Forward-Looking Statements
The following discussion and analysis should be read in conjunction with our
financial statements and the related notes thereto. The management's discussion
and analysis contain forward-looking statements, such as statements of our
plans, objectives, expectations, and intentions. Any statements that are not
statements of historical fact are forward-looking statements. When used, the
words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect"
and the like, and/or future tense or conditional constructions ("will," "may,"
"could," "should," etc.), or similar expressions, identify certain of these
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties, including those under "Risk Factors," which appear in
elsewhere in this Annual Report, that could cause actual results or events to
differ materially from those expressed or implied by the forward-looking
statements. Our actual results and the timing of events could differ materially
from those anticipated in these forward-looking statements as a result of
several factors. We do not undertake any obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of this
Annual Report.
The share and per share information in the following discussion reflects a
reverse stock split of our outstanding common stock at a 1-for-32 ratio,
effective as of May 13, 2021.
Overview
We were incorporated under the laws of the State of Florida on April 14, 2014,
as Illumination America, Inc.
Effective August 17, 2017, we acquired Grom Holdings pursuant to the terms of
the Share Exchange Agreement entered into on May 15, 2017. In connection with
the Share Exchange, the Company issued an aggregate of 3,464,184 shares of its
common stock to the Grom Holdings stockholders, pro rata to their respective
ownership percentage of Grom Holdings. Each share of Grom Holdings was exchanged
for 0.13 shares of our common stock. As a result, the stockholders of Grom
Holdings owned approximately 92% of the Company's issued and outstanding shares
of common stock at such time.
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In connection with the Share Exchange, we changed our name from Illumination
America, Inc. to "Grom Social Enterprises, Inc."
We are a media, technology and entertainment company that focuses on delivering
content to children under the age of 13 years in a safe secure platform that is
compliant with COPPA and can be monitored by parents or guardians. We conduct
our business through the following five operating subsidiaries:
· Grom Social was incorporated in the State of Florida on March 5, 2012 and
operates our social media network designed for children under the age of
13 years.
· TD Holdings was incorporated in Hong Kong on September 15, 2005. TD
Holdings operates through its two wholly-owned subsidiaries: (i) Top Draw
HK and (ii) Top Draw Philippines. The group's principal activities are the
production of animated films and televisions series.
· GES was incorporated in the State of Florida on January 17, 2017. GES
operates our web filtering services provided to schools and government
agencies.
· GNS was incorporated in the State of Florida on April 19, 2017. GNS
intends to market and distribute nutritional supplements to children. GNS
has no operations since its inception.
· Curiosity was organized in the State of Delaware on January 5, 2017.
Curiosity acquires and develops kids and family entertainment properties
and associated business opportunities.
Impact of COVID-19
The Company has experienced significant disruptions to its business and
operations due to circumstances related to COVID-19, and as a result of delays
caused government-imposed quarantines, office closings and travel restrictions,
which affect both the Company's and its service providers. The Company has
significant operations in Manila, Philippines, which was initially 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 89% of the Company's total revenues on a consolidated basis,
was forced to close its offices for significant periods of time during both the
years ended December 31, 2021 and 2020.
In response to the outbreak and business disruptions, the Company instituted
employee safety protocols to contain the spread, including domestic and
international travel restrictions, work-from-home practices, extensive cleaning
protocols, social distancing and various temporary closures of its
administrative offices and production studio. Further, the Company implemented a
range of actions aimed at temporarily reducing costs and preserving liquidity.
Recent Events
Reverse Stock Split
On April 7, 2021, the Company's board of directors approved, and, on April 8,
2021, the Company's shareholders approved, a reverse stock split at 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.
Listing on the Nasdaq Capital Market
On June 17, 2021, our common stock and warrants began trading on the Nasdaq
Capital Market under the symbols "GROM" and "GROMW," respectively.
