The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are
an integral part of the consolidated financial statements.
The accompanying notes are
an integral part of the consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial
Statements
Grom Social Enterprises, Inc. (the “Company”,
“Grom” “we”, “us” or “our”), a Florida corporation f/k/a Illumination America, Inc. (“Illumination”),
is a media, technology and entertainment company that focuses on delivering content to children under the age of 13 years in a safe secure
platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents
or guardians.
The Company conducts its business through the
following five operating subsidiaries:
|
·
|
Grom Social, Inc. (“Grom Social”) was incorporated in the State of Florida on March 5, 2012 and operates the Company’s social media network designed for children under the age of 13 years.
|
|
·
|
TD Holdings Limited (“TD Holdings”) was incorporated in Hong Kong on September 15, 2005. TD Holdings operates through its two subsidiary companies: (i) Top Draw Animation Hong Kong Limited (“TDAHK”), a Hong Kong corporation and (ii) Top Draw Animation, Inc. (“Top Draw” or “TDA”), a Philippines corporation. The group’s principal activities are the production of animated films and televisions series.
|
|
·
|
Grom Educational Services, Inc. (“GES”) was incorporated in the State of Florida on January 17, 2017. GES operates the Company’s web filtering services provided to schools and government agencies.
|
|
·
|
Grom Nutritional Services, Inc. (“GNS”) was incorporated in the State of Florida on April 19, 2017. GNS intends to market and distribute nutritional supplements to children. GNS has not generated any revenue since its inception.
|
|
·
|
Curiosity Ink Media, LLC (“Curiosity”), organized in the State of Delaware on January 5, 2017, acquires and develops kids and family entertainment properties and associated business opportunities.
|
The Company owns 100% of each of Grom Social, TD Holdings, GES and
GNS, and 80% of Curiosity.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Impact of COVID-19
On January 30, 2020, the World Health Organization
announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March
11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 has and continues to significantly
affect the United States and global economies.
The Company has experienced significant disruptions
to its business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings
and travel restrictions, which affect both the Company’s and its service providers. The Company has significant operations in Manila,
Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result
of the Philippines government’s call to contain COVID-19, the Company’s animation studio, located in Manila, Philippines,
which accounts for approximately 90% of the Company’s total revenues on a consolidated basis, has been mostly closed.
In response to the outbreak and business disruption,
the Company has instituted employee safety protocols to contain the spread, including domestic and international travel restrictions,
work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices
and production studio. The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity.
The outbreak has and may continue to spread, which
could materially impact the Company’s business. The full extent of potential impacts on the Company’s business, financing
activities and the global economy will depend on future developments, which cannot be predicted due to the uncertain nature of the continued
COVID-19 pandemic, government mandated shut downs, and its adverse effects, including new information which may emerge concerning the
severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. These effects could have a material adverse
impact on the Company’s business, operations, financial condition and results of operations.
Management’s Representation of Interim
Financial Statements
The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). The Company uses the same accounting policies in preparing quarterly and annual financial statements.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed by such rules and regulations,
and management believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated
financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial
position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative
of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto at December 31, 2020, as presented in the Company’s Annual Report on Form 10-K filed on April
13, 2021 with the SEC.
Basis of Presentation
The condensed consolidated financial statements
of the Company have been prepared in accordance with GAAP and are expressed in United States dollars. For the three and nine months ended
September 30, 2021, the condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries
Grom Social, TD Holdings, GES, and GNS. All intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements
in conformity with 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. The Company bases its estimates on historical experience, known or expected trends and various other assumptions
that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results
of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates.
Revenue Recognition
The Financial Accounting Standards Board (“FASB”)
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU
2014-09"). ASU 2014-09 outlines a single comprehensive model 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
For the nine months ended September 30, 2021 and
2020, the Company recorded a total of $4,373,409 and $4,015,061, respectively, of animation revenue from contracts with customers.
Animation revenue is primarily generated from
contracts with customers for preproduction and production services related to the development of animated movies and television series.
Preproduction activities include producing storyboards, location design, model and props design, background color and color styling. Production
focuses on library creation, digital asset management, background layout scene assembly, posing, animation and aftereffects. The Company
provides services under fixed-price contracts. Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined
price. To the extent actual costs vary from estimated costs, the Company’s profit may increase, decrease, or result in a loss.
The Company identifies a contract under ASC 606
once (i) it is approved by all parties, (ii) the rights of the parties are identified, (iii) the payment terms are identified, (iv) the
contract has commercial substance, and (v) collectability of consideration is probable.
The Company evaluates the services promised in
each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The
services in the Company’s contracts are distinct from one another as the referring parties typically can direct all, limited, or
single portions of the various preproduction and production activities required to create and design and entire episode to us and we therefore
have a history of developing standalone selling prices for all of these distinct components. Accordingly, our contracts are typically
accounted for as containing multiple performance obligations.
The Company determines the transaction price for
each contract based on the consideration it expects to receive for the distinct services being provided under the contract.
The Company recognizes revenue as performance
obligations are satisfied and the customer obtains control of the services. In determining when performance obligations are satisfied,
the Company considers factors such as contract terms, payment terms and whether there is an alternative future use of the product or service.
Substantially all of the Company’s revenue is recognized over time as it performs under the contract due to the contractual terms
present in each contract which irrevocably transfer control of the work product to the customer as the services are performed.
For performance obligations recognized over time,
revenue is recognized based on the extent of progress made towards completion of the performance obligation. The Company uses the percentage-of-completion
cost-to-cost measure of progress because it best depicts the transfer of control to the customer as the Company incurs costs against its
contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured
based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. The 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
For the nine months ended September 30, 2021 and
2020, the Company recorded a total of $403,676 and $460,984, respectively, of web filtering revenue from contracts with customers.
Web filtering revenue from subscription sales
is recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases computer hardware and a software and
support service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale.
The Company immediately recognizes revenue attributable to the computer hardware as it is non-refundable and control passes to the customer.
The advanced billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue
on a straight-line basis over the subscription period.
Contract Assets and Liabilities
Animation revenue contracts vary with movie contracts
typically allowing for progress billings over the contract term while other episodic development activities are typically billable upon
delivery of the performance obligation for an episode. These episodic activities typically create unbilled contract assets between episode
delivery dates while movies can create contract assets or liabilities based on the progress of activities versus the arranged billing
schedule. Revenues from web filtering contracts are all billed in advance and therefore represent contract liabilities until fully recognized
on a ratable basis over the contract life.
The following table depicts the composition of
the Company’s contract assets and liabilities as of September 30, 2021 and December 31, 2020:
Schedule of contract assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Animation contract assets
|
|
$
|
459,634
|
|
|
$
|
525,709
|
|
Web filtering contract assets
|
|
|
5,088
|
|
|
|
54,886
|
|
Other contract assets
|
|
|
7,337
|
|
|
|
7,337
|
|
Total contract assets
|
|
$
|
472,059
|
|
|
$
|
587,932
|
|
|
|
|
|
|
|
|
|
|
Animation contract liabilities
|
|
$
|
96,697
|
|
|
$
|
410,709
|
|
Web filtering contract liabilities
|
|
|
449,331
|
|
|
|
544,844
|
|
Other contract liabilities
|
|
|
11,500
|
|
|
|
11,500
|
|
Total contract liabilities
|
|
$
|
557,528
|
|
|
$
|
967,053
|
|
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. The Company is evaluating the impact of this amendment on its consolidated financial
statements.
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 the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will
modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The
Company is in the process of determining the effects adoption will have on its 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 unaudited condensed consolidated financial statements.
Acquisition of Curiosity Ink Media, LLC
On July 29, 2021, the Company entered into a membership
interest purchase agreement (the “Purchase Agreement”) with Curiosity Ink Media LLC, a Delaware limited liability company
(“Curiosity”) and the holders of all of Curiosity’s outstanding membership interests (the “Sellers”), for
the purchase of 80% of Curiosity’s outstanding membership interests (the “Purchased Interests”) from the Sellers (the
“Acquisition).
On August 19, 2021, pursuant to the terms of the
Purchase Agreement, the Company consummated the Acquisition and acquired the Purchased Interests in consideration for the issuance to
the Sellers of an aggregate of 1,771,883 shares of the Company’s common stock to the Sellers, pro rata to their membership interests
immediately prior to the closing of the Acquisition. The shares were valued at $2.82 per share which represents to the 20-day volume-weighted
average price of the Company’s common stock on August 19, 2021.
Pursuant to the Purchase Agreement, the Company
also paid $400,000 and issued an 8% eighteen-month convertible promissory note in the principal amount $278,000 (the “Note”)
to pay-down and refinance certain outstanding loans and advances previously made to Curiosity by Russell Hicks and Brett Watts.
