EDGAR 10-K Filing

Company CIK: 1662574
Filing Year: 2023
Filename: 1662574_10-K_2023_0001683168-23-002483.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
We were incorporated in the State of Florida on April 14, 2014 under the name Illumination America, Inc.
On August 17, 2017, we acquired Grom Holdings, Inc., a Delaware corporation (“Grom Holdings”), pursuant to a share exchange agreement (the “Share Exchange Agreement”) entered into on May 15, 2017 (the “Share Exchange”). In connection with the Share Exchange, the Company acquired 100% of the outstanding shares of capital stock of Grom Holdings from Grom Holdings’ stockholders in exchange for an aggregate of 115,473 shares of common stock, par value $0.001 per share, of the Company. As a result of the Share Exchange, the stockholders of Grom Holdings acquired approximately 92% of the Company’s then-issued and outstanding shares of common stock and Grom Holdings became a wholly-owned subsidiary of the Company. In connection with the Share Exchange, on August 17, 2017, we changed our name to Grom Social Enterprises, Inc.
We are a media, technology and entertainment company that focuses on (i) delivering content to children under the age of 13 years in a safe secure platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of Kids & Family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content. We conduct our business through our following subsidiaries:
· Grom Social, Inc. (“Grom Social”), incorporated in the State of Florida on March 5, 2012, operates our social media network designed for children under the age of 13 years.
· TD Holdings Limited (“TD Holdings”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited, a Hong Kong corporation (“Top Draw HK”), and (ii) Top Draw Animation, Inc., a Philippines corporation (“Top Draw Philippines”). The group’s principal activities are the production of animated films and television series.
· Grom Educational Services, Inc. (“GES”), incorporated in the State of Florida on January 17, 2017, operates our web filtering services provided to schools and government agencies.
· Grom Nutritional Services, Inc. (“GNS”), incorporated in the State of Florida on April 19, 2017, intends to market and distribute nutritional supplements to children. It has been nonoperational since its inception.
· Curiosity Ink Media, LLC (“CIM”), organized in the State of Delaware on January 5, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and family entertainment properties and associated business opportunities.
We own 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity.
Grom Social, Inc.
Grom Social is a media, technology and entertainment company for kids focused on producing original content on Grom Social’s website, www.gromsocial.com and mobile application. Visitors to the Grom Social website may log on via mobile phone, desktop computer or tablet and chat with friends, view original content or play games created by us.
The name “Grom” is derived from Australian surfing slang and is defined by us to mean “a promising young individual who is quick to learn.” Grom Social was conceptualized and developed in 2012 by Zachary Marks, who was 12 years old at the time. He is the son of our Chief Executive Officer, Darren Marks.
Our business model is based upon providing children under the age of 13 with a safe environment on the Internet while promoting “fun,” “wholesomeness” and “family values.” We require that each child receive parental approval prior to gaining full access to the Grom Social platform. In certain jurisdictions and circumstances, we allow parents, teachers and guardians (collectively, “Guardians”) to sign up groups of children at one time. If a Guardian’s approval is not granted, a child’s account will not be opened. If a child does not follow the proper registration process, he or she will be considered a user with limited access. Limited access does not allow the child to chat with other children or visit certain sections of the platform.
Based on data provided by Google Data Analytics and Joomla Management Systems, in February 2021, our platforms have generated approximately 25.0 million users in over 200 countries and territories since our inception in 2012. We define a "user" as any child under the age of 13 who registers for a Grom Social account through the website or downloads the Grom Social app from a mobile app store, and any parent who registers for a Grom Social account and any student or faculty that uses our NetSpective web filtering platform.
Monthly active users (“MAUs”) is a usage metric which reveals the total number of users who visit our platforms within a 30-day period. As of March 1, 2022, there were approximately 1.8 million MAUs on all platforms.
Based upon statistics provided by the Joomla Management System and Google Analytics, the average online duration of users logged onto our Grom Social platforms is approximately 51 minutes.
