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.
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 110,853,883 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 4.17 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.
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 operate
our business through the following four wholly-owned 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 not generated any revenue since its inception.
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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 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, has
been closed.
Recent Events
Series B Preferred Stock Designation
On August 4, 2020, the Company filed a Certificate of Designation of
Preferences, Rights and Limitations of Series B Stock with the Secretary of
State of the State of Florida designating 10,000,000 shares as Series B Stock.
The Series B 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 12-month anniversary of the issuance of the
shares of Series B Stock convert such shares into common stock at a conversion
price equal to the 30-day volume weighted average price ("VWAP") of a share of
common stock for each share of Series B Stock to be converted. In addition, the
Company at any time may require conversion of all or any of the Series B Stock
then outstanding at a 50% discount to the 30-day VWAP.
Each share of Series B Stock entitles the holder to fifty votes for each share
of Series B Stock. The consent of the holders of at least two-thirds of the
shares of Series B Stock is required for the amendment to any of the terms of
the Series B Stock, to create any additional class of stock unless the stock
ranks junior to the Series B Stock, to make any distribution or dividend on any
securities ranking junior to the Series B 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 B Stock at the rate of 8% per annum of the stated value of $1.00
per share and are payable in common stock in arrears quarterly commencing 90
days from issuance.
Upon a liquidation, dissolution or winding up of the Company, the holders of the
Series B 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 B Stock upon a liquidation until Series B
stockholders receive their liquidation preference. The holders of 66 2/3% of the
then outstanding shares of Series B 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.
Discretionary Reverse Stock Split
On September 14, 2020, the Board approved and on September 16, 2020, the
shareholders approved the granting of authority to the Board to amend the
Company's articles of incorporation to effect the Reverse Split at such time and
date, if at all, as determined by the Board in its sole discretion.
Series B Stock Purchases
On August 2, 2020, November 30, 2020, February 17, 2021, and March 31, 2021, the
Company entered into subscription agreements with accredited investors pursuant
to which the Company sold an aggregate of 250,000 shares, 233,500 shares,
300,000 shares, and 650,000 shares of Series B Stock for aggregate gross
proceeds of $250,000, $233,500, $300,000, and $650,000, respectively.
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August 2020 Exchange Agreements
On August 6, 2020, the Company, entered into debt exchange agreements (the "Debt
Exchange Agreements") with holders of the Company's (a) 10% convertible notes in
the aggregate amount of $411,223 of outstanding principal and accrued and unpaid
interest; (b) 12% secured convertible notes, which were secured against the
assets of TD Holdings, in the aggregate amount of $1,101,000 of outstanding
principal and accrued and unpaid interest; and (iii) 12% secured convertible
notes, which were secured against all of the other assets of the Company in the
aggregate amount of $782,500 of outstanding principal and accrued and unpaid
interest (collectively, the "Exchange Notes"). Pursuant to the terms of the Debt
Exchange Agreements, the holders of the Exchange Notes exchanged the outstanding
Exchange Notes, and all amounts owed by the Company thereunder, for an aggregate
of 3,623,884 shares of the Company's newly designated 8% Series B convertible
preferred stock (the "Series B Stock"). At the time of the exchange, all amounts
due under the Exchange Notes were deemed to be paid-in-full and the Exchange
Notes were cancelled.
In addition, on August 6, 2020, the Company entered into exchange agreements
(the "Series A Exchange Agreements" and together with the Debt Exchange
Agreements, the "Exchange Agreements") with the holders of 925,000 issued and
outstanding shares of the Company's Series A Stock. Pursuant to the terms of the
Series A Exchange Agreements, the holders of Series A Stock exchanged their
shares for an aggregate of 1,202,500 shares of the Company's Series B Stock. At
the time of the exchange, all of the exchanged shares of Series A Preferred
Stock were cancelled.
November 2020 Exchange Agreements
On November 30, 2020, the Company, entered into Debt Exchange Agreements with
holders of two of the Company's convertible promissory notes in the aggregate
amount of $200,000 of outstanding principal and accrued and unpaid interest. The
holders of the notes exchanged the outstanding notes, and all amounts owed by
the Company thereunder for an aggregate of 316,000 shares of 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.