The Note is convertible into shares of common
stock of the Company at a conversion price of $3.28 per share but may not be converted if, after giving effect to such conversion, the
noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The Note may
be prepaid at any time, in whole or in part. The Note is subordinate to the Company’s senior indebtedness.
The Sellers also have the ability to earn up to
$17,500,000 (payable 50% in cash and 50% in stock) upon the achievement of certain performance milestones as of December 31, 2025.
Schedule of Recognized Identified Assets Acquired and Liabilities Assumed
|
|
|
|
|
Consideration Paid:
|
|
|
|
Cash and cash equivalents
|
|
$
|
400,000
|
|
Common stock
|
|
|
5,000,000
|
|
Convertible notes
|
|
|
278,000
|
|
Fair value of total consideration
|
|
$
|
5,678,000
|
|
Recognized amount of identifiable assets acquired, and liabilities assumed:
|
|
|
|
Financial assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,408
|
|
Inventory
|
|
|
113,408
|
|
Prepaids and other assets
|
|
|
2,052
|
|
Intangible assets
|
|
|
1,157,712
|
|
Goodwill
|
|
|
4,378,420
|
|
Total identifiable assets acquired, and liabilities assumed
|
|
$
|
5,678,000
|
|
The Company expects to perform a valuation study
on this acquisition by December 31, 2021 to determine the level of intangible assets.
4.
|
ACCOUNTS RECEIVABLE, NET
|
The following table sets forth the components
of the Company’s accounts receivable at September 30, 2021, and December 31, 2020:
Schedule of accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Billed accounts receivable
|
|
$
|
376,529
|
|
|
$
|
443,806
|
|
Unbilled accounts receivable
|
|
|
137,408
|
|
|
|
188,029
|
|
Allowance for doubtful accounts
|
|
|
(41,878
|
)
|
|
|
(43,903
|
)
|
Total accounts receivable, net
|
|
$
|
472,059
|
|
|
$
|
587,932
|
|
During the nine months ended September 30, 2021,
the Company had four customers that accounted for 81.0% of revenues and four customers that accounted for 82.4% of accounts receivable.
During the year ended December 31, 2020, the Company had three customers that accounted for 68.5% of revenues and one customer that accounted
for 29.9% of accounts receivable.
5.
|
PROPERTY AND EQUIPMENT
|
The following table sets forth the components
of the Company’s property and equipment at September 30, 2021 and December 31, 2020:
Schedule of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
Capital assets subject to depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers, software and office equipment
|
|
$
|
2,696,708
|
|
|
$
|
(2,347,083
|
)
|
|
$
|
349,625
|
|
|
$
|
2,800,872
|
|
|
$
|
(2,257,797
|
)
|
|
$
|
543,075
|
|
Machinery and equipment
|
|
|
184,368
|
|
|
|
(158,822
|
)
|
|
|
25,546
|
|
|
|
192,988
|
|
|
|
(152,149
|
)
|
|
|
40,839
|
|
Vehicles
|
|
|
158,590
|
|
|
|
(124,667
|
)
|
|
|
33,923
|
|
|
|
163,525
|
|
|
|
(106,826
|
)
|
|
|
56,699
|
|
Furniture and fixtures
|
|
|
405,192
|
|
|
|
(366,052
|
)
|
|
|
39,140
|
|
|
|
422,234
|
|
|
|
(364,655
|
)
|
|
|
57,579
|
|
Leasehold improvements
|
|
|
1,090,960
|
|
|
|
(935,789
|
)
|
|
|
155,171
|
|
|
|
1,143,704
|
|
|
|
(903,381
|
)
|
|
|
240,323
|
|
Total fixed assets
|
|
|
4,535,818
|
|
|
|
(3,932,413
|
)
|
|
|
603,405
|
|
|
|
4,723,323
|
|
|
|
(3,784,808
|
)
|
|
|
938,515
|
|
Capital assets not subject to depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
25,368
|
|
|
|
–
|
|
|
|
25,368
|
|
|
|
26,594
|
|
|
|
–
|
|
|
|
26,594
|
|
Total fixed assets
|
|
$
|
4,561,186
|
|
|
$
|
(3,932,413
|
)
|
|
$
|
628,773
|
|
|
$
|
4,749,917
|
|
|
$
|
(3,784,808
|
)
|
|
$
|
965,109
|
|
For the three months ended September 30, 2021
and 2020, the Company recorded depreciation expense of $330,479 and $333,473, respectively.
The Company has entered into operating leases
primarily for real estate. These leases have terms which range from three years to five years, and often include one or more options to
renew or in the case of equipment rental, to purchase the equipment.
In the United States, the Company leases approximately
2,100 square feet of office space in Boca Raton, Florida at the rate of $4,000 per month pursuant to a three-year lease which expires
in October 2021. The Florida office space is the location of the Company’s corporate headquarters and administrative staff.
The Company’s animation operations leases
portions of three floors aggregating approximately 28,800 square feet in the West Tower of the Philippine Stock Exchange Centre in Pasig
City, Manila. The space is used for administration and production purposes. The Company pays approximately $24,000 per month in the aggregate
for such space (which increases by approximately 5% annually). These leases expire in December 2022.
The Company’s web filtering operations lease
approximately 1,400 square feet of office space in Norcross, Georgia. The Company pays approximately $2,100 per month pursuant to a five-year
lease which expires in December 2023. The lease payment increases by approximately 3% annually.
These operating leases are listed as separate
line items on the Company's condensed consolidated financial statements and represent the Company’s right to use the underlying
asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's
condensed consolidated financial statements.
Operating lease right-of-use assets and liabilities
commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term.
Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized
ROU assets and lease liabilities for operating leases of approximately $379,493 in assets, $303,168303,554 in current liabilities and $101,685101,299
in noncurrent liabilities as of September 30, 2021. For the nine months ended September 30, 2021, the Company recognized approximately
$272,980 in total lease costs.
The following table presents the remaining amortization
of the Company’s lease liabilities under ASC 842 for each of the following years ending December 31:
Schedule of Future Minimum Rental Payments for Operating Leases
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
76,082
|
|
2022
|
|
|
302,781
|
|
2023
|
|
|
25,990
|
|
Total
|
|
$
|
404,853
|
|
Because the rate implicit in each lease is not
readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating
ROU assets and related lease liabilities are as follows:
Schedule of operating right-of-use assets
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2021
|
|
Cash paid for operating lease liabilities
|
|
$
|
277,994
|
|
Weighted-average remaining lease term
|
|
|
1.7
|
|
Weighted-average discount rate
|
|
|
10%
|
|
Minimum future lease payments
|
|
$
|
453,889
|
|
The remaining future minimum payment obligations
at September 30, 2021 for operating leases are as follows:
Schedule of amortization of lease liabilities
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
89,642
|
|
2022
|
|
$
|
335,659
|
|
2023
|
|
$
|
28,588
|
|
7.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill represents the future economic benefit
arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the
Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
The following table sets forth the changes in
the carrying amount of the Company’s goodwill at September 30, 2021:
Schedule of Goodwill
|
|
|
|
|
Balance, January 1, 2021
|
|
$
|
8,380,504
|
|
Acquisition of Curiosity
|
|
|
4,378,420
|
|
Balance, September 30, 2021
|
|
$
|
12,758,924
|
|
See Note 3 – Business Combinations for more
information.
The following table sets forth the components
of the Company’s intangible assets at September 30, 2021 and December 31, 2020:
Schedule of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Amortization Period (Years)
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Book Value
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Book Value
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
10.00
|
|
|
$
|
1,600,286
|
|
|
$
|
(836,450
|
)
|
|
$
|
763,836
|
|
|
$
|
1,600,286
|
|
|
$
|
(716,429
|
)
|
|
$
|
883,857
|
|
Licensed and produced content
|
|
|
5.00
|
|
|
|
1,157,712
|
|
|
|
–
|
|
|
|
1,157,712
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Web filtering software
|
|
|
5.00
|
|
|
|
1,134,435
|
|
|
|
(1,077,713
|
)
|
|
|
56,722
|
|
|
|
1,134,435
|
|
|
|
(907,548
|
)
|
|
|
226,887
|
|
Subtotal
|
|
|
–
|
|
|
|
3,892,443
|
|
|
|
(1,914,163
|
)
|
|
|
1,978,270
|
|
|
|
2,734,721
|
|
|
|
(1,623,977
|
)
|
|
|
1,110,744
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
–
|
|
|
|
4,455,595
|
|
|
|
–
|
|
|
|
4,455,595
|
|
|
|
4,455,595
|
|
|
|
–
|
|
|
|
4,455,595
|
|
Total intangible assets
|
|
|
–
|
|
|
$
|
8,251,299
|
|
|
$
|
(1,914,163
|
)
|
|
$
|
6,433,865
|
|
|
$
|
7,190,316
|
|
|
$
|
(1,623,977
|
)
|
|
$
|
5,566,339
|
|
For the nine months ended September 30, 2021 and
2020, the Company recorded amortization expense of $290,187 for intangible assets subject to amortization.