Grom Social App
In May 2019, our Grom Social mobile application (or “app”) for Apple Store and Google Play Store was approved within each platform’s family designated section. The Apple Store markets iPhone operating system (“IOS”) applications for download solely on Apple devices. The Google Play Store markets applications for download on Android devices.
We communicate with the children through messaging on a child’s profile page and through seventeen unique Grom characters that engage with children with many additional “fun” and safety features.
We believe our mobile app is the only children’s app where kids can:
· Record videos of themselves to post in a social environment and use enhanced facial features, masks, and filters while doing so;
· upload videos that are COPPA compliant;
· View 1,450 hours of exclusive Grom TV content - video on demand platform for kids which is free and curated to provide only safe and educational content for children.
· Message with cartoon characters and cast members;
· Communicate with users and parents regardless of where they may be navigating on the Grom Social website. This feature eliminates the need to leave the section of the site in which they are engaged.
We have established the following safeguards and procedures which we believe will ensure our Grom Social platform is a safe place for children:
· Account Approval: We have account creation procedures to help ensure that only children under the age of 13 can create an account. If a child submits a request to open an account on the Grom Social website or mobile apps, we send an email notification to his or her parents that their child has applied to create a Grom Social account. If the child’s parents approve the account, by using one of three methods that are approved by COPPA guidelines, the account is opened. If a parent’s approval is not given, the account will not be opened, and the child will have limited access to the Grom Social website.
· Parental Involvement: By requiring parental approval for a child to open an account and to interact with other users on Grom Social, we hope to ensure that parents are aware of and involved with their child’s activity on the website. Further, we believe that parental involvement provides us with the ability to market products and services to parents.
· Digital Citizenship Educational Content - Children are encouraged to take and pass an internet safety course and receive a Digital Citizen License from us in order to gain increased access to the features provided on the Grom Social platforms.
· Limited Data Collection of Child and Parent - No digital profiles will be built for children or parents. The information we collect is for analytical data only and is limited to parent email, birthdate, gender and country locations.
· Content Monitoring: We have software that monitors posts for inappropriate content using standard “keyword” filter technology. If a post contains inappropriate content, it will not appear on the platform and the poster will be sent a warning about offensive content. We believe that through monitoring content we can promote social responsibility and digital citizenship. We view this as a learning opportunity but will ban users if the problem persists.
· Anti-bullying: We have software that monitors the Grom Social website for bullying. In addition to monitoring the interaction between children on the website, we also post messages that strongly emphasize anti-bullying and actively promotes social responsibility and digital citizenship. Additionally, our platform has received the “KidSafe Seal of Approval” from KidSafe, an independent safety certification service and seal-of-approval program designed exclusively for children-friendly websites and technologies, including online game sites, educational services, virtual worlds, social networks, mobile apps, tablet devices, connected toys, and other similar online and interactive services.
· Use of “Gromatars”: Children on Grom Social create animated pictures, which we call “Gromatars,” to represent themselves on Grom Social without providing a real-life photograph. Gromatars are viewed as profile pictures on a user’s home wall, and when a user leaves a comment or “like” on a public page. Kids can build and customize their Gromatars by selecting over 200 different options such as the eyes, nose, hair, teeth, ears, skin color, hairstyle, and color.
These safeguards and procedures are a critical component of our business model. We believe that children are increasingly accessing the Internet at younger ages and therefore the need for safe, age-appropriate platforms for younger children to browse and interact with other children is increasing. According to recent statistics on GuardChild.com:
· 81% of children from 9 to 17 years-old say they visited a social networking site in the past three months;
· 41% of teens had a negative experience as a result of using social networking; and
· 88% of teens have seen someone be mean or cruel to another person on a social networking site.