February 2021 Exchange Agreements
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.
The holders of the notes exchanged the outstanding notes, and all amounts owed
by the Company thereunder for an aggregate of 2,564,175 shares of 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.
In connection with the execution and delivery of the Exchange Agreements, the
holders of the notes and the Series A stockholders executed and delivered
proxies to Darren Marks and Melvin Leiner, both officers and directors of the
Company, granting each of them the power to vote all their shares in the Company
for a period of two years. As a result, Messrs. Marks and Leiner, collectively,
have an aggregate of 528,756,135, votes, or 81.2% of the voting capital of the
Company.
EMA Financial Financing
On November 30, 2020, the Company entered into a securities purchase agreement
with EMA Financial, LLC, a Delaware limited liability company ("EMA"), pursuant
to which the Company issued 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. EMA also
has the right to purchase an additional nine-month convertible promissory note
on the same terms.
If the Company fails to maintain the listing and trading and of its common
stock, or does not comply with the SEC reporting obligations, such failure will
result in liquidated damages of $15,000 payable to EMA, at its election, in cash
or an additional EMA Note.
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EMA will have the right of first refusal to participate in future financings of
the Company to the extent that such participation would not result in EMA and
its affiliates beneficially owning more than 4.99% of the Company's outstanding
shares of common stock. If future financings of the Company have more favorable
terms than the EMA Note, EMA will be entitled to such favorable terms. Failure
to timely notify EMA of a financing will result in liquidated damages of $1,000
per day in cash, or, at the option of EMA, as additional EMA Note principal.
EMA has piggyback registration rights for shares issuable upon conversion of the
EMA Note. Failure to register EMA's shares will result in liquidated damages of
50% of the outstanding principal amount of the EMA Note, but not less than
$25,000, payable to EMA, at its election, in cash or additional EMA Note
principal.
If the Company engages in capital raising transactions, EMA may compel the
Company to redeem up to 25% of the outstanding balance of the EMA Note from the
gross proceeds of such transaction, or 100%, if such financing is $1,000,000 or
greater.
EMA is entitled to liquidated damages of $250 for each business day that the
delivery of unlegended shares is not timely made and, if the delivery is late
for an aggregate of 30 days during any 360-day period, EMA may require the
Company to redeem such shares at a price per share as set forth in the EMA Note.
If delivery of the common stock issuable upon conversion the EMA Note is not
timely made, the Company will pay EMA $250 per day in cash or, at the option of
EMA, as additional EMA Note principal.
The Company's performance and payment obligations under the EMA Note are jointly
and severally guaranteed by the Company's subsidiaries.
If the EMA Note is not paid when due, it will bear interest at 24% per annum
until paid.
The EMA Note is convertible into common stock of the Company at any time after
180 days from issuance, provided that no such conversion would result in
beneficial ownership by EMA and its affiliates of more than 4.99% of the
Company's outstanding shares of common stock.
The conversion price of the EMA Note is equal to the lower of: (i) $0.06 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. If an event of default as described in the EMA Note has occurred, EMA may
elect to use a conversion price equal to the lower of: (i) the lowest traded
price of the common stock on the trading day immediately preceding the date of
issuance of the EMA Note, or (ii) 70% of either the lowest traded price or the
closing bid price. The conversion price of the EMA Note is subject to adjustment
in the event of stock distributions, subdivisions, combinations, splits or
reclassifications. The conversion price is also subject to a 15% discount if the
Company's common stock is chilled for DTC deposit or for certain other trading
restrictions if the Company ceases to be a reporting company, or the EMA Note
cannot be converted into free trading shares after 181 days from the issuance
date.
If in connection with a merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, shares are changed
into the same or a different number of shares of another class of stock or
securities of the Company or another entity, or in case of any sale or
conveyance of substantially all of the assets of the Company, EMA has the right
to receive, in lieu of common stock, such securities or assets which EMA would
have been entitled to receive if the EMA Note been converted in full immediately
prior to such transaction.