The following table provides information regarding
estimated remaining amortization expense for intangible assets subject to amortization for each of the following years ending December
31:
Schedule of amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
150,162
|
|
2022
|
|
|
391,571
|
|
2023
|
|
|
391,571
|
|
2024
|
|
|
391,571
|
|
2025
|
|
|
391,571
|
|
Thereafter
|
|
|
261,824
|
|
Future amortization total
|
|
$
|
1,978,270
|
|
The following table sets forth the components
of the Company’s accrued liabilities at September 30, 2021 and December 31, 2020:
Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
Executive and employee compensation
|
|
$
|
380,158
|
|
|
$
|
1,642,959
|
|
Interest on convertible notes and promissory notes
|
|
|
27,562
|
|
|
|
135,980
|
|
Other accrued expenses and liabilities
|
|
|
618
|
|
|
|
15,293
|
|
Total accrued liabilities
|
|
$
|
408,338
|
|
|
$
|
1,794,232
|
|
9.
|
RELATED PARTY TRANSACTIONS AND PAYABLES
|
Marks’s Family
The Company has engaged the family of Darren Marks,
its Chief Executive Officer, to assist in the development of the Grom Social website and mobile application. These individuals have created
over 1,400 hours of original short form content. Sarah Marks, the wife of Mr. Marks, and Zach Marks, Luke Marks, Jack Marks, Dawson Marks,
Caroline Marks and Victoria Marks, each Mr. Marks’s children, are, or have been, employed by or independently contracted with the
Company.
Compensation for services provided by the Marks
family is expected to continue for the foreseeable future. Each member of the Marks family is actively involved in the creation of content
for the website and mobile app, including numerous videos focusing on social responsibility, anti-bullying, digital citizenship, unique
blogs, and special events.
Liabilities Due to Executive and Other Officers
Pursuant to verbal agreements, Messrs. Marks and
Leiner have made loans to the Company to help fund operations. These loans are non-interest bearing and callable on demand. No such loans
were made to the Company during the three months ended September 30, 2021.
On July 11, 2018, our director Dr. Thomas Rutherford
loaned the Company $50,000. The loan bears interest at a rate of 10% per annum and was due on August 11, 2018. No notice of default or
demand for payment has been received by the Company.
As of September 30, 2021 and December 31, 2020,
the aggregate related party payables were $50,000 and $143,741, respectively.
The following tables set forth the components
of the Company’s convertible notes as of September 30, 2021 and December 31, 2020:
Schedule of convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
8% Unsecured Convertible Notes (Curiosity)
|
|
$
|
278,000
|
|
|
$
|
–
|
|
8% - 12% Convertible Promissory Notes (Bridge Notes)
|
|
|
–
|
|
|
|
373,587
|
|
10% Unsecured Convertible Redeemable Notes – Variable Conversion Price
|
|
|
–
|
|
|
|
265,000
|
|
10% Senior Secured Convertible Note with Original Issuance Discount (L1 Capital Global Master Fund or “L1”)
|
|
|
4,400,000
|
|
|
|
–
|
|
10% Secured Convertible Notes with Original Issuance Discounts (OID Notes)
|
|
|
75,000
|
|
|
|
153,250
|
|
12% Senior Secured Convertible Notes (Newbridge)
|
|
|
–
|
|
|
|
52,572
|
|
12% Senior Secured Convertible Notes (Original TDH Notes)
|
|
|
–
|
|
|
|
882,175
|
|
12% Senior Secured Convertible Notes (TDH Secured Notes)
|
|
|
359,056
|
|
|
|
1,645,393
|
|
12% Senior Secured Convertible Notes (Additional Secured Notes)
|
|
|
68,221
|
|
|
|
260,315
|
|
Loan discounts
|
|
|
(1,988,089
|
)
|
|
|
(385,266
|
)
|
Total convertible notes, net
|
|
|
3,192,188
|
|
|
|
3,247,026
|
|
Less: current portion of convertible notes, net
|
|
|
(1,879,853
|
)
|
|
|
(2,349,677
|
)
|
Convertible notes, net
|
|
$
|
1,312,335
|
|
|
$
|
897,349
|
|
8% Unsecured Convertible Notes (Curiosity)
On July 29, 2021, the Company entered into a membership
interest purchase agreement with Curiosity and the holders of all of Curiosity’s outstanding membership interests, for the purchase
of 80% of Curiosity’s outstanding membership interests from the sellers. Pursuant to the purchase agreement, the Company issued
8% eighteen-month convertible promissory notes in the aggregate principal amount $278,000 to pay-down and refinance certain outstanding
loans and advances previously made by certain of its principals. The notes are convertible into shares of common stock of the Company
at a conversion price of $3.28 per share but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates
would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The notes may be prepaid at any time, in whole
or in part. The notes are subordinate to the Company’s senior indebtedness.
At September 30, 2021, the principal balance of
the Curiosity notes was $278,000.
8% - 12% Convertible Promissory Notes (Bridge
Notes)
On November 30, 2020, the Company entered into
a securities purchase agreement with EMA Financial, LLC (“EMA”) pursuant to which the Company issued to EMA a nine-month 8%
convertible promissory note in the principal amount of $260,000 (the “EMA Note”) for a $234,000 investment. The term of the
EMA Note may be extended by EMA up to an additional year. The EMA Note is convertible into common stock of the Company at any time after
180 days from issuance. The conversion price of the EMA Note is equal to the lower of: (i) $1.92 per share, or (ii) 70% of the lowest
trading price of the common stock during the ten consecutive trading days including and immediately preceding the conversion date.
On February 17, 2021, the terms of the EMA financing
were amended to (i) reduce the conversion rate to $1.28, and (ii) add a three-year3 warrant to purchase up to 81,250 shares of the Company’s
common stock, at an exercise price of $1.60 per share. On May 19, 2021, the terms of the EMA financing were further amended to (i) increase
the interest rate to 12%, and (ii) add a three-year warrant (the “EMA Warrant”) to purchase up to 38,855 shares of the Company’s
common stock, at an exercise price of $1.92 per share.
ASC 470-20 requires proceeds from the sale of
a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument
without the warrants and of the warrants themselves at the time of issuance. In connection with the EMA warrant issuance, the Company
allocated an aggregate fair value of $104,760 to the stock warrants and recorded a debt discount which will be amortized to interest expense
over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated
the fair value of the warrants at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price
on the date of grant ranging between $1.60 and $4.48, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest
rate of 0.19% and (iv) an expected volatility of the price of the underlying common stock ranging between 224.9% and 258.6%.
On May 24, 2021, EMA Warrant was amended to delete
the full-ratchet anti-dilution provision and the EMA Note was amended to delete the variable conversion price feature.
On June 2, 2021, the Company issued 10,000 shares
of common stock to EMA upon the conversion of $11,800 in note principal and $1,000 in conversion fees. On June 17, 2021, the Company issued
100,000 shares of common stock to EMA upon the conversion of $127,000 in note principal and $1,000 in conversion fees. On August 20, 2021,
the Company issued 108,978 shares of common stock to EMA upon the conversion of $121,200 in note principal and $17,292 in accrued interest
and conversion fees.
At September 30, 2021, the principal balance of
the EMA Note was $0 and all associated loan discounts were fully amortized.
On December 17, 2020, the Company entered into
a note purchase agreement with Quick Capital, LLC (“Quick Capital”) pursuant to which the Company issued Quick Capital a nine-month
convertible promissory note in the principal amount of $113,587 (the “Quick Note”) for a $100,000 investment, which included
an original issuance discount of 8% and a $4,500 credit for Quick Capital’s transaction expenses. The Quick Note may be converted
into shares of common stock at (i) a 30% discount to the lowest price per share of any debt or securities offering by the Company if the
Company’s common stock is listed on NASDAQ or NYSE within 90 days of the Quick Note issuance; (ii) the lesser of (A) $1.28 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) $1.28 per
share, upon an event of default as described in the Note.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $12,621. This
amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
In connection with the Quick Note issuance, the
Company also issued a 3three-year warrant (the “Quick Warrant”) to purchase up to an aggregate of 36,975 shares of the Company’s
common stock at an exercise price of $1.60 per share. The Company estimated the fair value of this warrant at date of grant using the
Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $1.60, (ii) the contractual term
of the warrant of 3 years, (iii) a risk-free interest rate of 0.19% and (iv) an expected volatility of the price of the underlying common
stock of 224.3%. As a result, the Company allocated a fair value of $33,056 to the stock warrants and recorded debt discount to be amortized
as interest expense over the term of the related convertible note.
