms of the Second Amendment:
| |
· |
The maturity date of the notes was extended from July 1, 2019 to April 2, 2020. |
| |
|
|
| |
· |
The TDH Sellers shall have the right to convert the notes at a conversion price of $259.20 per share, either in whole or in part at any time prior to the maturity, subject to the terms and conditions set forth in the Second Amendment. |
| |
|
|
| |
· |
In the event that the notes are not repaid prior to July 2, 2019, no funds will be transferred by TDH to the Company. |
| |
|
|
| |
· |
The payment terms of the contingent earnout was modified from 50% payable in cash and 50% payable in stock to 75% payable in cash and 25% payable in stock. |
As consideration to enter into the Second Amendment,
the Company issued an additional 833 shares of its common stock valued at $220,000 to the TDH Sellers.
Due to the inclusion of a conversion feature,
the Second Amendment was considered an extinguishment and subsequent reissuance of the notes under the guidelines of ASC 470-20-40-7 through
40-9. As a result, the Company recorded a loss on the extinguishment of debt of $363,468 related to the Second Amendment during the year
ended December 31, 2019.
The principal value of the notes was reclassified
to convertible notes, net – current on the Company’s consolidated financial statements.
Third Amendment to the TDH Share Sale Agreement
On March 16, 2020, the Company entered into a
third amendment (the “Third Amendment”) to the TDH Share Sale Agreement, pursuant to which the Company’s subsidiary,
Grom Holdings, had acquired 100% of the common stock of TDH (representing ownership of the animation studio) from certain individuals
(the “TDH Sellers”). The Company used the proceeds received from the TDH Secured Notes Offering to pay the TDH Sellers $3,000,000
of the principal due under the Original TDH Notes, leaving a principal amount due to the TDH Sellers of $1,000,000 (plus accrued interest
and costs). In addition, the accrued interest of $361,767 due to the TDH Sellers pursuant to the Original TDH Notes was paid in three
monthly payments of $93,922, commencing April 16, 2020, and twelve-monthly installments of $6,667 commencing April 16, 2020.
Pursuant to the Third Amendment, the TDH Sellers
and the Company agreed, among other things:
| |
· |
To extend the maturity date of the remaining Original TDH Notes by one year to June 30, 2021; |
| |
|
|
| |
· |
To increase the interest rate on the remaining Original TDH Notes to 12%; |
| |
|
|
| |
· |
To grant a first priority security interest on the shares of TDH and TDAHK to the TDH Sellers, pari passu with the holders of the TDH Secured Notes; and |
| |
|
|
| |
· |
To pay the balance of the Original TDH Notes monthly in arrears, amortized over a four-year period. |
On August 18, 2021, the Company paid the TDH Sellers
an aggregate of $834,760, representing all remaining amounts due and payable under the TDH Secured Notes. As a result, the TDH Sellers
released the pledged shares of TDH and its subsidiary, Top Draw Animation Hong Kong Limited from escrow. The TDH Sellers have no further
security interest in the assets of the Company or its subsidiaries.
At December 31, 2022 and 2021, the principal balance
of the Original TDH Notes was $0.
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 $96.00 per share.
The Company’s obligations under the TDH
Secured Notes, are secured by Grom Holdings’ shares of stock of TDH, and of its wholly owned subsidiary, TDAHK. The TDH Secured
Notes rank equally and ratably on a pari passu basis with (i) the other TDH Secured Notes and (ii) the Original TDH Notes issued by the
Company pursuant to TDH Share Sale Agreement.
If the Company sells the animation studio located
in Manila, Philippines, which is currently owned by TDH through TDAHK (the “Animation Studio”), for more than $12,000,000,
and so long as any amount of principal is outstanding under the TDH Secured Notes, the Company will pay the TDH Secured Notes holders
from the proceeds of the sale (i) all amounts of principal outstanding under the TDH Secured Notes, (ii) such amount of interest which
would be due and payable assuming the TDH Secured Notes were held to maturity (minus any amounts of interest previously paid hereunder),
and (iii) an additional 10% of the amount of principal outstanding under the TDH Secured Notes within five days of the closing of such
sale.