If the Company makes a distribution of its assets to its common shareholders as
a dividend, stock repurchase, or otherwise, EMA is entitled, to receive the
amount of such assets which would have been payable to EMA with respect to
shares issuable upon such conversion had such shares been converted.
If the Company issues convertible securities or rights to purchase securities or
other property pro rata to its shareholders, EMA will be entitled to acquire
such securities or rights upon the same terms as if the EMA Note had been
converted.
The Company pay prepay the EMA Note at any time until 180 days following the
date of issuance of the EMA Note at a 105% premium if prior to 30 days, 115% if
from 31 days through 60 days, 120% if from 61 days through 90 days, 125% if from
91 days through 120 days; 130% if from 121 days through 159 days; 135% if from
151 days through 180 days following the date of issuance of the EMA Note.
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The EMA Note contains certain negative covenants, including restricting the
Company from certain distributions, stock repurchases, borrowing, sale of
assets, loans and exchange offers.
Upon the occurrence of an event of default as described in the EMA Note, the
Note will become immediately due and payable at a default interest rate of 125%
of the then outstanding principal amount of the EMA Note plus any other default
interest or amounts owing to EMA or the parity value of common stock as
calculated in accordance with the terms of the EMA Note.
Quick Capital Financing
On December 17, 2020, the Company entered into a note purchase agreement with
Quick Capital, LLC, a Wyoming limited liability company ("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. In connection with the
Note issuance, Quick Capital was also issued a three-year warrant (the "Quick
Warrant") to purchase up to an aggregate of 1,183,197 shares of the Company's
common stock at an exercise price of $0.05 per share (the "Quick Warrant
Shares").
Quick Capital is entitled to a cash payment of $25,000 as liquidated damages for
any failure to include all shares issuable upon the conversion of the Quick Note
and the exercise of the Quick Warrant on any registration statement filed with
the SEC. For twelve months following the issuance of the Quick Note, Quick
Capital will have the right of first refusal to participate in future financings
proposed to the Company by bonafide third parties on the same terms as such
third party. If the Company receives cash proceeds, the Quick Capital has the
right to require that such proceeds be used to repay outstanding amounts under
the Quick Note.
The Company must use its best efforts to uplist its common stock to Nasdaq or
the New York Stock Exchange within 90 days of the issuance of the Quick Note.
The Quick Note may be prepaid in whole or in part, subject to a 10% premium if
prepaid in the first 60 days of the term of the Quick Note and a 30% premium
thereafter.
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) $0.04 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) $0.04 per share, upon an event of default as
described in the Quick Note. If delivery of conversion shares is not timely
made, the Company is obligated to pay Quick Capital $2,000 for each day that the
delivery is late as liquidated damages. The conversion price of the Quick Note
will be reduced if the Company issues common stock or grants derivative
securities for consideration at a price less than the conversion price to the
amount of the consideration of such dilutive issuance.
If the Company makes a distribution of its assets, Quick Capital will be
entitled to receive the amount of such assets which would have been payable had
Quick Capital been the holder of such shares on the record date for such
distribution. If the Company issues convertible securities or rights to purchase
securities or other property pro rata to its common shareholders, Quick Capital
will be entitled to acquire such securities or rights upon the same terms as if
Quick Capital had converted the Quick Note.
The Quick Note also contains certain restrictive covenants limiting the
Company's ability to repurchase its securities, incur debt, sell its assets,
make loans, or engage in exchange offers.
If the Company receives cash proceeds from any source, Quick Capital has the
right to require the Company to apply such proceeds to repay outstanding amounts
owed under the Quick Note.
If an event of default (as described in the Quick Note) occurs, the Quick Note
will become immediately due and payable in an amount equal to (i) 150% of the
then outstanding principal amount of the Quick Note plus any other default
interest or amounts owing to Quick Capital or (ii) the parity value of common
stock as calculated in accordance with the terms of the Quick Note.