On May 21, 2021, the Quick Note was amended to
replace the variable conversion price with a fixed conversion price of $1.28 per share and the Quick Warrant was amended to delete the
full-ratchet anti-dilution provision.
On June 21, 2021, the Company issued 290,000 shares
of common stock to Quick Capital upon the conversion of $27,487 in note principal and $65,313 in penalties and accrued interest. On June
28, 2021, the Company issued 269,061 shares of common stock to Quick Capital upon the conversion of $86,100 in note principal.
At September 30, 2021, the principal balance of
the Quick Note was $0 and all associated loan discounts were fully amortized.
On February 9, 2021, the Company entered into
a securities purchase agreement with Auctus Fund, LLC (“Auctus”) pursuant to which the Company issued to Auctus a twelve-month
12% convertible promissory note in the principal amount of $500,000 (the “Auctus Note”). The note is convertible into shares
common stock at a conversion price of $1.92 per share. The Company received net proceeds of $428,000 after deducting fees and expenses
related to the transaction.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $155,875. This
amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
In connection with the note issuance, Auctus was
also issued a 5five-year warrant (the “Auctus Warrant”) to purchase up to an aggregate of 195,313 shares of the Company’s
common stock, at an exercise price of $1.92 per share. The Company estimated the fair value of this warrant at date of grant using the
Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $4.48, (ii) the contractual term
of the warrant of 5 years, (iii) a risk-free interest rate of 0.48% and (iv) an expected volatility of the price of the underlying common
stock of 259.2%. As a result, the Company allocated a fair value of $272,125 to the stock warrants and recorded debt discount to be amortized
as interest expense over the term of the related convertible note.
On May 25, 2021, Auctus Warrant was amended to
delete the full-ratchet anti-dilution provision.
On July 14, 2021, the Company issued 274,427 shares of common stock
to Auctus upon the conversion of $500,000 in note principal and $26,900 in accrued interest and conversion fees.
At September 30, 2021, the principal balance of
the Auctus Note was $0 and all associated loan discounts were fully amortized.
On March 11, 2021, the Company entered into a
securities purchase agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”) pursuant to which the Company issued
to FirstFire a twelve-month 12% convertible promissory note in the principal amount of $300,000 (the “FirstFire Note”). The
first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. At any time after
180 days from the date of issuance, FirstFire may convert any amount due under the note into shares of the Company’s common stock
at a conversion price of $1.92 per share. The Company received net proceeds of $238,500 after deducting fees and expenses related to the
transaction.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $93,220. This
amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
In connection with the issuance of the note, FirstFire
was also issued a five-year warrant (the “FirstFire Warrant”) to purchase up to an aggregate of 117,188 shares of the Company’s
common stock, at an exercise price of $1.92 per share. The Company estimated the fair value of this warrant at date of grant using the
Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $4.16, (ii) the contractual term
of the warrant of 5 years, (iii) a risk-free interest rate of 0.78% and (iv) an expected volatility of the price of the underlying common
stock of 258.6%. As a result, the Company allocated a fair value of $145,280 to the stock warrants and recorded debt discount to be amortized
as interest expense over the term of the related convertible note.
On May 20, 2021, the FirstFire Note was amended
to replace the variable conversion feature price with a fixed conversion price of $1.92 and the FirstFire Warrant was amended to delete
the full ratchet anti-dilution provision.
On June 17, 2021, the Company issued 175,000 shares
of common stock to FirstFire upon the conversion of $300,000 in note principal and $36,000 in accrued interest.
At September 30, 2021, the principal balance of
the FirstFire Note was $0 and all associated loan discounts were fully amortized.
On April 16, 2021, the Company entered into a
securities purchase agreement with Labrys Fund, LP (“Labrys”), pursuant to which the Company issued to Labrys a one-year convertible
promissory note in the principal amount of $300,000 (the “Labrys Note”). The Labrys Note bears interest at a rate of 12% per
annum. The first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. Labrys
may convert any amount due under the Labrys Note into shares of the Company’s common stock at a conversion price of $1.92 per share.
The Company received net proceeds of $266,000, after deducting fees and expenses related to the transaction.
In connection with the issuance of the note, Labrys
was also issued a five-year warrant to purchase up to an aggregate of 117,118 shares of the Company’s common stock (the “Labrys
Warrant”), at an exercise price of $1.92 per share. The Company estimated the fair value of this warrant at date of grant using
the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $6.37, (ii) the contractual
term of the warrant of 5 years, (iii) a risk-free interest rate of 0.84% and (iv) an expected volatility of the price of the underlying
common stock of 251.2%. As a result, the Company allocated a fair value of $172,479 to the stock warrants and recorded debt discount to
be amortized as interest expense over the term of the related convertible note.
On May 22, 2021, the Labrys Warrant was amended
to delete the full-ratchet anti-dilution provision.
On June 17, 2021, the Company issued 175,000 shares
of common stock to Labrys upon the conversion of $300,000 in note principal and $36,000 in accrued interest.
At September 30, 2021, the principal balance of
the Labrys Note was $0 and all associated loan discounts were fully amortized.
10% Unsecured Convertible Redeemable Note
– Variable Conversion Price
On March 1, 2020, the Company issued a convertible
redeemable note to an unrelated party in the principal amount of $100,000. The note accrues interest at a rate of 10% per annum, was due
on August 31, 2020 and is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount
from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $44,129. This
amount is recorded as a debt discount and is amortized as interest expense over the term of the note.
In connection with the note issuance, the Company
also issued a five-year warrant to purchase up to an aggregate of 15,625 shares of the Company’s common stock at an exercise price
of $3.20 per share. ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two
elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance.
This resulted in the debt being recorded at a discount which will be amortized to interest expense over the term of the loan using the
effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of this warrant
at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $3.20,
(ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.89% and (iv) an expected volatility of the price
of the underlying common stock of 144.4%. As a result, the Company allocated a fair value of $30,935 to the stock warrants.
On April 14, 2021, the Company issued 62,500 shares
of common stock to the noteholder upon the conversion of $100,000 in note principal and $11,205 of accrued interest.
At September 30, 2021, the principal balance of
this note was $0 and all associated loan discounts were fully amortized.
On November 20, 2020, the Company issued a convertible
redeemable note to an unrelated party in the principal amount of $165,000 less a $15,000 original issuance discount resulting in net cash
proceeds to the Company of $150,000. The note accrues interest at a rate of 10% per annum, was due on February 15, 2021 and is convertible
into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount from the lowest volume weighted average
price of the Company’s common stock in the preceding 20 trading days.
The Company analyzed the conversion feature of
the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial
conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $50,871. This
amount is recorded as a debt discount and is amortized as interest expense over the term of the note.
On February 17, 2021, the Company entered into
a debt exchange agreement with the holder of the convertible promissory note, in the aggregate amount of $169,000 of outstanding principal
and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreement, the holder exchanged the outstanding note, and
all amounts owed by the Company thereunder, for 169,000 shares of the Company’s 8% Series B convertible preferred stock. At the
time of the exchange, all amounts due under the note was deemed to be paid in full and the note was cancelled.
At September 30, 2021, the principal balance
of this note was $0 and all associated loan discounts were fully amortized.
10% Senior Secured Convertible Note with
Original Issuance Discount (L1)
On September 14, 2021, the Company entered into
a securities purchase agreement (the “Purchase Agreement”) with L1 Capital Global Master Fund (“L1”) pursuant
to which it issued (i) a 10% original issue discount senior secured convertible note in the principal amount of $4,400,000 to L1 (the
“L1 Note”) and (ii) a 5five-year warrant to purchase 813,278 shares of the Company’s common stock at an exercise price
of $4.20 per share (“Warrant Shares”) in exchange for $3,960,000 (the “First Tranche Financing”). The Purchase
Agreement also provided, subject to shareholder approval, for the issuance, subject to certain conditions, of an additional $1,500,000
of notes and warrants to purchase 277,777 shares of common stock (the “Second Tranche Financing”) on the same terms.
The L1 Note is convertible by L1 into common stock
of the Company at a price of $4.20 per share, or approximately 1,047,619 shares. It is repayable in 18eighteen equal monthly installments
with certain deferments or an acceleration of up to three months' payments. The Company may repay the L1 Note in cash or shares of common
stock at a price equal to the lesser of the then conversion price or 95% of the lowest daily VWAP during the ten consecutive trading days
immediately preceding the monthly payment date, but in no event less than $1.92. In the event that VWAP drops below $1.92, the Company
will have the right to pay at such VWAP with any shortfall paid in cash. The L1 Note is senior to all other Company indebtedness and the
Company’s obligations under the note are secured by all of the assets of the Company’s subsidiaries.