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Registered Offering
On June 21, 2021 (in this case, the "Closing Date"), the Company, sold an
aggregate of 2,409,639 units (the "Units"), at a price to the public of $4.15
per Unit (the "Underwritten Offering"), each Unit consisting of one share of
common stock and a warrant to purchase one share of common stock at an exercise
price of $4.565 per share pursuant to an underwriting agreement, dated as of
June 16, 2021 (the "Underwriting Agreement"), between the Company and EF Hutton,
division of Benchmark Investments, LLC, as representative (the "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 to purchase up to 361,445 additional Units of common stock and warrants,
to cover over-allotments in connection with the Offering, which EF Hutton
exercised with respect to warrants exercisable for up to an additional 361,445
shares on the Closing Date.
The shares and the warrants were offered and sold to the public pursuant to the
Company's registration statement on Form S-1, as amended (File No. 333-253154),
filed by the Company with the SEC under the Securities Act, which became
effective on June 16, 2021.
On the Closing Date, the Company received gross proceeds of approximately
$10,000,000, before deducting underwriting discounts and commissions of 8% of
the gross proceeds and estimated offering expenses. The Company is using the net
proceeds from the Underwritten Offering primarily for sales and marketing
activities, product development, acquisition of, or investment in, technologies,
solutions, or businesses that complement the Company's business, and for working
capital and general corporate purposes.
Pursuant to the Underwriting Agreement, the Company issued to EF Hutton
five-year warrants to purchase up to 144,578 shares (6% of the shares sold in
the Underwritten Offering), on the Closing Date. EF Hutton's warrants are
exercisable at $4.15 per share and are subject to a lock-up for 180 days from
the commencement of sales in the Underwritten Offering, including a mandatory
lock-up period in accordance with FINRA Rule 5110(e).
The total expenses of the Underwritten Offering were approximately $1,162,738,
which included the underwriting discounts and commissions and EF Hutton's
reimbursable expenses relating to the Underwritten Offering.
On July 15, 2021, EF Hutton exercised in full the over-allotment option with
respect to all 361,445 additional shares. After giving effect to the full
exercise of the over-allotment option, the total number of Units sold by the
Company in the Underwritten Offering was 2,771,084, for total gross proceeds to
the Company of approximately $11,500,000, before deducting underwriting
discounts and commissions and other offering expenses payable by the Company.
Curiosity Acquisition
On July 29, 2021, the Company entered into a membership interest purchase
agreement (in this case, the "Purchase Agreement") with CIM, and the holders of
all of CIM's outstanding membership interests (the "Sellers"), for the purchase
of 80% of CIM's outstanding membership interests (the "Purchased Interests")
from the Sellers (the "Acquisition).
On August 19, 2021, pursuant to the terms of the Purchase Agreement, the Company
consummated the Acquisition and acquired the Purchased Interests in
consideration for the issuance to the Sellers of an aggregate of 1,771,883
shares of the Company's common stock to the Sellers, pro rata to their
membership interests immediately prior to the closing of the Acquisition. The
shares were valued at $2.82 per share which represents to the 20-day
volume-weighted average price of the Company's common stock on August 19, 2021.
Pursuant to the Purchase Agreement, the Company also paid $400,000 and issued an
8% eighteen-month convertible promissory note in the principal amount $278,000
(the "Note") to pay-down and refinance certain outstanding loans and advances
previously made to CIM by two of the Sellers, Russell Hicks and Brett Watts.
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The Note is convertible into shares of common stock of the Company at a
conversion price of $3.28 per share, but may not be converted if, after giving
effect to such conversion, the noteholder and its affiliates would beneficially
own in excess of 9.99% of the Company's outstanding common stock. The Note may
be prepaid at any time, in whole or in part. The Note is subordinate to the
Company's senior indebtedness.
The Sellers also have the ability to earn up to $17,500,000 (payable 50% in cash
and 50% in stock) upon the achievement of certain performance milestones as of
December 31, 2025.
Executive Officers
On July 26, 2021, Melvin Leiner resigned as Chief Financial Officer, Secretary
and Treasurer of the Company. Mr. Leiner remains the Company's Executive Vice
President and Chief Operating Officer, and a director.
On July 26, 2021, effective immediately upon Mr. Leiner's resignation, Jason
Williams was appointed the Company's Chief Financial Officer, Secretary and
Treasurer.