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Quick Capital is entitled to the same terms of future financings of the Company
that are more favorable than the terms of the Quick Note.
The Quick Warrant provides, among other things, that if the Quick Warrant Shares
are not timely delivered, the Company will be obligated to pay $3,000 per day as
liquidated damages. If there is no effective registration statement covering the
Quick Warrant Shares, Quick Capital may exercise the Quick Warrant on a cashless
basis in accordance with the terms of the Quick Warrant. The exercise price and
number of Quick Warrant Shares are subject to adjustment in the event of certain
corporate actions as described in the Quick Warrant, including stock dividends,
distributions, stock splits and dilutive issuances. Upon the occurrence of
certain fundamental transactions including mergers, the sale of all of the
Company's assets and tender offers, Quick Capital will be entitled to
alternative consideration related to those transactions.
The Quick Note may not be converted and the Quick Warrant may not be exercised
if after giving effect to such conversion or exercise, as the case may be, Quick
Capital and its affiliates would beneficially own more than 4.99% of the
outstanding common stock of the Company.
Auctus Fund Financing
On February 9, 2021, the Company entered into a securities purchase agreement
(the "Auctus Purchase Agreement") with Auctus Fund, LLC, a Delaware limited
liability company ("Auctus"), pursuant to which the Company issued Auctus a
one-year convertible promissory note in the principal amount of $500,000 which
accrues interest at 12% per annum (the "Auctus Note") for proceeds of $428,000
(after deducting fees and expenses related to the transaction). Auctus was also
issued a five-year warrant (the "Auctus Warrant") to purchase 6,250,000 shares
of the Company's common stock, at an exercise price of $0.06 per share (the
"Auctus Warrant Shares").
The Company granted Auctus piggyback registration rights with respect to the
shares underlying the Auctus Note and the Auctus Warrant. In addition, the
Company agreed that, while any amount remains unpaid under the Auctus Note, it
would not sell securities on more favorable terms than those provided to Auctus,
without adjusting Auctus' terms accordingly. Further, among other things, the
Company agreed that, while any amount remains unpaid under the Auctus Note, it
would not enter into any variable rate transactions.
In the event the Company fails to pay any amount when due under the Auctus Note,
the interest rate will increase to the greater of 16%, or the maximum amount
permitted by law. The Auctus Note may not be prepaid. Auctus may convert any
amount due under the Auctus Note at any time and its affiliates into shares of
common stock at a conversion price of $0.06 per share; provided, that no such
conversion would result in Auctus beneficially owning in excess of 4.99% of the
Company's then outstanding common stock. The conversion price and number of
shares issuable upon conversion of the Auctus Note will be subject to adjustment
for any subdivision or consolidation of shares and other dilutive events.
Auctus may not exercise the Auctus Warrant with respect to any number of Auctus
Warrant Shares that would cause it to beneficially own in excess of 4.99% of the
Company's common stock. The Auctus Warrant may be exercised for cash, or, if the
"market price" of the Company's common stock is greater than the Auctus
Warrant's exercise price, and there is not an effective registration statement
covering the Auctus Warrant Shares, the Auctus Warrant may be exercised on a
cashless basis. The number of Warrant Shares is subject to adjustment for
subdivision or consolidation of shares and other dilutive events, or in the
event the Company effects a reorganization, reclassification, merger,
consolidation, disposition of assets, or other fundamental transaction.
FirstFire Global Financing
On March 11, 2021 the Company entered into a securities purchase agreement (the
"FirstFire Purchase Agreement") with FirstFire Global Opportunities Fund, LLC, a
Delaware limited liability company ("FirstFire"), pursuant to which the Company
issued to FirstFire a one-year 12% convertible promissory note in the principal
amount of $300,000 (the "FirstFire Note"). In connection with the issuance of
the FirstFire Note, FirstFire was also issued a five-year warrant (the
"FirstFire Warrant") to purchase up to an aggregate of 3,750,000 shares of the
Company's common stock (the "FirstFire Warrant Shares"), at an exercise price of
$0.06 per share. The net proceeds received by the Company were $270,000, after
deducting an original issue discount in the amount of $30,000.