In connection with the issuance of the TDH Secured
Notes, the Company issued to each TDH Secured Note holder shares of common stock equal to 20% of the principal amount of such holder’s
TDH Secured Note, divided by $96.00. Accordingly, an aggregate of 6,250 shares of common stock were issued to the TDH Secured Note holders
on March 16, 2020. These shares were valued at $420,000, or $67.20 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.
At December 31, 2022 and 2021, the principal
balance of these notes was $204,907 and $330,030, respectively, and the remaining balance on the associated loan discounts was $21,246
and $38,646, respectively.
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 $96.00 per share.
In connection with the issuance of the Additional
Secured Notes, the Company issued to each Additional Secured Note Lender shares of common stock equal to 20% of the principal amount of
such holder’s Additional Secured Note, divided by $96.00. Accordingly, an aggregate of 2,208 shares of common stock were issued.
These shares were valued at $148,000, or $67.20 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.
At December 31, 2022 and 2021, the principal
balance of these notes was $38,932,
and $63,098,
respectively, and the remaining balance on the associated loan discounts was $4,018
and $7,343,
respectively.
Future Minimum Principal Payments
The principal repayments based upon the maturity
dates of the Company’s borrowings for each of the next five years are as follows:
| Schedule of future debt maturity payments | |
| |
| 2023 | |
$ | 520,793 | |
| 2024 | |
$ | 76,046 | |
| 2025 | |
$ | – | |
| 2026 | |
$ | – | |
| 2027 | |
$ | – | |
| 2028 and thereafter | |
$ | – | |
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 $16.20 (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 $16.20
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 fair value of
derivative liability was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:
| Schedule of assumptions | |
| |
| | |
May 9, 2022 | |
| Stock price | |
$ | 17.10 | |
| Strike price | |
| 16.20 | |
| Risk-free rate | |
| 2.12% | |
| Annualized volatility | |
| 150% | |
| Forecast horizon in years | |
| 1.20 | |
| Alternative Conversion Discount | |
| 20.0% | |
| Maximum Shares to be Delivered | |
| 108,025 | |
During the year ended December 31, 2022, L1
Capital converted $1,750,000
of the Second Tranche convertible note for 108,025
shares and a cash settlement of $1,146,901,
resulting in a $143,598
loss on settlement of derivative.
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.
| 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.
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 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 December 31, 2022 and 2021 are as follows:
| Schedule of financial instruments | |
| | |
| | |
| | |
| |
| | |
December 31, 2022 | |
| | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Liabilities: | |
| | |
| | |
| | |
| |
| Contingent Purchase Consideration | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| Total Liabilities | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| | |
December 31, 2021 | |
| | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| 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 years ended December 31, 2022 and 2021:
| Schedule of changes in the fair value financial liabilities | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
Level 3 Financial Liabilities for the Year Ended December 31, 2022 | |
| | |
Balance January 1, 2022 | | |
Realized (Gains) Losses | | |
Additions | | |
Settlements | | |
Unrealized (Gains) Losses | | |
Balance December 31, 2022 | |
| Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| |
| Derivative Liabilities | |
$ | – | | |
$ | 143,598 | | |
$ | 1,052,350 | | |
$ | (1,146,901 | ) | |
$ | (49,047 | ) | |
$ | – | |
| Contingent Purchase Consideration | |
| 5,586,493 | | |
| – | | |
| – | | |
| – | | |
| (5,586,493 | ) | |
| – | |
| Total Liabilities | |
$ | 5,586,493 | | |
$ | 143,598 | | |
$ | 1,052,350 | | |
$ | (1,146,901 | ) | |
$ | (5,635,540 | ) | |
$ | – | |
| | |
Level 3 Financial Liabilities for the Year Ended December 31, 2021 | |
| | |
Balance January 1, 2021 | | |
Realized (Gains) Losses | | |
