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Item 1.01
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Entry Into Material Definitive Agreement.
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Entry into Convertible Debt Financing of up
to $5,900,000
Effective as of September 14, 2021 (the “Closing
Date”), Grom Social Enterprises, Inc., a Florida corporation (the “Company”), entered into a Securities Purchase Agreement
(the “Purchase Agreement”) with L1 Capital Global Master Fund (the “Investor”) pursuant to which it has sold (i)
a $4,400,000 principal amount 10% Original Issue Discount Senior Secured Convertible Note (the “Note”) due March 13, 2023,
and (ii) a five year Common Stock Purchase Warrant exercisable at $4.20 per share for 813,278 shares (“Warrants”), in exchange
for consideration of $3,960,000.
EF Hutton, division of Benchmark Investment, LLC,
acted as exclusive placement agent for the offering and received a fee of $316,800 therefore.
2nd Tranche Pending Shareholder
Approval
The Company and Investor have agreed, subject
to certain conditions, to a second tranche (the "2nd Tranche") in the amount of $1,500,000 of Notes and approximately 277,777
Warrants at the same terms, which would require stockholder approval. The Company has agreed as part of the closing conditions for the
transaction, to secure agreements from certain key stockholders for the closing on the 2nd Tranche, and, has agreed to file
a Schedule 14C reflecting such approval when able. After filing and effective date of the Definitive Schedule 14C, the additional Note
and Warrant may be entered into. A copy of the Voting Agreement is annexed hereto as Exhibit 9.1 and incorporated herein by reference.
Note Terms
The initial Note of $4,400,000 is convertible
at the discretion of the Investor into common stock of the Company at a price of $4.20 per share (based on 150% of the Value Weighted
Average Price for 5 consecutive trading days prior to Closing), or approximately 1,047,619 shares (the "Conversion Shares"),
if converted at the discretion of L1 Capital.
The Conversion Price is subject to full ratchet
anti-dilution protections only 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, if the stock
price is below the Conversion Price at time of default and only for so long as a default is continuing, the 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.
The Notes are repayable in 18 equal monthly installments
with certain deferments or an acceleration of up to 3 months' payments as more fully detailed in the Note. The Company will have the right
to repay the Notes either in cash each month, or, at its option, with stock at a price of the lesser of the Conversion Price or 95% of
the lowest daily VWAP during the 10 consecutive trading days immediately preceding the monthly payment date, with a floor of $1.92. In
the event that VWAP drops below $1.92 the Company will have the right to pay in stock at said VWAP with any shortfall paid in cash, with
an ultimate floor of $0.54. If the Issuer repays the entire principal amount of the Notes with stock, presuming current stock prices,
an aggregate of 1,929,824 shares to repay the Note over 18 months in equal installments, or in combinations of cash and stock.
Repayment of the Note is guaranteed by certain
subsidiaries of the Company pursuant to a subsidiary guaranty (the “Guaranty”).
The foregoing description of the Purchase Agreement,
Note and Subsidiary Guaranty are a summary only and does not purport to be complete and, is qualified in its entirety by reference to
the full text of such documents, the forms of which is attached hereto as Exhibit 10.1, 10.2 and 10.4 respectively, and incorporated herein
by reference.
Warrant Terms
Pursuant to the Purchase Agreement, at the Closing
the Investor was issued 813,278 Warrants, exercisable at $4.20 per share for 5 years from the date shareholder approval is received and
deemed effective for issuance of the Warrants, with the same anti-dilution protection as the Notes and same adjustment floor. The Warrants
are exercisable via cashless exercise only for so long as no registration statement covering resale of the shares is in effect. The foregoing
description of the Warrant does not purport to be complete and is qualified in its entirety by reference to the full text of such document,
the form of which is attached hereto as Exhibit 10.3 and incorporated herein by reference.
Lockup Agreements
The Purchase Agreement provides for the continuation
of the existing lockup agreements entered into between various executive officers, directors through June 21, 2022 and 5% beneficial owners
of common stock through December 16, 2021, and EF Hutton as Underwriter in connection with the Underwriting Agreement relating to the
June 16, 2021 IPO and NASDAQ up-listing, all of which have already been provided to the NASDAQ staff in connection with such listing.
Registration Rights
The Company is required to file a registration
statement with the SEC on or before October 19, 2021, registering all Conversion Shares and Warrant Shares for resale, to go effective
no later than 75 days after the first Closing of the offering (the “Registration Rights Agreement”). The foregoing description
of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of
such document, the form of which is attached hereto as Exhibit 10.5 and incorporated herein by reference.
Security Agreement
The Company entered into a Security Agreement
with the Investor pursuant to which the Investor was granted a security interest in all of the assets of the Company and certain of its
subsidiaries (the “Security Agreement”). As part of the entry into the Security Agreement, certain pre-existing secured creditors
agreed to give up their exclusive senior security interest in our TDH subsidiary assets, in exchange for a shared senior secured interest
with the Investor on a pari pasu basis on all assets of the Company. The foregoing description of the Security Agreement and Intercreditor
Agreement are a summary only and do not purport to be complete and is qualified in its entirety by reference to the full text of such
documents, the forms of which is attached hereto as Exhibit 10.6 and 10.7 respectively, and incorporated herein by reference.