Payoff of TDH Sellers Notes
On August 18, 2021, the Company paid the holders of certain secured promissory
notes (the "TDH Secured Notes") an aggregate of $834,759.77, representing all
remaining amounts due and payable under the TDH Secured Notes. Upon receipt of
such payment by the holders of the TDH Secured Notes, the pledged shares of TDH
Holdings and its subsidiary, Top Draw HK were released from escrow, and the
holders of the TDH Secured Notes had no further security interest in the assets
of the Company or its subsidiaries.
L1 Capital Financing
Closing of First Tranche
On September 14, 2021, the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement") with L1 Capital Global Opportunities Master Fund ("L1
Capital"), pursuant to which it sold L1 Capital (i) a 10% Original Issue
Discount Senior Secured Convertible Note in the principal amount of $4,400,000,
due March 13, 2023 (the "Original Note"), and (ii) a five-year warrant to
purchase 813,278 shares of the Company's common stock at an exercise price of
$4.20 per share (the "Original Warrant"), for consideration of $3,960,000 (the
"First Tranche").
EF Hutton acted as exclusive placement agent for the offering and received a fee
of $316,800.
The Original Note is convertible into common stock at a rate of $4.20 per share
(the "Conversion Price"), and is repayable in 18 equal monthly installments, in
cash, or, at the discretion of the Company, and if the Equity Conditions
described below are met, by issuance of shares of common stock at a price equal
to 95% of the volume weighted average price ("VWAP") prior to the respective
monthly redemption dates (with a floor of $1.92), multiplied by 102% of the
amount due on such date. In the event that the 10-day VWAP drops below $1.92,
the Company will have the right to pay in shares of common stock at said VWAP,
with any shortfall to be paid in cash. The Conversion Price may be adjusted in
the event of dilutive issuances but in no event to less than $0.54. In addition,
under the terms of the Original Note, L1 Capital had the right to accelerate up
to 3 of the monthly payments. Neither the Company, nor L1 Capital, may convert
any portion of the Original Note to the extent that, after giving effect to such
conversion, L1 Capital (together with any affiliated parties) would beneficially
own in excess of 4.99% of the Company's outstanding common stock.
37
The Equity Conditions required to be met in order for the Company to redeem the
Original Note with shares of common stock in lieu of a monthly cash payment,
include, without limitation, that (i) a registration statement must be in effect
with respect to the resale of the shares issuable upon conversion or redemption
of the Original Note (or, that an exemption under Rule 144 is available), and
(ii) that the average daily trading volume of the Company's common stock will be
at least $250,000 immediately prior to the date of the monthly redemption.
The Original Warrant has the same anti-dilution protection as the Original Note
and same adjustment floor. The Original Warrant is exercisable for cash, or on a
cashless basis only for so long as no registration statement covering resale of
the shares is in effect. L1 Capital shall not have the right to exercise any
portion of the Original Warrant to the extent that, after giving effect to such
exercise, L1 Capital (together with any affiliated parties), would beneficially
own in excess of 4.99% of the Company's outstanding common stock.
The Company entered into a Security Agreement with L1 Capital pursuant to which
L1Capital was granted a security interest in all of the assets of the Company
and certain of its subsidiaries. As further inducement for L1 Capital to enter
into the Security Agreement, certain of the Company's pre-existing secured
creditors agreed to give up their exclusive senior security interest in the
assets of TD Holdings, in exchange for a shared senior secured interest with L1
Capital on a pari pasu basis on all assets of the Company. Repayment of the Note
is also guaranteed by certain subsidiaries of the Company pursuant to a
subsidiary guaranty.
The Company agreed to file a registration statement with the SEC within 35 days
of the closing of the First Tranche registering all First Tranche Conversion
Shares and First Tranche Warrant Shares for resale, to go effective no later
than 75 days after the closing of the First Tranche.
The Purchase Agreement also contemplated the purchase by L1 Capital (the "Second
Tranche") of an additional 10% Original Issue Discount Senior Secured
Convertible Note in the principal amount of $1,500,000, and warrants to purchase
approximately 277,000 shares (presuming current market prices) of common stock
on identical terms to the Original Note and Warrant, subject to, and upon
receipt of, shareholder approval under Nasdaq rules and effectiveness of a
registration statement covering the resale of the shares issuable under the
Original Note and Warrant issued in the First Tranche.