In the event the Company fails to pay any amount when due under the FirstFire
Note, the interest rate will increase to the lesser of 20%, or the maximum
amount permitted by law. At any time while the FirstFire Warrant Shares are
subject to an effective registration statement, or, if no registration statement
covering the FirstFire Warrant Shares is effective, at any time after 180 days
from the date of issuance, FirstFire may convert any amount due under the
FirstFire Note into shares of the Company's common stock ("FirstFire Conversion
Shares") at a conversion price of $0.06 per share; provided, however, that, if
an event of default exists, the conversion price will be the lesser of (i) $0.03
per share, or (ii) 70% of the lowest trading price of the Company's common stock
during the ten consecutive trading days prior to the conversion. FirstFire may
not convert any portion of the FirstFire Note of the FirstFireWarrant that would
cause it and its afiliates to beneficially own in excess of 4.99% of the
Company's common stock (which may be waived, up to 9.99%, by FirstFire upon 61
days' prior notice to the Company). The conversion price and number of shares of
the Company's common stock issuable upon conversion of the FirstFire Note will
be subject to adjustment in the event of any merger, consolidation, distribution
of shares, or other dilutive issuances.
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The FirstFire Warrant may be exercised for cash, or, if there is not an
effective registration statement covering the FirstFire Warrant Shares, on a
cashless basis. The exercise price and number of Warrant Shares is subject to
adjustment for subdivision or consolidation of shares, or other dilutive
issuances.
Pursuant to the FirstFire Purchase Agreement, the Company agreed that, while any
of the FirstFire Note, the FirstFire Conversion Shares, the FirstFire Warrants,
or the FirstFire Warrant Shares remain outstanding, it would not sell securities
on more favorable terms than those provided to FirstFire without adjusting
FirstFire's securities to incorporate those more favorable terms.
FirstFire has a right of first refusal to participate in sale of the Company's
securities for a period of 18 months and mandatory registration rights with
respect to the FirstFire Conversion Shares and the FirstFire Warrant Shares.
Curiosity Ink Media Letter of Intent
On April 1, 2021, the Company entered into a binding letter of intent with
Curiosity Ink Media, LLC, a California limited liability company ("Curiosity"),
Russell Hicks ("Hicks"), Brent Watts ("Watts"), and the other members of
Curiosity (collectively, the "Sellers"), pursuant to which the Company agreed to
acquire an aggregate of 80% of Curiosity's membership interests (the "80%
Membership Interests") from the Sellers, on a pro rata basis, for a purchase
price of $3,678,000, of which: (i) $400,000 is payable in cash, to be used to
pay down a portion of loans made to Curiosity by Hicks and Watts; (ii)
$3,000,000 is payable in shares of the Company's common stock, valued at a price
per share equal to the 20-day volume-weighted average price of the Company's
common stock; and (iii) $278,000 is payable by the issuance to Hicks and Watts
of 8% convertible promissory notes payable in equal monthly installments, on an
amortized basis over 18 months. The Sellers will have the opportunity to receive
up to an additional $2,000,000 in acquisition consideration, paid in shares of
the Company's common stock, based upon the successful execution of certain
specified contracts and/or material agreements. The Sellers will also have the
opportunity to receive an additional $17,500,000 in purchase consideration, paid
50% in cash and 50% in shares of the Company's common stock, based upon
achieving certain performance milestones through December 31, 2023. The Company
has the exclusive right to acquire the 80% Membership Interests through June 30,
2021. The consummation of the acquisition is contingent upon the parties
entering into a definitive agreement and other closing conditions.
Results of Operations
For the years ended December 31, 2020 and December 31, 2019
Revenue
Revenue for the year ended December 31, 2020 was $6,159,531, compared to revenue
of $8,296,997 during the year ended December 31, 2019, representing a decrease
of $2,137,466 or 25.8%.