The Company estimated the fair value of the warrant
at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $2.70,
(ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.79% and (iv) an expected volatility of the price
of the underlying common stock of 299.8%. As a result, the Company allocated a fair value of $1,200,434 to the stock warrants and recorded
debt discount to be amortized as interest expense over the term of the related convertible note.
As of September 30, 2021, the principal balance
of these notes was $4,400,000 and the remaining balance on the associated loan discounts was $1,936,894.
10% Secured Convertible Notes with Original
Issuance Discounts (“OID Notes”)
During the year ended December 31, 2017, the Company
issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $601,223. The notes were
issued with original issuance discounts of 10.0%, or $60,122, bear interest at a rate of 10% per annum, are payable semiannually in cash,
and carry a two-year term with a fixed conversion price of 24.96. In connection with the issuance of these notes, the Company issued to
such investors an aggregate of 4,698 shares of common stock as an inducement to lend. These shares were valued at $78,321 with share prices
ranging between $15.36 and $22.40 per share. The Company recorded the value of these shares as a loan discount to be amortized as interest
expense over the term of the related convertible notes.
On August 6, 2020, the Company entered into debt
exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of 331,954 shares of the Company’s
Series B preferred stock (“Series B Stock) were issued to noteholders for an aggregate of $211,223 of outstanding principal and
accrued and unpaid interest. On November 30, 2020, the Company entered into a debt exchange agreement with the remaining holder of these
10% convertible notes pursuant to which an aggregate of 158,000 shares of Series B Stock were issued to the noteholder for an aggregate
of $111,250 of outstanding principal and accrued and unpaid interest.
At September 30, 2021, the principal balance
of these notes was $0 and all associated loan discounts were fully amortized.
During the year ended December 31, 2018, the Company
issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $1,313,485 in a private
offering. The notes were issued with original issuance discounts of 10.0%, or $131,348, bear interest at a rate of 10% per annum, are
payable semiannually in cash, and carry a two-year term with a fixed conversion price of $24.96. In connection with the issuance of these
notes, the Company issued to such investors an aggregate of 10,262 shares of common stock as an inducement to lend. These shares were
valued at $198,259 with share prices ranging between $9.60 and $25.92 per share. The Company recorded the value of these shares as a loan
discount to be amortized as interest expense over the term of the related convertible notes.
On August 6, 2020, the Company entered into debt
exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of 316,000 shares of the Company’s
Series B Stock were issued to noteholders for an aggregate of $200,000 of outstanding principal and accrued and unpaid interest. On September
10, 2021, the Company entered into a debt exchange agreement with a holder of a 10% convertible note pursuant to which 85,250 shares of
the Company’s Series C Stock was issued for $85,250 of outstanding principal and accrued and unpaid interest.
As of September 30, 2021, the principal balance
of these notes was $25,000 and all associated loan discounts were fully amortized. No notices of default or demands for payment have been
received by the Company.
During the year ended December 31, 2018, the Company
also issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $356,000 in a private
offering. The notes were issued with original issuance discounts of 20.0%, or $71,200, bear interest at a rate of 10% per annum, are payable
semiannually in cash, and carry a two-year term with a fixed conversion price of $16.00. In connection with the issuance of these notes,
the Company issued to such investors an aggregate of 6,344 shares of common stock as an inducement to lend. These shares were valued at
$62,269 with share prices ranging between $9.28 and $11.20 per share. The Company recorded the value of these shares as a loan discount
to be amortized as interest expense over the term of the related convertible notes.
On July 19, 2021, the Company repaid $6,329 outstanding
principal and accrued and unpaid interest to a 10% secured convertible noteholder.
As of September 30, 2021, the principal balance
of these notes was $50,000 and all associated loan discounts were fully amortized. No notices of default or demands for payment have been
received by the Company.
12% Senior Secured Convertible Notes (Newbridge Offering)
On November 30, 2018, the Company closed a private
offering in which it sold 12% secured convertible promissory notes (“12% Notes”) in an aggregate principal amount of $552,000
and issued an aggregate of 22,843 shares of its common stock to nine accredited investors pursuant to a private placement memorandum and
subscription agreement. The 12% Notes which are due and payable two years from issuance are secured by certain assets of the Company and
rank senior to all other indebtedness of the Company except for the $4,000,000 promissory notes (the “TD Notes”) issued to
the shareholders of TD Holdings in connection with a share sale agreement dated June 30, 2016, as amended. Messrs. Marks and Leiner pledged
an aggregate of 312,500 shares of common stock of the Company pursuant to a pledge and security agreement to secure the timely payment
of the 12% Notes. The 12% Notes are convertible, in whole or in part, by the noteholders at a conversion rate of $12.80 if the Company’s
common stock trades or is quoted at more than $12.80 per share for 10 consecutive days. The conversion price is subject to adjustment
resulting from certain corporate actions including the subdivision or combination of stock, payment of dividends, reorganization, reclassification,
consolidations, merger or sale of the Company.
Interest on the 12% Notes is payable monthly in
21 equal installments commencing four months after the issuance of the 12% Notes. Upon the occurrence of an event of default, the interest
rate will increase to 15% and the 12% Notes will become immediately due and payable. The Company may prepay the 12% Notes in full at any
time by paying accrued interest and 110% of the outstanding principal balance. Newbridge Securities Corporation acted as exclusive placement
agent for the offering and received (i) $55,200, (ii) 3,550 shares of common stock, and (iii) $11,040, representing a non-accountable
expense allowance for its services.
As of September 30, 2021, the principal balance
of these notes was $0 and all associated loan discounts were fully amortized.
12% Senior Secured Convertible Notes (Original TDH Notes)
On June 20, 2016, the Company issued $4,000,000
of senior secured promissory notes to the shareholders of TD Holdings (the “TDH Sellers”) in connection with a share sale
agreement pursuant to which the Company acquired 100% of the common stock of TD Holdings (“the TDH Share Sale Agreement”).
The notes bear interest at 5.0% per annum and are due on the earlier of (i) June 20, 2018 or (ii) the date on which the Company successfully
completes a qualified initial public offering as defined in the agreement. The notes are collateralized by all of the assets of TD Holdings.
First Amendment to the TDH Share Sale Agreement
On January 3, 2018, the Company entered into an
amendment to the TDH Share Sale Agreement (the “First Amendment”). Under the terms of the First Amendment:
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The maturity date of the notes was extended from July 1, 2018 until July 1, 2019.
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·
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The interest rate on the notes during for one-year extension period from July 2, 2018 to July 1, 2019 was increased to 10%.
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·
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Interest is payable quarterly in arrears during the one-year extension period, instead of annually in arrears. The first such quarterly interest payment of $100,000 is due on September 30, 2018.
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·
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Under the terms of the terms of TDH Share Sale Agreement, the TDH Sellers could earn up to an additional $5.0 million in contingent earnout payments. The original earnout period ended on December 31, 2018. The First Amendment extended the earnout period by one year to December 31, 2019.
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As consideration to enter into the First Amendment,
the Company issued 25,000 shares of its common stock valued at $480,000 to the TDH Sellers.
Second Amendment to the TDH Share Sale Agreement
On January 15, 2019, the Company entered into
a second amendment to the TDH Share Sale Agreement (the “Second Amendment”). Under the terms of the Second Amendment:
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The maturity date of the notes was extended from July 1, 2019 to April 2, 2020.
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·
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The TDH Sellers shall have the right to convert the notes at a conversion price of $8.64 per share, either in whole or in part at any time prior to the maturity, subject to the terms and conditions set forth in the Second Amendment.
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·
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In the event that the notes are not repaid prior to July 2, 2019, no funds will be transferred by TDH to the Company.
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·
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The payment terms of the contingent earnout was modified from 50% payable in cash and 50% payable in stock to 75% payable in cash and 25% payable in stock.
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As consideration to enter into the Second Amendment,
the Company issued an additional 25,000 shares of its common stock valued at $220,000 to the TDH Sellers.
Due to the inclusion of a conversion feature,
the Second Amendment was considered an extinguishment and subsequent reissuance of the notes under the guidelines of ASC 470-20-40-7 through
40-9. As a result, the Company recorded a loss on the extinguishment of debt of $363,468 related to the Second Amendment during the year
ended December 31, 2019.
The principal value of the notes was reclassified
to convertible notes, net – current on the Company’s condensed consolidated financial statements.