Additions | | |
Settlements | | |
Unrealized (Gains) Losses | | |
Balance December 31, 2021 | |
| Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| |
| Contingent Purchase Consideration | |
$ | – | | |
$ | – | | |
$ | 5,586,493 | | |
$ | – | | |
$ | – | | |
$ | 5,586,493 | |
| Total Liabilities | |
$ | – | | |
$ | – | | |
$ | 5,586,493 | | |
$ | – | | |
$ | – | | |
$ | 5,586,493 | |
The following table sets forth the components
of income tax expense (benefit) for the years ended December 31, 2022 and 2021:
| Schedule of income tax expense (benefit) |
|
|
|
|
|
|
|
|
| |
|
December 31,
2022 |
|
|
December 31,
2021 |
|
| Current: |
|
|
|
|
|
|
|
|
| Federal |
|
$ |
– |
|
|
$ |
– |
|
| State and local |
|
|
– |
|
|
|
– |
|
| Foreign |
|
|
– |
|
|
|
– |
|
| Total current |
|
|
– |
|
|
|
– |
|
| Deferred: |
|
|
|
|
|
|
|
|
| Federal |
|
|
– |
|
|
|
– |
|
| State and local |
|
|
– |
|
|
|
– |
|
| Foreign |
|
|
446,178 |
|
|
|
21,042 |
|
| Total deferred |
|
|
446,178 |
|
|
|
21,042 |
|
| Total |
|
$ |
446,178 |
|
|
$ |
21,042 |
|
The following table sets forth a reconciliation
of income tax expense (benefit) at the federal statutory rate to recorded income tax expense (benefit) for the years ended December 31,
2022 and 2021:
| | |
December 31,
2022 | | |
December 31, 2021 | |
| Computed tax at the expected statutory rate | |
| 21.00% | | |
| 21.00% | |
| State and local income taxes, net of federal benefit | |
| 0.67% | | |
| – | |
| Permanent differences | |
| -14.58% | | |
| – | |
| Foreign deferred tax adjustment | |
| -1.36% | | |
| – | |
| Noncontrolling interest | |
| -0.56% | | |
| – | |
| Foreign tax differential | |
| 0.10% | | |
| – | |
| Change in valuation allowance | |
| -5.27% | | |
| -21.20% | |
| Total | |
| 0.00% | | |
| -0.20% | |
The following tables set forth the components of income taxes payable
at December 31, 2022 and 2021:
| Schedule of income tax payable | |
| | | |
| | |
| | |
| December 31, 2022 | | |
| December 31,
2021 | |
| Federal | |
$ | – | | |
$ | – | |
| State and local | |
| – | | |
| – | |
| Foreign | |
| – | | |
| – | |
| Total | |
$ | – | | |
$ | – | |
The following tables set forth the components of deferred income taxes
at December 31, 2022 and 2021:
| Schedule of deferred income taxes |
|
|
|
|
|
|
|
|
| |
|
December 31,
2022 |
|
|
December 31,
2021 |
|
| Non-current deferred tax assets: |
|
|
|
|
|
|
|
|
| Retirement benefits |
|
$ |
73,756 |
|
|
$ |
57,714 |
|
| Write down of investment(s) |
|
|
49,636 |
|
|
|
43,325 |
|
| Deferred revenue net |
|
|
84,126 |
|
|
|
58,477 |
|
| Other |
|
|
14,947 |
|
|
|
15,409 |
|
| Net operating loss carryforwards |
|
|
11,351,901 |
|
|
|
6,937,604 |
|
| Less: valuation allowance |
|
|
(11,574,366 |
) |
|
|
(6,646,897 |
) |
| Total non-current deferred tax asset |
|
|
– |
|
|
|
465,632 |
|
| Total deferred tax asset |
|
$ |
– |
|
|
$ |
465,632 |
|
Certain prior year deferred income tax balances
have been reclassified to conform with the current year presentation. The changes do not have any financial impact on the Company’s
consolidated financial statements.
As of December 31, 2022, the Company had
federal, state and foreign net operating loss carryforwards of approximately $49.9
million, $6.7
million, and $2.0
million, respectively. Approximately $20.7
million of these NOL's begin to expire in 2032 and $29.6 million currently do not expire. The $6.7 million of state NOL's do not
expire and the foreign NOL's begin to expire in 2023. 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 remains subject to examination in
federal, state and foreign jurisdictions in which the Company conducts its operations and files tax returns. These tax years range from
2016 through 2022. The Company believes that the results of current or any prospective audits will not have a material effect on its financial
position or results of operations.
The Company has made its assessment of the level
of tax authority for each tax position, including the potential application of interest and penalties, based on the technical merits and
determined that no unrecognized tax benefits associated with the tax positions exist.
Preferred Stock
The Company is authorized to issue 25,000,000
shares of preferred stock, par value of $0.001 per share.