Animation revenue for the year ended December 31, 2020 was $5,483,332, compared
to animation revenue of $7,565,672 during the year ended December 31, 2019,
representing a decrease of $2,082,340 or 27.5%. The decrease in animation
revenue is primarily attributable to the decline in the overall number of
contracts completed, and client delays to the timing and production of certain
animation projects due to concerns related to the spread of COVID-19.
Web filtering revenue for the year ended December 31, 2020 was $673,182,
compared to web filtering revenue of $723,800 during the year ended December 31,
2019, representing a decrease of $50,618 or 7.0%. The decrease is primarily due
to a decline in organic sales growth, and the timing or loss of multi-year
contract renewals.
Subscription and advertising revenue from our Grom Social website, Grom Social
mobile application and MamaBear safety mobile application have been nominal.
Subscription and advertising revenue for the year ended December 31, 2020 was
$3,017 compared to subscription and advertising revenue of $7,525 during the
year ended December 31, 2019, representing a decrease of $4,508 or 59.9%,
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, 2020 and 2019 were $2,806,891, or
45.6%, and $3,686,036, or 44.4%, respectively. The decrease in gross profit is
primarily attributable to the higher percentage of web filtering revenue to
total revenue when compared to the prior year, and higher contract margins
realized in our animation business.
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Operating Expenses
Operating expenses for the year ended December 31, 2020 were $6,188,689,
compared to operating expenses of $6,664,933 during the year ended December 31,
2019, representing a decrease of $476,244 or 7.2%. The decrease is primarily
attributable to a decrease in general and administrative expenses and
professional services fees resulting from reduced investor relations services
and general cost cutting efforts undertaken by the Company. General and
administrative expenses were $4,462,095 for the year ended December 31, 2020,
compared to $5,140,100 for the year ended December 31, 2019, representing a
decrease of $678,005 or 13.2%. Professional fees were $623,014 for the year
ended December 31, 2020, compared to $908,093 for the year ended December 31,
2019, representing a decrease of $285,079 or 31.4%. At December 31, 2020, we
performed our annual impairment tests as prescribed by ASC 350 on the carrying
value of our goodwill and recorded an impairment charge totaling $472,757; of
which $420,257 was attributed to the assets of Fyoosion LLC acquired in 2017 and
$52,500 was attributed to the assets of Bonnie Boat and Friends acquired in
2018.
Other Income (Expense)
Net other expense for the year ended December 31, 2020 was $2,585,662, compared
to a net other expense of $1,577,002 for the year ended December 31, 2019,
representing an increase of $1,008,660 or 64.0%. The increase in net other
expense is primarily attributable to the loss recorded on the extinguishment of
debt realized through the conversion of convertible promissory notes into 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
$1,398,731 for the year ended December 31, 2020, compared to $1,705,123 during
the year ended December 31, 2019, representing a decrease of $306,392 or 18.0%.
The decrease is attributable to servicing lower levels of debt and recording
lower amortization expense on note discounts during the year ended December 31,
2020.
During the year ended December 31, 2020, we recorded extinguishment losses of
$1,312,983 related to the conversion of approximately $2.6 million of
convertible promissory notes into 3,939,884 shares of our Series B preferred
stock. During the year ended December 31, 2019, we recorded an extinguishment
loss of $363,468 related to the amendment of our $4,000,000 promissory note
issued with our acquisition of TD Holdings. During the year ended December 31,
2019, we also recorded gains of $429,000 related to the change in fair value of
contingent consideration and $45,521 related to the settlement of certain
accounts payable.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $6,020,933, or
$0.03 per share, for the year ended December 31, 2020, compared to a net loss
attributable to common stockholders of $5,332,173, or $0.04 per share, during
the year ended December 31, 2019 representing an increase in net loss
attributable to common stockholders of $688,760 or 12.9%.
Liquidity and Capital Resources
At December 31, 2020, we had cash and cash equivalents of $120,300.
Net cash used in operating activities for the year ended December 31, 2020 was
$1,223,148, compared to net cash used in operating activities of $1,697,185
during the year ended December 31, 2019 representing a decrease in cash used of
$474,037. The primary reason for the decrease was due to a change in operating
assets and liabilities.