Third Amendment to the TDH Share Sale Agreement
On March 16, 2020, the Company entered into a
third amendment (the “Third Amendment”) to the TDH Share Sale Agreement, pursuant to which the Company’s subsidiary,
Grom Holdings, had acquired 100% of the common stock of TDH (representing ownership of the animation studio) from certain individuals
(the “TDH Sellers”). The Company used the proceeds received from the TDH Secured Notes Offering to pay the TDH Sellers $3,000,000
of the principal due under the Original TDH Notes, leaving a principal amount due to the TDH Sellers of $1,000,000 (plus accrued interest
and costs). In addition, the accrued interest of $361,767 due to the TDH Sellers pursuant to the Original TDH Notes was paid in three
monthly payments of $93,922, commencing April 16, 2020, and twelve-monthly installments of $6,667 commencing April 16, 2020.
Pursuant to the Third Amendment, the TDH Sellers
and the Company agreed, among other things:
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To extend the maturity date of the remaining Original TDH Notes by one year to June 30, 2021;
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To increase the interest rate on the remaining Original TDH Notes to 12%;
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To grant a first priority security interest on the shares of TDH and TDAHK to the TDH Sellers, pari passu with the holders of the TDH Secured Notes; and
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To pay the balance of the Original TDH Notes monthly in arrears, amortized over a four-year period.
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On August 18, 2021, the Company paid the TDH Sellers
an aggregate of $834,760, representing all remaining amounts due and payable under the TDH Secured Notes. As a result, the TDH Sellers
released the pledged shares of TDH and its subsidiary, Top Draw Animation Hong Kong Limited from escrow. The TDH Sellers have no further
security interest in the assets of the Company or its subsidiaries.
As of September 30, 2021, the principal balance
of the Original TDH Notes was $0.
12% Senior Secured Convertible Notes (“TDH
Secured Notes”)
On March 16, 2020, the Company sold (the “TDH
Secured Notes Offering”) an aggregate $3,000,000 of its 12% senior secured convertible notes (the “TDH Secured Notes”),
to eleven accredited investors (the “TDH Secured Note Lenders”), pursuant to a subscription agreement with the TDH Secured
Note Lenders. Interest on the TDH Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and
interest on the TDH Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024.
Pursuant to the TDH Secured Notes, TD Holdings will pay amounts due under the TDH Secured Notes. Prepayment of amounts due under TDH Secured
Notes is subject to a prepayment penalty in an amount equal to 4% of the amount prepaid.
The TDH Secured Notes are convertible at the option
of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion
provided that the conversion price shall not be less than $3.20 per share.
The Company’s obligations under the TDH
Secured Notes, are secured by Grom Holdings’ shares of stock of TDH, and of its wholly owned subsidiary, TDAHK. The TDH Secured
Notes rank equally and ratably on a pari passu basis with (i) the other TDH Secured Notes and (ii) the Original TDH Notes issued by the
Company pursuant to TDH Share Sale Agreement.
If the Company sells the animation studio located
in Manila, Philippines, which is currently owned by TDH through TDAHK (the “Animation Studio”), for more than $12,000,000,
and so long as any amount of principal is outstanding under the TDH Secured Notes, the Company will pay the TDH Secured Notes holders
from the proceeds of the sale (i) all amounts of principal outstanding under the TDH Secured Notes, (ii) such amount of interest which
would be due and payable assuming the TDH Secured Notes were held to maturity (minus any amounts of interest previously paid hereunder),
and (iii) an additional 10% of the amount of principal outstanding under the TDH Secured Notes within five days of the closing of such
sale.
In connection with the issuance of the TDH Secured
Notes, the Company issued to each TDH Secured Note holder shares of common stock equal to 20% of the principal amount of such holder’s
TDH Secured Note, divided by $3.20. Accordingly, an aggregate of 187,500 shares of common stock were issued to the TDH Secured Note holders
on March 16, 2020. These shares were valued at $420,000, or $2.24 per share, which represents fair market value. The Company recorded
the value of these shares as a loan discount to be amortized as interest expense over the term of the notes.
On August 6, 2020, the Company entered into debt
exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 1,739,580 shares of the Company’s
Series B Stock were issued to noteholders for an aggregate of $1,101,000 of outstanding principal and accrued and unpaid interest.
On November 30, 2020, the Company entered into
a debt exchange agreement with another holder of these 12% TDH Secured Notes pursuant to which an aggregate of 158,000 shares of Series
B Stock were issued to the noteholder for an aggregate of $99,633 of outstanding principal and accrued and unpaid interest.
On February 17, 2021, the Company entered into
debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 2,106,825 shares of the
Company’s Series B Stock were issued to noteholders for an aggregate of $1,256,722 of outstanding principal and accrued and unpaid
interest.
As of September 30, 2021, the principal balance
of these notes was $359,056 and the remaining balance on the associated loan discounts was $43,021.
12% Senior Secured Convertible Notes (Additional
Secured Notes)
On March 16, 2020, the Company issued to seven
accredited investors (the “Additional Secured Note Lenders”) an aggregate of $1,060,000 of its 12% senior secured convertible
notes (the “Additional Secured Notes”) in a private offering pursuant to a subscription agreement with substantially the same
terms as the TDH Secured Notes except that the Additional Secured Notes are secured by all of the assets of the Company other than the
shares and other assets of TDH and TDAHK, pursuant to a security agreement by and among the Company and the Additional Secured Note Lenders.
Interest on the Additional Secured Notes accrues
on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the Additional Secured Notes are payable monthly,
on an amortized basis over 48 months, with the last payment due on March 16, 2024. Prepayment of the amounts due under the Additional
Secured Notes is subject to a prepayment penalty of 4% of the amount prepaid.
The Additional Secured Notes are convertible at
the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding
conversion provided that the conversion price shall not be less than $0.10 per share.
In connection with the issuance of the Additional
Secured Notes, the Company issued to each Additional Secured Note Lender shares of common stock equal to 20% of the principal amount of
such holder’s Additional Secured Note, divided by $3.20. Accordingly, an aggregate of 66,250 shares of common stock were issued.
These shares were valued at $148,000, or $2.24 per share, which represents fair market value. The Company recorded the value of these
shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.
On August 6, 2020, the Company entered into debt
exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of 1,236,350 shares of the
Company’s Series B Stock were issued to noteholders for an aggregate of $782,500 of outstanding principal and accrued and unpaid
interest.
On February 17, 2021, the Company entered into
a debt exchange agreement with another holder of these 12% Additional Secured Notes pursuant to which an aggregate of 288,350 shares of
the Company’s Series B Stock were issued to the noteholder for an aggregate of $191,273 of outstanding principal and accrued and
unpaid interest.
As of September 30, 2021, the principal balance
of these notes was $68,221 and the remaining balance on the associated loan discounts was $8,174.
Future Minimum Principal Payments
The remaining principal repayments based upon
the maturity dates of the Company’s borrowings for each of the next five years are as follows:
Schedule of future debt maturity payments
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2021
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$
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721,308
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2022
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$
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4,215,130
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2023
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$
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167,792
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2024
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$
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76,047
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2025 and thereafter
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$
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–
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$
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5,180,277
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Preferred Stock
The Company is authorized to issue 25,000,000
shares of preferred stock, par value of $0.001 per share.
Series A Preferred Stock
On February 22, 2019, the Company designated 2,000,000
shares of its preferred stock as 10% Series A convertible preferred stock, par value $0.001 per share (“Series A Stock”).
Each share of Series A Stock is convertible, at any time, into 0.15625 shares of common stock of the Company.
On each of February 27, 2019 and March 11, 2019,
the Company received $400,000 from the sale of 400,000 shares of Series A Stock to accredited investors in private offerings pursuant
to Section 4(a)(2) and/or Rule 506(b) of Regulation D, as promulgated under the Securities Act of 1933, as amended (the “Securities
Act”). As an inducement to purchase the Series A Stock, each investor also received 62,500 restricted shares of the Company’s
common stock.
On April 2, 2019, the Company received $125,000
from the sale of 125,000 shares of Series A Stock to an accredited investor in a private offering pursuant to Section 4(a)(2) and/or Rule
506(b) of Regulation D, as promulgated under the Securities Act. As an inducement to purchase the Series A Stock, the investor also received
19,532 restricted shares of the Company’s common stock.
As a result of the issuance of the Series A Stock,
the Company recorded a beneficial conversion feature and other discounts as a deemed dividend in its condensed consolidated financial
statements of $740,899.
On August 6, 2020, the Company entered into exchange
agreements with the holders of 925,000 issued and outstanding shares of the Company’s Series A Stock pursuant to which such shares
of Series A Stock were exchanged for an aggregate of 1,202,500 shares of the Company’s Series B Stock.