Series A Preferred Stock
On February 22, 2019, the Company designated 2,000,000
shares of its preferred stock as 10% Series A convertible preferred stock, par value $0.001 per share (“Series A Stock”).
At December 31, 2022 and December 31, 2021, the
Company had no 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”).
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 March 31, 2021, the Company issued 75,000 shares
of Series B Stock with a fair market value of $75,000 to its attorneys for legal services rendered.
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.
At December 31, 2022 and 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 $57.60
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 $57.60 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 686
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 1,371
shares of common stock to a stockholder upon the conversion of 79,000
shares of Series C preferred stock.
As of December 31, 2022 and 2021, the Company
had 9,281,759 shares and 9,400,259 shares of Series C Stock issued and outstanding, respectively.
For the years ended December 31, 2022 and 2021,
the Company declared cumulative dividends totaling $735,586 and $459,068, 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 2,515,290 and 433,518 shares of common stock issued and outstanding as of
December 31, 2022 and 2021, respectively.
Reverse Stock Splits
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.
On October 4, 2022, 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-30, 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 December 9, 2022, the Board effected a 1-for-30 reverse stock split in connection
with our continued listing of the Company’s 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. All share and per share information in this prospectus
reflects the reverse stock split of our outstanding common stock at a ratio of 1-for-30.
Registered Offerings
On June 21, 2021, the Company sold an aggregate
of 80,321 units (“Units”), at a price to the public of $124.50 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 $136.95 per
share (the “Warrants”), pursuant to a 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 12,048 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 12,048 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 12,048 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.
On December 8, 2022, the Company sold an aggregate
of 1,415,682 units (the “Units”) and 314,422 pre-funded units (the “Pre-Funded Units”), with (a) each Unit consisting
of: (i) one share of common stock, par value $0.001 per share (the “Common Stock”); and (ii) two warrants (the “Warrants”),
each Warrant to purchase one share of Common Stock at $2.89 per share (100% of the offering price per Unit); and (b) each Pre-Funded Unit
consisting of: (i) one pre-funded warrant (the “Pre-Funded Warrant”) exercisable for one share of Common Stock at $0.001;
and (ii) two Warrants. The Warrants will be immediately exercisable and will expire on the fifth anniversary of the original issuance
date. The Pre-Funded Warrants will be exercisable immediately and may be exercised at any time until all of the Pre-Funded Warrants are
exercised in full. The Warrants and Pre-Funded Warrant will be issued pursuant to a warrant agent agreement (the “Warrant Agent
Agreement”) entered into by and between the Company and Equiniti Trust Company, as warrant agent. Pursuant to the Underwriting Agreement,
the Company granted the Underwriter a 45-day option to purchase up to an additional 259,515 Units and/or Pre-Funded Units to cover over-allotments.
On December 12, 2022 the Underwriter exercised in part, the over-allotment to purchase 495,602 Warrants.
The Company received gross proceeds of approximately
$5,000,000 in the Offering, before deducting underwriting discounts and commissions and other offering expenses.
Private Offerings
During the year ended December 31, 2022, the Company
we sold 51,498 shares of common stock for gross proceeds of $275,000 to accredited investors in a private offering.
Common Stock Issued as Compensation to Employees,
Officers and/or Directors
During the year ended December 31, 2021, the Company
issued 5,265 shares of common stock with a fair market value of $410,652 to an officer as compensation.
Common Stock Issued in Exchange for Consulting,
Professional and Other Services
During the year ended December 31, 2022, the Company
issued 5,950 shares of common stock with a fair market value of $116,736 to contractors for services rendered.
During the year ended December 31, 2021, the Company
issued 9,656 shares of common stock with a fair market value of $1,199,135 to contractors for services rendered.
Common Stock Issued in Connection with the
Conversion of Convertible Note Principal and Accrued Interest
During the year ended December 31, 2022, the Company
issued 299,938 shares of common stock upon the conversion of $5,875,000 in convertible note principal and accrued interest.
During the year ended December 31, 2021, the Company
issued 53,161 shares of common stock upon the conversion of $2,048,797 in convertible note principal and accrued interest.
Common Stock Issued in Connection with the
Issuance of Convertible Promissory Notes
During the year ended December 31, 2021, the Company
issued 592 shares of common stock valued at $39,750 in connection with the issuance of convertible notes.