· 70% of children have accidentally encountered online pornography
· 90% of children from 8 to 16 years-old have seen online pornography
· 65% of children from 8 to 14 years-old have been involved in a cyber-bullying incident
GuardChild.com is a website providing software and applications to promote safe Internet browsing for children and statistics collected from various resources including: Social Media and Young Adults, Pew Internet & American Life Project, Global Insights Into Family Life Online, Norton/Symantec & StrategyOne, Teen/Mom Internet Safety Survey, McAfee & Harris Interactive, Pew Research Center, FOSI, Cable in the Classroom 2011, Journal of Adolescent Health, National Cyber Security Alliance (NCSA)-McAfee Online Safety Study, American Osteopathic Association, Social Media and Young Adults, Pew Internet, American Life Project and Grunwald Associates.
Content
In addition to providing a safe, fun, social media platform for children to interact with their peers, we create our own content consisting of animated characters, interactive chats, videos, blogs, and games geared to provide wholesome family entertainment. We create our own short-form content consisting of animated characters, interactive chats, videos, blogs, games and two live action shows released weekly. We currently have over 1,450 hours of live action shows in our content library. This exclusive content is only available on our platforms.
Our Grom Social app features include direct messaging, video recordings with face filters and effects, notifications, profiles with custom colors, Gromatar cartoon avatars, over 1,450 hours of Grom TV exclusive videos on demand, a search and discovery section, hashtags and mentions in post descriptions, liking, commenting, sharing of content, including the ability to share photos, videos and doodle drawings in direct messages. With this feature set and the safety permissions in place, the app will provide children their own social platform similar to the popular adult platforms, but in a safe controlled environment. Kids can upload videos along with a variety of different music, similar to TikTok. Users also have a vast variety of face filters similar to Snapchat and Instagram. The Company produces up to two new short-form videos each week similar to Netflix to maintain user engagement.
According to a survey released on October 29, 2019 from Common Sense Media, a nonprofit that tracks young people’s tech habits reports, twice as many young people watch videos every day as they did four years ago, and the average time spent watching videos, mostly on You Tube has roughly doubled, to an hour a day. The survey also found that on average, American children from 8 to 12-years old spend 4 hours and 44 minutes on screen media each day and teens average 7 hours and 22 minutes, not including time spent using screens for school or homework. Based upon statistics provided by the Joomla Management System, the average online duration of users logged onto our Grom Social platform was approximately 51 minutes as of February 2, 2021. We believe the longer duration time is a result of our ability to better engage users through our original content.
Strategy
· Advertising Revenue. We believe that our app will enable us to begin to generate advertising revenue and the growth of our database may attract high-profile companies to advertise on our Grom Social website and mobile platforms, although there can be no assurances that advertisers will use our website or mobile app. We intend to emphasize to advertisers what we believe is the unique level of parental involvement on Grom Social. We currently have an agreement with SuperAwesome one of the largest COPPA complaint kid advertising companies in the world. A number of SuperAwesome’s clients, including Disney, Nickelodeon, and McDonalds are currently advertising on our platform. In addition, we currently have several advertisers that are advertising on our newly created Grom Safe Ads advertising program that allows pre-approved (by Grom) COPPA complaint ads to run on our platforms
· Subscription Based Premium Content. Although we currently do not charge a subscription fee, we hope to be able to move to a subscription-based model in the future. We are continuously making software upgrades which we hope will enable us to offer premium content to users for which they will be charged a monthly subscription fee. Users that sign up for a premium program will become Grom Club Members which will enable them to utilize current and new features to:
Ø Create and view interactive videos that can be shared with other Grom Club Members, with non-paying Grom users and with any other third parties in their approved network;
Ø Receive exclusive Gromatar options and accessories including masks, voice modification, face modification, special effects, and numerous filters.
Ø Have unlimited access to new premium games;
Ø Engage in exclusive chats with athletes and celebrities that we hope to engage in the future;
Ø Receive discounts on Grom Social merchandise;
Ø Turn off ads; and
Ø Participate in Bookstore pre/reviews and live readings.
Publishing and Distribution
We believe that Grom Social offers a great way to get user feedback and see how kids respond to content. We believe offering book titles to be previewed and added to wish lists for parents to purchase is a good way to get titles out to the Grom Social kids demographic.