As of September 30, 2021 and December 31, 2020,
the Company had no shares of Series A Stock issued and outstanding.
Series B Preferred Stock
On August 4, 2020, the Company filed with the
Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series B Stock designating
10,000,000 shares as Series B Preferred Stock (the “Series B Stock”). 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 1.5625 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.
On June 19, 2020, the Company received gross cash
proceeds of $250,000 from one accredited investor, pursuant to the terms of a subscription agreement, and subsequently issued an aggregate
of 250,000 shares of Series B Stock on August 6, 2020.
On August 6, 2020, the Company, entered into debt
exchange agreements with holders of the Company’s (i) OID Notes in the aggregate amount of $411,223 of outstanding principal and
accrued and unpaid interest; (ii) TDH Secured Notes, in the aggregate amount of $1,101,000 of outstanding principal and accrued and unpaid
interest; and (iii) Additional Secured Notes, which were secured by all of the other assets of the Company in the aggregate amount of
$782,500 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders
of the notes exchanged outstanding and all amounts owed by the Company thereunder, for an aggregate of 3,623,884 shares of the Company’s
Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid-in-full and the notes were cancelled.
In addition, on August 6, 2020, the Company entered
into exchange agreements (the “Series A 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 Stock were cancelled.
On September 22, 2020, the Company received gross
cash proceeds of $233,500 from two accredited investors, pursuant to the terms of a subscription agreement, and subsequently issued an
aggregate of 233,500 shares of Series B Stock on November 30, 2020.
On November 30, 2020, the Company entered into
debt exchange agreements with holders of the Company’s (i) OID Notes in the aggregate amount of $111,250 of outstanding principal
and accrued and unpaid interest; and (ii) TDH Secured Notes, in the aggregate amount of $99,633 of outstanding principal and accrued and
unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders of the outstanding notes exchanged all amounts owed
by the Company thereunder, for an aggregate of 316,000 shares of the Company’s Series B Stock. At the time of the exchange, all
amounts due under the notes were deemed to be paid-in-full and the notes were cancelled.
On February 17, 2021, the Company entered into
debt exchange agreements with holders of three of the Company’s convertible promissory notes in the aggregate amount of $1,700,905
of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders exchanged
the outstanding notes, and all amounts owed by the Company thereunder, for an aggregate of 2,564,175 shares of the Company’s Series
B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid in full and the notes were cancelled.
On February 17, 2021, the Company entered into
subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 300,000 shares
of Series B Stock for aggregate gross proceeds of $300,000.
On March 31, 2021, the Company entered into subscription
agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 650,000 shares of Series B
Stock for aggregate gross proceeds of $650,000.
On March 31, 2021, the Company issued 75,000 shares
of Series B Stock with a fair market value of $75,000 to its attorneys for legal services rendered.
On May 20, 2021, the Company entered into exchange
agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed
to exchange all of the issued and outstanding shares of Series B Stock for shares of the Company’s newly-designated Series C Stock,
on a one for one basis. As a result of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059
shares of Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
As of September 30, 2021 and December 31, 2020,
the Company had no shares and 5,625,884 shares of Series B Stock issued and outstanding, respectively.
Series C Preferred Stock
On May 20, 2021, the Company filed with the Secretary
of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series C Stock designating 10,000,000
shares as Series C Preferred Stock (the “Series C Stock”). The Series C Stock ranks senior and prior to all other classes
or series of the Company’s preferred stock and common stock.
The holder may, at any time after the 6-month
anniversary of the issuance of the shares of Series C Preferred Stock, convert such shares into common stock at a conversion rate of $1.92
per share. In addition, the Company may, at any time after the issuance of the shares, convert any or all of the outstanding shares of
Series C Preferred Stock at a conversion rate of $1.92 per share
Each share of Series C Stock entitles the holder
to 1.5625 votes for each share of Series C Stock. The consent of the holders of at least two-thirds of the shares of Series C Stock is
required for the amendment to any of the terms of the Series C Stock, to create any additional class of stock unless the stock ranks junior
to the Series C Stock, to make any distribution or dividend on any securities ranking junior to the Series C Stock, to merge or sell all
or substantially all of the assets of the Company or acquire another business or effectuate any liquidation of the Company.
Cumulative dividends accrue on each share of Series
C Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in 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 C Stock are entitled to $1.00 per share plus all accrued and unpaid dividends. No distribution
may be made to holders of shares of capital stock ranking junior to the Series C Stock upon a liquidation until Series C stockholders
receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series C Stock, may elect to deem a merger,
reorganization or consolidation of the Company into or with another corporation, not affiliated with said majority, or other similar transaction
or series of related transactions in which more than 50% of the voting power of the Company is disposed of in exchange for property, rights
or securities distributed to holders thereof by the acquiring person, firm or other entity, or the sale of all or substantially all of
the assets of the Company.
On May 20, 2021, the Company entered into exchange
agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed
to exchange all of the issued and outstanding shares of Series B Stock for shares of Series C Stock, on a one for one basis. As a result
of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059 shares of the Company’s
Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
On June 11, 2021, the Company entered into subscription
agreements with an accredited investor, pursuant to which the Company sold the investor an aggregate of 100,000 shares of Series C Stock
for aggregate gross proceeds of $100,000.
On September 10, 2021, the Company entered into
a debt exchange agreement with a holder of a 10% convertible note pursuant to which 85,250 shares of the Company’s Series C Stock
was issued for $85,250 of outstanding principal and accrued and unpaid interest.
As of September 30, 2021 and December 31, 2020,
the Company had 9,400,259 and no shares of Series C Stock issued and outstanding, respectively.
Common Stock
The Company is authorized to issue 500,000,000
shares of common stock, par value of $0.001 per share and had 12,325,736 and 5,886,073 shares of common stock issued and outstanding as
of September 30, 2021 and December 31, 2020, respectively.
Reverse Stock Split
On April 7, 2021, the board of directors of the
Company approved, and on April 8, 2021, the Company’s shareholders approved, an increase to the range of the ratio for a reverse
stock split to a ratio of no less than 1-for-2 and no more than 1-for-50. On May 6, 2021, the board fixed the ratio for a reverse stock
split at 1-for-32 and, on May 7, 2021, the Company filed a certificate of amendment to its articles of incorporation with the Secretary
of State of the State of Florida to effect the reverse stock split which became effective as of May 13, 2021. The Company’s common
stock began being quoted on the OTCQB on a post-reverse split basis beginning on May 19, 2021.
Registered Offering
On June 21, 2021, the Company sold an aggregate
of 2,409,639 units (“Units”), at a price to the public of $4.15 per Unit (the “Offering”), each Unit consisting
of one share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price of $4.565 per
share (the “Warrants”), pursuant to a underwriting agreement, dated as of June 16, 2021 (the “Underwriting Agreement”),
between the Company and EF Hutton, division of Benchmark Investments, LLC, as representative (“EF Hutton”) of the several
underwriters named in the Underwriting Agreement. In addition, pursuant to the Underwriting Agreement, the Company granted EF Hutton a
45-day option (the “Over-Allotment Option”) to purchase up to 361,445 additional Units, to cover over-allotments in connection
with the Offering, which EF Hutton exercised with respect to Warrants exercisable for up to an additional 361,445 shares of common stock.
The Company received gross proceeds of approximately $10,000,000 in the Offering, before deducting underwriting discounts and commissions
and other offering expenses.
On July 15, 2021, EF Hutton exercised in full
the Over-Allotment Option with respect to all 361,445 additional shares of the Company’s common stock for total gross proceeds to
the Company of approximately $1,500,000, before deducting underwriting discounts and commissions and other offering expenses.
Common Stock Issued as Compensation to Employees,
Officers and/or Directors
During the nine months ended September 30, 2021,
the Company issued 157,943 shares of common stock with a fair market value of $426,446 to an officer as compensation.
During the nine months ended September 30, 2020,
the Company issued 13,125 shares of common stock with a fair market value of $35,600 to employees, officers and/or directors as compensation.
Common Stock Issued in Exchange for Consulting,
Professional and Other Services
During the nine months ended September 30, 2021,
the Company issued 150,393 shares of common stock with a fair market value of $511,458 to contractors for services rendered.
During the nine months ended September 30, 2020,
the Company issued 191,034 shares of common stock with a fair market value of $555,440 to contractors for services rendered.
Common Stock Issued in lieu of Cash for
Loans Payable and Other Accrued Obligations
During the nine months ended September 30, 2020,
the Company issued 15,625 shares of common stock with a fair market value of $50,000 to satisfy loans payable and other accrued obligations.
Common Stock Issued in Connection with the
Conversion of Convertible Note Principal and Accrued Interest
During the nine months ended September 30 2021,
the Company issued 1,464,966 shares of common stock upon the conversion of $1,766,832 in convertible note principal and accrued interest.