Common Stock Issued in the Acquisition of
a Business
During the year ended December 31, 2021, the Company
issued 59,063 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 December 31, 2022 and 2021.
| Schedule of warrants | |
| | |
| | |
| |
| | |
Number of Warrants Outstanding | | |
Weighted Avg. Exercise Price | | |
Weighted Avg. Contractual Life (Yrs.) | |
| Balance January 1, 2021 | |
| 7,654 | | |
$ | 220.20 | | |
| 1.66 | |
| Warrants issued | |
| 142,458 | | |
$ | 125.40 | | |
| | |
| Warrants exercised | |
| (8,316 | ) | |
$ | – | | |
| | |
| Warrants forfeited | |
| (224 | ) | |
$ | – | | |
| | |
| December 31, 2021 | |
| 141,572 | | |
$ | 132.00 | | |
| 1.75 | |
| Warrants issued | |
| 4,280,355 | | |
$ | 3.20 | | |
| | |
| Warrants exercised | |
| (279,069 | ) | |
$ | – | | |
| | |
| Warrants forfeited | |
| (5,678 | ) | |
$ | – | | |
| | |
| Balance December 31, 2022 | |
| 4,137,180 | | |
$ | 7.29 | | |
| 4.89 | |
All stock warrants are exercisable for a period
ranging from three to five years from the date of issuance. See Note 13 – Debt for more information.
During the year ended December 31, 2022, the Company
issued 279,069 shares of common stock upon the exercise of 279,069 Pre-Funded Warrants for gross proceeds of $279.
As of December 31, 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 at December 31, 2022.
| Schedule of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Issued |
|
Options
Issued |
|
|
Options
Forfeited |
|
|
Options
Outstanding |
|
|
Vested
Options |
|
|
Strike
Price |
|
|
Weighted
Average
Remaining
Life (Yrs.) |
|
| 2013 |
|
|
8,058 |
|
|
|
(869 |
) |
|
|
7,189 |
|
|
|
7,189 |
|
|
$ |
230.40 |
|
|
|
0.72 |
|
| 2018 |
|
|
62 |
|
|
|
– |
|
|
|
62 |
|
|
|
62 |
|
|
|
748.80 |
|
|
|
0.33 |
|
| 2021 |
|
|
6,950 |
|
|
|
– |
|
|
|
6,950 |
|
|
|
2,317 |
|
|
$ |
89.40 |
|
|
|
3.58 |
|
| Total |
|
|
15,070 |
|
|
|
(869 |
) |
|
|
14,201 |
|
|
|
9,568 |
|
|
$ |
163.68 |
|
|
|
1.23 |
|
On July 29, 2021, the Company granted stock options
to purchase an aggregate of 6,950 shares to new employees at an exercise price of $89.40. The options vest annually in equal installments
over a three-year period and expire in five 5 years from the date of grant. Using the Black Sholes model with a volatility of 326.5%,
with no dividends paid since inception and a risk-free interest rate of 0.37%; resulted in stock-based compensation expense of $585,728
which will be amortized over a 36-month period, or $16,270 per month.
During the years ended December 31, 2022 and 2021,
the Company recorded $315,332 and $82,910, respectively, in stock-based compensation expense related to stock options. Stock-based compensation
expense is reported in selling, general and administrative on the Company’s Consolidated Statement of Operations and Comprehensive
Loss.
As of December 31, 2022, the outstanding stock
options had an aggregate intrinsic value of $0.
| 18. |
COMMITMENTS AND CONTINGENCIES |
In the ordinary course of business, we and our
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 our current knowledge, and taking into
consideration our legal expenses, we do not believe we are a party to, nor are any of our subsidiaries the subject of, any legal proceeding
that would have a material adverse effect on our consolidated financial condition or liquidity.
See also Note 7 (“Leases”).
See also Note 16 (“Income Taxes”).