Comments could be used for reviews and a rating star system could be implemented. Badges could be awarded to users to complete different book titles, similar to an online e-book store.
Authors could schedule a live reading where users would be able to log on during the live time-period and listen to the author live read a chapter of their book to the kids, with Q&A with the author live in public forum.
· Online Game Fees. The games currently available to users on our website are free. We intend to offer users an option to pay to play exclusive games and/or pay for game upgrades. These games may be developed by us, such as Grom Skate, where the character skates through three worlds collecting coins, doing tricks and avoiding obstacles and solving geometry problems, or obtained from outside developers and adapted to use on our website.
· Licensing Merchandise Revenue. We hope to create Grom Social apparel and other merchandise for purchase through our website and mobile app and enter into licensing and merchandise agreements.
· Partnerships and Collaborations. The Company believes that due to its strong youth following that it can be a valuable resource to many organizations and sports leagues looking to build, reconnect and/or maintain their brand among the youth market. The Company has designed an opportunity for clients to utilize existing programming and broadcasts by condensing long programming such as 3-4 hour baseball games, 8 hour-a-day surfing events and 6-hour golf rounds into engaging short-form content wrapped in gaming and animation utilizing celebrities and athlete interaction.
· Intellectual Property Strategy. The Company plans to produce, develop, license and purchase a number of intellectual properties and monetize by franchise, licensing and merchandising opportunities in addition to hosting on its own platform. To satisfy and help fill the demand for content, the Company intends to continue to create original content as well as use underutilized content.
Throughout our monetization efforts, we will maintain a free version of the app in an effort to not negatively impact our user base. The Grom Social website and mobile app have generated nominal revenues to date.
TD Holdings Limited and Subsidiaries
TD Holdings is a holding company that operates through its two wholly-owned subsidiaries (i) Top Draw Animation Hong Kong Ltd and (ii) Top Draw Animation, Inc. Based in Manila, Philippines, the group’s principal activities are the production of animated television series and movies. Top Draw Animation Hong Kong, which owns our animation studio in Manila, Philippines, contracts with third parties for the production of animated television series and movies. Through an intercompany agreement, Top Draw Animation then does the production work at our studio in Manila, Philippines.
Top Draw Animation is a full-service production and pre-production animation studio working with a diverse roster of global clients. It specializes in providing two-dimensional digital production services for animated television series and movies on a contract basis or under co-production arrangements.
Top Draw Philippines’ pre-production services include planning and creating storyboards, location design, model and props design, background color and color styling. Its production services focus on library creation, digital asset management, animation layout, background, library development, background layout scene assembly, posing, animation, composting and after-effects. Top Draw Philippines currently provides services to high-profile brands and properties, as well as all-new, original intellectual properties. Its studio produces over 200 half-hour segments of animated content annually which we believe makes it one of the top global producers of animation for television worldwide.
The following table depicts some of Top Draw Philippines’ recent notable projects:
Show
Client
Number of Series in Years
Period
My Little Pony
DHX Media
2010-2019
My Little Pony - Equestria Girls
DHX Media
2012-2013, 2015-2019
Tom and Jerry Seasons 2 - 5
Slap Happy Cartoons
2015-2019
Penn Zero: Part-Time Hero
Disney
2016-2017
Polly Pocket Seasons 1 - 4
WildBrain (formerly DHX Media)
2017-2021
Glitch Techs
Nickelodeon
2018-2019
Carmen Sandiego
WildBrain (formerly DHX Media)
2019-2020
Rhyme Time Town
DreamWorks
2019-2020
Viking Skool
Samka Production
Archibald’s Next Big Thing Is Here
DreamWorks
2020-2021
Polly Pocket Season 3
DHX Media
The Loud House Movie
New Nickelodeon Animation
Bionic Max
Gaumont Animation
Jamie’s Got Tentacles Seasons 1 - 3
Samka Production
2013, 2016, and 2021
The Guava Juice Show Seasons 1 - 2
Main Frame Studios
2021-2022
Half Heros Season 2
Cyber Group Studios
2021-2022
Strawberry Shortcake Seasons 1 - 2
WildBrain
2021-2022
Star Trek: Lower Decks
Titmouse
Grom Educational Services, Inc.