During the nine months ended September 30 2020,
the Company issued 36,206 shares of common stock upon the conversion of $56,049 in convertible note principal and accrued interest.
Common Stock Issued in Connection with the
Issuance of Convertible Promissory Notes
During the nine months ended September 30, 2021,
the Company issued 17,746 shares of common stock valued at $39,750 in connection with the issuance of convertible notes.
During the nine months ended September 30, 2020,
the Company issued 339,678 shares of common stock valued at $736,014 in connection with the issuance of convertible notes.
Common Stock Issued in the Acquisition of
a Business
During the nine months ended September 30, 2021,
the Company issued 1,771,883 shares of common stock valued at $5,000,000 in connection with the acquisition of a business.
Stock Purchase Warrants
Stock purchase warrants are accounted for as equity
in accordance with ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s
Own Stock, Distinguishing Liabilities from Equity.
The following table reflects all outstanding and
exercisable warrants at September 30, 2021 and December 31, 2020. All warrants are exercisable for a period of three to five years from
the date of issuance:
Schedule of warrants
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Number of Warrants Outstanding
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|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Contractual Life (Yrs.)
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|
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|
|
|
|
|
|
|
|
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Balance January 1, 2020
|
|
|
177,028
|
|
|
$
|
8.91
|
|
|
|
1.79
|
|
Warrants issued
|
|
|
52,600
|
|
|
$
|
2.08
|
|
|
|
|
|
Warrants exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
Warrants forfeited
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
December 31, 2020
|
|
|
229,628
|
|
|
$
|
7.34
|
|
|
|
1.66
|
|
Warrants issued
|
|
|
4,241,504
|
|
|
$
|
4.15
|
|
|
|
|
|
Warrants exercised
|
|
|
(117,188
|
)
|
|
$
|
–
|
|
|
|
|
|
Warrants forfeited
|
|
|
(4,307
|
)
|
|
$
|
–
|
|
|
|
|
|
Balance September 30, 2021
|
|
|
4,349,637
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|
|
$
|
4.36
|
|
|
|
1.82
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|
On June 24, 2021, the Company issued 105,648 shares
of common stock to Labrys upon the cashless exercise of a warrant to purchase 117,188 shares of common stock.
As of September 30, 2021, the outstanding warrants
had an aggregate intrinsic value of $950,142.
Stock Options
The following table represents all outstanding
and exercisable stock options as of September 30, 2021.
Schedule of options
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|
|
|
|
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Year Issued
|
|
Options
Issued
|
|
|
Options
Forfeited
|
|
|
Options
Outstanding
|
|
|
Vested
Options
|
|
|
Strike Price
|
|
|
Weighted Average Remaining Life (Yrs.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
241,730
|
|
|
|
(26,063
|
)
|
|
|
215,667
|
|
|
|
215,667
|
|
|
$
|
7.68
|
|
|
|
1.97
|
|
2016
|
|
|
169,406
|
|
|
|
(169,406
|
)
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
2018
|
|
|
1,875
|
|
|
|
–
|
|
|
|
1,875
|
|
|
|
1,875
|
|
|
|
24.96
|
|
|
|
1.58
|
|
2021
|
|
|
208,500
|
|
|
|
–
|
|
|
|
208,500
|
|
|
|
–
|
|
|
$
|
2.98
|
|
|
|
4.83
|
|
Total
|
|
|
621,511
|
|
|
|
(195,469
|
)
|
|
|
426,042
|
|
|
|
217,542
|
|
|
$
|
5.46
|
|
|
|
2.48
|
|
On July 29, 2021, the Company granted stock
options to purchase an aggregate of 208,500
shares to new employees at an exercise price of $2.98.
The options vest annually in equal installments over a three-year period and expire in 5five
years from the date of grant. Using the Black Sholes model with a volatility of 326.5%,
with no dividends paid since inception and a risk-free interest rate of 0.37%;
resulted in stock-based compensation expense of $585,728
which will be amortized over a 36-month period, or $166,270
per month.
During the three and nine months ended September
30, 2021, the Company recorded $33,699 in stock-based compensation expense related to stock options. No stock-based compensation expense
related to stock options was recorded during the three and nine months ended September 30, 2020.
As of September 30, 2021, the outstanding exercisable
stock options had an aggregate intrinsic value of $0.
12.
|
COMMITMENTS AND CONTINGENCIES
|
None.
In accordance with FASB ASC 855-10, Subsequent
Events, the Company has analyzed its operations subsequent to September 30, 2021 to the date these condensed consolidated financial
statements were issued, and has determined that it does not have any material subsequent events to disclose in these condensed consolidated
financial statements, except as follows:
On September 14, 2021, the Company entered into
a securities purchase agreement (the “Purchase Agreement”) with L1 Capital Global Master Fund (“L1”) pursuant
to which it issued (i) a 10% original issue discount senior secured convertible note in the principal amount of $4,400,000 to L1 (the
“L1 Note”) and (ii) a five-year warrant to purchase 813,278 shares of the Company’s common stock at an exercise price
of $4.20 per share (“Warrant Shares”) in exchange for $3,960,000 (the “First Tranche Financing”). The Purchase
Agreement also provided, subject to shareholder approval, for the issuance, subject to certain conditions, of an additional $1,500,000
of notes and warrants to purchase 277,777 shares of common stock (the “Second Tranche Financing”) on the same terms.
Pursuant to the Purchase Agreement, the Company
entered into a registration rights agreement which, among other things, requires the Company to file a registration statement with the
SEC to register for resale the shares issuable upon the conversion of the note and the exercise of the warrant within 35 days of entering
into the Purchase Agreement, and have such registration statement deemed effective within 60 days or, in the event of a “full review”
by the SEC within 75 days. L1 also has certain rights with respect to certain future debt or equity financings.
Prior to maturity on March 13, 2023, the L1 Note
is convertible by L1 into common stock of the Company at a price of $4.20 per share (based on 150% of the value weighted average price
(“VWAP”) of the common stock for five consecutive trading days prior to September 14, 2021, or approximately 1,047,619 shares,
subject to anti-dilution adjustments in the event of financings at less than $4.20 but in no effect less than $0.54. If the stock price
is below $4.20 and an event of default (as described in the Purchase Agreement) occurs, the conversion price will equal 80% of the lowest
VWAP in the ten prior trading days.
The L1 Note is repayable in eighteen equal monthly
installments with certain deferments or an acceleration of up to three months' payments as described in the Note. The Company may repay
the L1 Note in cash or shares of common stock at a price equal to the lesser of the then conversion price or 95% of the lowest daily VWAP
during the ten consecutive trading days immediately preceding the monthly payment date, but in no event less than $1.92. In the event
that VWAP drops below $1.92, the Company will have the right to pay at such VWAP with any shortfall paid in cash. If such monthly conversion
price is less than $0.54, the Company is obligated to pay in cash. The L1 Note is senior to all other Company indebtedness and the Company’s
obligations under the note are secured by all of the assets of the Company’s subsidiaries.
The L1 Note may not be converted and the warrant
may not be exercised to the extent that after giving effect to the conversion or exercise, the noteholder or warrant holder, as the case
may be, and its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock immediately
after giving effect to such conversion or exercise provided such percentage may be increased to 9.99% upon 61 days prior notice to the
Company of such proposed conversion or exercise. The warrant contains anti-dilution protection and provides for cashless exercise if
no registration statement covering resale of the shares issuable upon the exercise of the warrant is effective.
The Company’s obligations under the Purchase
Agreement and related transaction documents are guaranteed by the Company’s subsidiaries and its obligations under the L1 Note are
secured by all of the assets of the Company and its subsidiaries.
The Company paid $35,000 to L1 for its legal
fees and expenses and $316,800 to EF Hutton, division of Benchmark Investment, LLC, as placement agent for the financing.
On October 20, 2021, the Company and L1 entered
into an amended and restated purchase agreement which increased the amount of the Second Tranche Financing from $1,500,000 to $6,000,000
and provides (i) for an amended and restated 10% original issue discount senior secured convertible note to be issued in exchange for
the L1 Note pursuant to the Purchase Agreement and (ii) for the issuance of a five-year warrant to purchase 1,041,194 shares of the Company’s
common stock at an exercise price of $4.20 per share.
In the event the principal amount of the L1 Note
issued in the First Tranche Financing, when aggregated with the L1 Note to be issued in the Second Tranche Financing, exceeds 25% of the
market capitalization of the Company’s common stock as reported by Bloomberg L.P, then the principal amount to be issued in the
Second Tranche Financing will be limited to 25%, in the aggregate of both L1 Notes, unless waived in the sole discretion of the Purchaser.