In accordance with FASB ASC 855-10, Subsequent
Events, the Company has analyzed its operations subsequent to December 31, 2022 to the date these consolidated financial statements
were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements,
except as follows:
PIPE Offering and Related Waiver
On January 25, 2023, the Company consummated a
private investment in public equity financing (the “PIPE Offering”) pursuant to the terms of the Securities Purchase Agreement,
dated January 25, 2023, as amended (the “2023 SPA”), by and between it and the purchaser named therein (the “2023 SPA
Selling Stockholder”) and issued (i) 100,000 shares of common stock; (ii) 1,327,434 warrants (the “Purchase Warrants”)
to purchase an aggregate of 2,323,010 shares of common stock; and (iii) 1,227,434 prefunded warrants (the “Pre-Funded Warrants,”
and together with the Purchase Warrants, the “Warrants”) to purchase an aggregate of 1,227,434 shares of common stock. The
purchase price of each share of common stock and associated Purchase Warrant was $2.26. The purchase of each Pre-Funded Warrant and associated
Purchase Warrant was $2.25. The aggregate gross proceeds of the PIPE Offering was approximately $3 million, before deducting fees to the
placement agent and other expenses payable by the Company. EF Hutton, division of Benchmark Investments, LLC, acted as the exclusive placement
agent in connection with the PIPE Offering.
In connection with the PIPE Offering, the Company
entered into a waiver agreement (the “Waiver”) with L1 Capital Global Opportunities Master Fund (“L1”) waiving
certain provisions of the Securities Purchase Agreement, dated as of September 14, 2021 (the “2021 SPA”), by and between it
and L1. Pursuant to the terms of the Waiver, L1 waived certain provisions of the 2021 SPA and in consideration thereof, the Company (i)
issued 150,000 purchase warrants substantially similar to the Purchase Warrants issued in connection with the 2023 SPA; and (ii) paid
a cash fee of $50,000 to L1.
The Purchase Warrants are immediately exercisable
for $2.26 per share of common stock, subject to certain adjustments, including with respect to stock dividends, splits, subsequent rights
offerings, pro rata distributions and a Fundamental Transaction (as defined in the purchase warrant agreement (the “Purchase Warrant
Agreement”)), until the fifth anniversary of the original issuance date (the “Expiration Date”). The Prefunded Warrants
are immediately exercisable for $0.01 per share of common stock, subject to certain adjustments, including with respect to stock dividends,
splits, subsequent rights offerings, pro rata distributions and a Fundamental Transaction (as defined in the Prefunded Warrant), until
all of the Prefunded Warrants are exercised in full. The exercise of the Warrants is subject to beneficial ownership limitations.
Pursuant to the 2023 SPA, the Company is obligated
to hold a special stockholders’ meeting no later than 60 days following the date of the 2023 SPA to solicit the approval of the
issuance of the shares of common stock, Warrants and the shares of common stock underlying the Warrants in compliance with the rules of
the Nasdaq Stock Market (without regard to any limitations on exercise set forth in the Purchase Warrant Agreement or the prefunded warrant
agreement (the “Prefunded Warrant Agreement”). On March 27, 2023, the Company held a virtual special meeting of stockholders,
and at the meeting, the issuance of the securities in compliance with the rules of the Nasdaq Stock Market has been approved.
In connection with the PIPE Offering, the Company
entered into a Registration Rights Agreement with the Purchasers, dated January 25, 2023 (the “Registration Rights Agreement”).
The Registration Rights Agreement provides that we shall file a registration statement covering the resale of all of the Registrable Securities
(as defined in the Registration Rights Agreement) with the SEC no later than the 7th calendar day following the date of the Registration
Rights Agreement, and have the registration statement declared effective by the SEC as promptly as possible after the filing thereof,
but in any event no later than the 30th calendar day following the date of the Registration Rights Agreement, or in the event of a “full
review” by the SEC, the 45th day following the date of the Registration Rights Agreement. On February 2, 2023, the Company filed
the registration statement, and on February 9, 2023, the registration statement was declared effective by the SEC.
Notice of Delisting of Failure to Satisfy
a Continued Listing Rule or Standard
On April 10, 2023, the Company received a deficiency
letter (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying it that, based upon
the closing bid price of the Company’s common stock for the last 30 consecutive business days, it was not in compliance with the
requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq, as set forth in Nasdaq Listing Rule 5550(a)(2)
(the “Minimum Bid Requirement”). The Notice had no immediate effect on the continued listing status of the Company’s
common stock on Nasdaq, and, therefore, its listing remains fully effective. The Company was provided initial compliance period of 180
calendar days from the date of the Notice, or until October 9, 2023, to regain compliance with Nasdaq Listing Rule 5550(a)(2).