Net cash used in investing activities for the year ended December 31, 2020 was
$574,512, compared to net cash used in investing activities of $292,911 during
the year ended December 31, 2019 representing an increase in cash used of
$281,601. This change is attributable to an increase in the amount of fixed
assets purchased and leasehold improvements made by our animation studio in
Manilla, Philippines during the year ended December 31, 2020.
Net cash provided by financing activities for the year ended December 31, 2020
was $1,375,559, compared to net cash provided by financing activities of
$1,807,143 for the year ended December 31, 2019 representing a decrease in cash
provided of $431,584. The decrease is attributable to an increase in the
repayment of debt during the year ended December 31, 2020. Our primary sources
of cash from financing activities were attributable to $3,655,000 in proceeds
from the sale of 12% senior secured convertible notes and $483,500 in proceeds
from the sale of our Series B Stock in private offerings during the year ended
December 31, 2020 as compared to $1,420,000 in proceeds from the sale of
preferred and common stock in private offerings during the year ended December
31, 2019. On March 16, 2020, the Company repaid $3,000,000 in principal due to
the former shareholders of TD Holdings Limited on a convertible note originally
dated September 20, 2016.
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We currently have a monthly consolidated cash operating loss ranging between
$100,000 to $150,000, or approximately $1,200,000 to $1,800,000 annually. In
order to fund our operations for the next twelve months, we believe that we will
need to raise $2,000,000. Historically, we have funded our operations through
sales of equity, debt issuances and officer loans. We currently have no
commitment from any investment banker or other traditional funding sources and
no definitive agreement with any third party to provide us with financing,
either debt or equity, and there can be no assurances that we will be able to
raise additional funds, or if we are successful, on favorable terms. Future
equity sales may result in dilution to current shareholders and debt may have
negative covenants. In addition, the COVID-19 pandemic has had and may continue
to have an adverse effect on the capital markets and our ability to raise
additional funding. The failure to obtain the financing necessary to allow us to
continue to implement our business plan will have a significant negative impact
on our anticipated results of operations.
Going Concern
The accompanying consolidated financial statements have been prepared assuming
we will continue as a going concern, which contemplates realization of assets
and the satisfaction of liabilities in the normal course of business for the
twelve-month period following the date of these financial statements. On a
consolidated basis, we have incurred significant operating losses since
inception and have a working capital deficit. Because we do not expect that
existing operational cash flow will be sufficient to fund presently anticipated
operations, this raises substantial doubt about our ability to continue as a
going concern. Therefore, we will need to raise additional funds and are
currently exploring sources of financing. Historically, we have raised capital
through private offerings of debt and equity and officer loans to finance
working capital needs. There can be no assurances that we will be able to
continue to raise additional capital through the sale of common stock or other
securities or obtain short-term loans.
We will need approximately $2,000,000 to operate and execute our business plan
for the next twelve months. Because we do not expect that existing operational
cash flow will be sufficient to fund presently anticipated operations, this
raises substantial doubt about our ability to continue as a going concern.
Therefore, we will need to raise additional funds and are currently exploring
alternative sources of financing. Historically, we have raised capital through
private offerings of debt and equity and officer loans to finance working
capital needs. There can be no assurances that we will be able to continue to
raise additional capital through the sale of common stock or other securities or
obtain short-term loans.
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.
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.
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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.
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.
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:
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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, 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.
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.
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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.
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.
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 will be effective for public companies with fiscal years beginning
after December 15, 2020; early adoption is permitted. We are evaluating the
impact of this amendment on our consolidated financial statements.
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In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit
Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on
Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic
842) which amends the effective date of the original pronouncement for smaller
reporting companies. ASU 2016-13 and its amendments will be effective for us for
interim and annual periods in fiscal years beginning after December 15, 2022. We
believe the adoption will modify the way we analyze financial instruments, but
we do not anticipate a material impact on results of operations. We are in the
process of determining the effects adoption will have on our consolidated
financial statements.
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.
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