Amendment to Purchase Agreement and Original Note
On October 20, 2021, the Company and L1 Capital entered into an Amended and
Restated Purchase Agreement (the "Amended Purchase Agreement"), pursuant to
which the amount of the proposed Second Tranche investment was increased from
$1,500,000 to $6,000,000. In the event that the conditions to closing the Second
Tranche investment are satisfied, the Company intends on issuing (i) a 10%
Original Issue Discount Senior Secured Convertible Note in the principal amount
of $6,000,000 (the "Additional Note"), identical to the Original Note, but due
18 months from the closing of the Second Tranche, and (ii) a five-year warrant
to purchase 1,041,194 at an exercise price of $4.20 per share (the "Additional
Warrant"), for consideration of $5,400,000.
The closing of the Second Tranche is subject to a registration statement being
declared effective by the SEC covering the shares issuable upon conversion or
redemption of the Original Note and Original Warrant, shareholder consent being
obtained as required by Nasdaq Rule 5635(d), and a limitation on the principal
amount of notes that may be issued to no more than 30% of the Company's market
capitalization as reported by Bloomberg L.P., which requirement may be waived by
L1 Capital.
The conversion and redemption terms, as well as all other material terms of the
Additional Note, and exercise price of terms of the warrants to be issued in the
Second Tranche, are identical in all other material respects as the originally
issued note and warrants, except for the amendments provided herein.
As of October 20, 2021, and as part of the terms of the Amended Purchase
Agreement, the Original Note was amended (the "Amended Original Note") to
increase the monthly redemption amount for the 18 monthly installments from
$275,000 to $280,500. In addition, the Amended Original Note provides that, in
the event that the Second Tranche closes, the Equity Conditions required to be
satisfied in order for the Company to elect to make monthly note payments by
issuance of common stock in lieu of cash (and in addition to the requirement
that a registration statement is in effect or an exemption exists) the average
trading volume of the Company's common stock must be at least $550,000
(increased from $250,000) during the five trading days prior to the respective
monthly redemption. Except as described above, the other terms of the Original
Note as previously disclosed remain in full force and effect. In addition, if
the Second Tranche is consummated, L1 Capital will have the right to accelerate
up to six of the monthly payments as opposed to just three.
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Closing of Second Tranche
The Purchase Agreement, as amended on October 20, 2021, contemplated a closing
of a second tranche of the offering (the "Second Tranche Closing") of up to an
additional $6,000,000 principal amount of Notes identical to the First Tranche
Note, and warrants exercisable for five years to purchase up to 1,041,194 shares
at an exercise price of $4.20 per share.
On January 20, 2022 (the "Second Tranche Closing") the Company and LI Capital
closed on the Second Tranche of the offering, resulting in the issuance of (i) a
$1,750,000 10% Original Issue Discount Senior Secured Convertible Note, Due July
20, 2023, (the "Second Tranche Note"); and (ii) a five year warrant to purchase
303,682 shares of Common Stock of the Company at an exercise price of $4.20 per
share (the "Second Tranche Warrants"), in exchange for consideration of
$1,575,000 (i.e. the face amount less the 10% Original Issue Discount of
$175,000).
In connection with the Second Tranche Closing, the Company paid to EF Hutton a
fee of $126,000.
The Second Tranche Note is convertible into common stock of the Company at a
rate of $4.20 per share (the "Conversion Price") into 416,667 shares of Common
Stock (the "Second Tranche Conversion Shares") and, is repayable in 16 equal
monthly installments commencing on the date that the SEC declares a registration
statement with respect to the resale of such shares effective, with all
remaining amounts due on July 20, 2023. The Second Tranche Note is repayable by
payment of cash, or, at the discretion of the Company and if the below listed
"Equity Conditions" are met, by issuance of shares of the Common Stock at a
price of 95% of the lowest daily VWAP during the ten-trading day period prior to
the respective monthly redemption dates (with a floor of $1.92) multiplied by
102% of the amount due on such date. In the event that the ten-trading day VWAP
drops below $1.92 the Company will have the right to pay in stock at such
ten-trading day VWAP with any shortfall paid in cash. The Conversion Price may
be adjusted in the event of dilutive issuances but in no event to less than
$0.54 (the "Monthly Conversion Price").
If the Company elects to repay the entire Second Tranche Note by issuance of
shares, presuming recent stock prices, an aggregate of approximately 1,201,373
shares may be issued over 16 months plus interest.
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 the Investor at its sole discretion.
Other provisions of the Second Tranche Note, which is similar in terms to the
First Tranche Note, include that the Second Tranche Note Conversion Price is
subject to full anti-dilution price protections in the event of financings that
are below the Conversion Price with a floor of $0.54.
In the event of an Event of Default as defined in the notes, if the stock price
is below the Conversion Price at the time of default and only for so long as a
default is continuing, the Second Tranche Notes would be convertible at a rate
of 80% of the lowest VWAP in the ten prior trading days, provided, that if the
default is cured the default conversion rate elevates back to the normal
Conversion Price.
As part of the Second Tranche Closing, the Company issued Second Tranche
Warrants exercisable for five years from the date of issuance, at $4.20 per
share which carry the same anti-dilution protection as the Second Tranche Notes,
subject to the same adjustment floor. The Second Tranche Warrants are
exercisable via cashless exercise only for so long as no registration statement
covering resale of the shares is in effect.
The Company is required to file a registration statement with the SEC which
shall be declared effective on or prior to 75 days the closing of the Second
Tranche.
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 LI
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.
Results of Operations
For the years ended December 31, 2021 and December 31, 2020
Revenue
Revenue for the year ended December 31, 2021 was $6,297,922, compared to revenue
of $6,159,531 during the year ended December 31, 2020, representing a decrease
of $2,137,466 or 25.8%.
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Animation revenue for the year ended December 31, 2021 was $5,602,466, compared
to animation revenue of $5,483,332 during the year ended December 31, 2020,
representing an increase of $119,134 or 2.2%. The increase in animation revenue
is primarily attributable to the increase in the overall number of contracts
completed offset, in part, by client delays caused by concerns related to the
spread of COVID-19.
Web filtering revenue for the year ended December 31, 2021 was $594,996,
compared to web filtering revenue of $673,182 during the year ended December 31,
2020, representing a decrease of $78,186 or 11.6%. The decrease is primarily due
to a decline in organic sales growth, and the timing or loss of multi-year
contract renewals.
Produced and licensed content revenue for the year ended December 31, 2021 was
$98,301, compared to produced and licensed content revenue of $0 during the year
ended December 31, 2020. The increase in produced and licensed content revenue
is directly attributable to revenue derived from our acquisition of Curiosity
Ink Media LLC on August 19, 2021.
Subscription and advertising revenue from our Grom Social mobile application has
been nominal. Subscription and advertising revenue for the year ended December
31, 2021 was $2,159 compared to subscription and advertising revenue of $3,017
during the year ended December 31, 2020, representing a decrease of $858 or
28.4%, primarily attributable to a decrease in marketing and promotion
activities.
Gross Profit
Our gross profits vary significantly by subsidiary. Historically, our animation
business has realized gross profits between 45% and 55%, while our web filtering
business has realized gross profits between 75% and 90%. Additionally, our gross
profits may vary from period to period due to the nature of the business of each
subsidiary, and the timing and volume of customer contracts and projects.
Current gross margins percentages may not be indicative of future gross margin
performance.
Gross profit for the years ended December 31, 2021 and 2020 were $2,590,654, or
41.1%, and $2,806,891, or 45.6%, respectively. The decrease in gross profit is
primarily attributable lower contract margins realized in our animation business
due to the absorption of fixed overhead expenses against reduced revenue levels
and certain projects exceeding budgeted costs.
Operating Expenses
Operating expenses for the year ended December 31, 2021 were $9,463,580,
compared to operating expenses of $6,188,689 during the year ended December 31,
2020, representing an increase of $3,274,891 or 52.9%. The increase is primarily
attributable to an increase in selling, general and administrative costs and
fees for professional services rendered during the year ended December 31, 2021
due to the Company's registered offering, Nasdaq stock exchange uplisting, the
acquisition of Curiosity, and stock-based compensation from the grant of stock
and stock option awards.
Selling, general and administrative ("SG&A") expenses are comprised of selling,
marketing and promotional expenses, compensation and benefits, insurance, rent
and related facility costs, research and development, and other general
expenses. SG&A expenses were $5,811,792 for the year ended December 31, 2021,
compared to $4,643,539 for the year ended December 31, 2020, representing an
increase of $688,921 or 15.4%.
Stock-based compensation, a non-cash component of our SG&A, was $493,563 for the
year ended December 31, 2021, compared to $62,600 for the year ended December
31, 2020, representing an increase of $430,963 or 688.4%. On August 2, 2021, we
issued 157,943 shares of our common stock valued at $410,652 to our chief
executive officer as compensation. On August 19, 2021, we granted 208,500
options to purchase shares of our common stock in connection with certain
employment agreements entered into in connection with our acquisition of
Curiosity.
Professional fees are comprised of accounting and compliance services, legal
services, investor relations and other advisory fees. Professional fees were
$2,773,510 for the year ended December 2021, compared to $623,014 for the year
ended December 31, 2020, representing an increase of $2,150,496 or 345.2%. The
significant increase is largely attributable to our registration offering and
Nasdaq stock exchange uplisting processes.
At December 31, 2021, we performed our annual impairment tests as prescribed by
ASC 350 on the carrying value of our goodwill and recorded an impairment charge
totaling $382,798; of which $276,448 was attributed to the carrying value of
goodwill and $106,350 of intangible assets related to the NetSpective
webfiltering business acquired in 2017. The determination was made as the result
of our qualitative assessment of our webfiltering business, including a
multi-year decline in sales revenue and the unexpected loss of certain renewal
customer accounts.
Other Income (Expense)
Net other expense for the year ended December 31, 2021 was $3,329,015, compared
to a net other expense of $2,585,662 for the year ended December 31, 2020,
representing an increase of $743,353 or 28.8%. The increase in net other expense
is primarily attributable to increased interest expense related to the
amortization of debt discounts, and a one-time extinguishment loss of $947,179
related to the exchange of $1,447,996 in principal and interest accrued under
certain convertible notes for 2,395,175 shares of our Series B Stock.
Interest expense is comprised of interest accrued and paid on our convertible
notes and recorded from the amortization of note discounts. Interest expense was
$2,556,689 for the year ended December 31, 2021, compared to $1,398,731 during
the year ended December 31, 2020, representing an increase of $1,157,958 or
40.6%. The increase is attributable to an increase in amortization expense
associated with debt discounts recorded during the year ended December 31, 2021
compared to the year ended December 31, 2020.
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During the year ended December 31, 2021, we recorded a gain on loan forgiveness
of the paycheck protection program loan of $228,912.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $10,612,267, or
$1.18 per share, for the year ended December 31, 2021, compared to a net loss
attributable to common stockholders of $6,020,933, or $0.03 per share, during
the year ended December 31, 2020 representing an increase in net loss
attributable to common stockholders of $4,202,049 or 69.8%.
Liquidity and Capital Resources
At December 31, 2021, we had cash and cash equivalents of $6,530,161.
Net cash used in operating activities for the year ended December 31, 2021 was
$7,856,242, compared to net cash used in operating activities of $1,223,148
during the year ended December 31, 2020 representing an increase in cash used of
$6,633,094, primarily due to the increase in our loss from operations and the
change in working capital assets and liabilities.
Net cash used in investing activities for the year ended December 31, 2021 was
417,096, compared to net cash used in investing activities of $574,512 during
the year ended December 31, 2020 representing a decrease in cash used of
$157,416. This change is attributable to a decrease in the amount of fixed
assets purchased and leasehold improvements made by our animation studio in
Manilla, Philippines offset by an increase related to acquisition of majority
interest for Curiosity, net of cash received.
Net cash provided by financing activities for the year ended December 31, 2021
was $14,673,567, compared to net cash provided by financing activities of
$1,375,559 for the year ended December 31, 2020 representing an increase in cash
provided of $13,298,008. The increase is attributable to proceeds received from
the sale of preferred and common stock and the issuance of convertible notes,
net of issuance costs, and to the decrease in repayments of convertible notes
during the year ended December 31, 2021. Our primary sources of cash from
financing activities were attributable to $10,220,351 in proceeds from issuance
of common stock, $1,050,000 in proceeds from issuance of preferred stock and
$4,516,700 in proceeds from issuance of convertible notes during the year ended
December 31, 2021 as compared to $483,500 in proceeds from issuance of preferred
stock, and $4,143,500 from issuance of convertible notes.
We believe we have adequate working capital to meet our operational needs for
the next 12 months.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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, income
taxes, and contingencies. We base our estimates on historical experience, known
or expected trends and various other assumptions that are believed to be
reasonable given the quality of information available as of the date of these
financial statements. The results of these assumptions provide the basis for
making estimates about the carrying amounts of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from these
estimates.
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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. The Company may use independent valuation
services to assist in determining the estimated fair values.
Revenue Recognition
The Financial Accounting Standards Board ("FASB") Accounting Standards Update
("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) outlines
a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers. The guidance provided in Accounting
Standards Codification ("ASC") Topic 606 ("ASC 606") requires entities to use a
five-step model to recognize revenue by allocating the consideration from
contracts to performance obligations on a relative standalone selling price
basis. Revenue is recognized when a customer obtains control of promised goods
or services in an amount that reflects the consideration that the entity expects
to receive in exchange for those goods or services. The standard also requires
new disclosures regarding the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers. ASC 606 also includes
Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers,
which requires the deferral of incremental costs of obtaining a contract with a
customer.
Animation Revenue
Animation revenue is primarily generated from contracts with customers for
preproduction and production services related to the development of animated
movies and television series. Preproduction activities include producing
storyboards, location design, model and props design, background color and color
styling. Production focuses on library creation, digital asset management,
background layout scene assembly, posing, animation and after effects. We
provide services under fixed-price contracts. Under fixed-price contracts, we
agree to perform the specified work for a pre-determined price. To the extent
actual costs vary from estimated costs, our profit may increase, decrease, or
result in a loss.
We identify 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.
We evaluate 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 our 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.
We determine the transaction price for each contract based on the consideration
we expect to receive for the distinct services being provided under the
contract.
We recognize revenue as performance obligations are satisfied and the customer
obtains control of the services. In determining when performance obligations are
satisfied, we consider factors such as contract terms, payment terms and whether
there is an alternative future use of the product or service. Substantially all
of our revenue is recognized over time as we perform 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.
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For performance obligations recognized over time, revenue is recognized based on
the extent of progress made towards completion of the performance obligation. We
use the percentage-of-completion cost-to-cost measure of progress because it
best depicts the transfer of control to the customer as we incur costs against
its contracts. Under the percentage-of-completion cost-to-cost measure of
progress, the extent of progress towards completion is measured based on the
ratio of costs incurred to date to the total estimated costs to complete the
performance obligation. The percentage-of-completion cost-to-cost method
requires management to make estimates and assumptions that affect the reported
amounts of contract assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates relate to the total estimated
amount of costs that will be incurred for a project or job.
Web Filtering Revenue
Web filtering revenue from subscription sales is recognized on a pro-rata basis
over the subscription period. Typically, a subscriber purchases computer
hardware and a software and support service license for a period of use between
one year to five years. The subscriber is billed in full at the time of the
sale. We immediately recognize revenue attributable to the computer hardware as
it is non-refundable and control passes to the customer. The advanced billing
component for software and service is initially recorded as deferred revenue and
subsequently recognized as revenue on a straight-line basis over the
subscription period.
Produced and Licensed Content Revenue
Since the acquisition of Curiosity to the period ended December 31, 2021, the
Company recorded a total of $98,301, 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.
Publishing Revenue
Since the acquisition of Curiosity to the period ended December 31, 2021, no
publishing revenue has been recorded.
Publishing revenues are recognized when merchandise is shipped or electronically
delivered to the consumer. Consumer print books are generally sold with a right
of return. The Company records a returns reserve and corresponding decrease in
revenue at the time of sale based upon historical trends. For publishing
revenues, payments are due shortly after shipment or electronic delivery.
Fair Value Measurements
The Financial Accounting Standards Board ("FASB") Accounting Standards
Codification ("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.
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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, 2020 and
December 31, 2019. We use 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 and reporting units and long-lived assets used in the related asset
impairment tests utilize inputs classified as Level 3 in the fair value
hierarchy.
We determine 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, we
reassess our 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.
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.
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Capitalized Website Development Costs
The Company capitalizes certain costs associated with the development of its
Santa.com website after the preliminary project stage is complete and until the
website is ready for its intended use. Planning and operating costs are expensed
as incurred. Capitalization begins when the preliminary project stage is
complete, project plan is defined, functionalities are determined and internal
and external resources are identified. Qualified costs incurred during the
operating stage of our software applications relating to upgrades and
enhancements are capitalized to the extent it is probable that they will result
in added functionality, while costs that cannot be separated between maintenance
of, and minor upgrades and enhancements to the websites are expensed as
incurred.
Capitalized website costs are amortized on a straight-line basis over their
estimated useful life of three years beginning with the time when it is ready
for intended use. Amounts amortized are presented through cost of sales.
Management evaluates the useful lives of these assets on an annual basis and
tests for impairment whenever events or changes in circumstances occur that
could impact the recoverability of these assets.
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 our 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. Our amortizable intangible assets
consist of customer relationships and non-compete agreements. Their useful lives
range from 1.5 to 10 years. Our indefinite-lived intangible assets consist of
trade names.
Goodwill and indefinite-lived assets are not amortized but are subject to annual
impairment testing unless circumstances dictate more frequent assessments. We
perform an annual impairment assessment for goodwill and indefinite-lived assets
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. Goodwill impairment testing is a two-step process
performed at the reporting unit level. Step one compares the fair value of the
reporting unit to its carrying amount. The fair value of the reporting unit 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, we determine 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, we rely
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, our
risk relative to the overall market, our 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, then the second step must be completed to measure the
amount of impairment, if any. Step two calculates the implied fair value of
goodwill by deducting the fair value of all tangible and intangible net assets
of the reporting unit from the fair value of the reporting unit as calculated in
step one. In this step, the fair value of the reporting unit is allocated to all
of the reporting unit's assets and liabilities in a hypothetical purchase price
allocation as if the reporting unit had been acquired on that date. If the
carrying amount of goodwill exceeds the implied fair value of goodwill, an
impairment loss is recognized in an amount equal to the excess.
Indefinite-lived intangible assets are evaluated for impairment at the
individual asset level by assessing whether it is more likely than not that the
asset is impaired (for example, that the fair value of the asset is below its
carrying amount). If it is more likely than not that the asset is impaired, its
carrying amount is written down to its fair value.
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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 our 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 us to perform an impairment
test prior to scheduled annual impairment tests.
We performed our annual fair value assessment at December 31, 2020 on our
subsidiaries with material goodwill and intangible asset amounts on their
respective balance sheets and determined that an impairment charge of $472,757
was necessary.
Impairment of Long-Lived Assets
We evaluate the recoverability of our 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.
We evaluated the recoverability of our long-lived assets at December 31, 2020,
respectively on its subsidiaries with material amounts on their respective
balance sheets and determined that no impairment exists.
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 January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04
simplifies the accounting for goodwill impairment by removing Step 2 of the
goodwill impairment test, which requires a hypothetical purchase price
allocation. Under this pronouncement, an entity would perform its annual, or
interim, goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount and would recognize an impairment change for the
amount by which the carrying amount exceeds the reporting unit's fair value;
however, the loss recognized is not to exceed the total amount of goodwill
allocated to that reporting unit. In addition, income tax effects will be
considered, if applicable. ASU 2017-04 is effective for annual or interim
goodwill impairment tests in fiscal years beginning after December 15, 2019 and
should be applied on a prospective basis.
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.
Early adoption continues to be permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. The Company
does not anticipate the adoption of ASU 2017-04 will have a material impact on
its financial statements for both annual and interim reporting periods.
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.
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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.
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