On January 2, 2017, we acquired certain assets including Internet content filtering software called “NetSpective Webfilter” from TeleMate.net. Since inception, we have sold hardware and/or subscriptions for web filtering software to thousands of schools with more than 4,000,000 children in attendance. Clients pay for hardware within 30 days of delivery and in advance for filtering service ranging between one to five years. We offer a proprietary digital citizenship program that assists K-12 schools in the United States to comply with The Children's Internet Protection Act (“CIPA”) requirements. CIPA requirements include the use Internet content filters and implementation of other protective measures to prevent children from exposure to harmful online content.
Grom Nutritional Services, Inc.
GNS was formed with the intention of developing, marketing and distributing nutritional supplement beverages to children to support the healthy development of neurological structure and intellectual development of cognitive skills. We initially intend to market and distribute nutritional based supplements to our user base of children and their parents, then subsequently expand our marketing efforts to the wholesale/retail grocery, convenience, and big box sectors. GNS had no operations since its inception, but the Company is exploring partnerships.
Curiosity Ink Media, LLC
On August 19, 2021, we acquired 80% of the outstanding membership interest of Curiosity Ink Media LLC. Curiosity is a kids and family original content and media company that focuses on building and managing entertainment brands and franchises. Specializing in revitalizing lapsed and underutilized properties, the Company reimagines beloved properties by strategically defining their strengths to ensure their continued growth and legacy. Curiosity leverages its creative talent, established media distribution networks, and industry connections to market proven media properties through strategic licensing agreements, partnerships, and original content creation.
Acquisition Strategy
Our acquisition strategy is to acquire synergistic companies, products or intellectual property that will help grow our Grom Social user base and operate profitably as both a stand-alone enterprise as well as enhance Grom’s overall monetization strategy.
Acquisition of TD Holdings Limited
On July 1, 2016, we entered into a share sale agreement (the “TDH Share Sale Agreement”) for the acquisition of 100% of the capital stock of TD Holdings for which we paid $4,000,000 in cash, issued a 5% secured promissory note in the principal amount of $4,000,000 which originally matured on July 1, 2018 (the “TDH Note”), and 7,367,001 shares of our common stock valued at $4,240,000, or approximately $0.58 per share, to the selling shareholders of TDH (“TDH Sellers”). The TDH Share Sale Agreement was subsequently amended and on August 18, 2021, the Company paid the holders of the TDH Notes an aggregate of $834,760, representing all remaining amounts due and payable under the TDH Note.
Acquisition of the NetSpective Webfilter Assets
On January 1, 2017, we acquired NetSpective webfilter assets from TeleMate.net Software, LLC, a Georgia limited liability company, (“TeleMate”) pursuant to an asset purchase agreement (the “NetSpective APA”). Under the terms of the NetSpective APA, we issued a three-year 0.68% $1,000,000 redeemable, convertible promissory note to TeleMate (the “TeleMate Note”). The TeleMate Note is convertible into our common stock at a conversion rate of $0.78 per share. If not converted by TeleMate by November 1, 2019, the note may be converted by the Company into shares of common stock at a conversion rate of $0.48 per share. In addition, we entered into a master services agreement (“MSA”) with TeleMate under which TeleMate provided engineering and sales support for twelve months and assumed all risks of NetSpective negative cash flow for one year.
In April 2019, TeleMate paid the TeleMate Note in full. On December 4, 2019, the Company converted the outstanding principal and interest of $1,013,200 under the TeleMate Note into 2,113,428 shares of its common stock.
Acquisition of Curiosity Ink Media LLC
On August 19, 2021, we acquired 80% of the outstanding membership interest of Curiosity Ink Media LLC, a Delaware limited liability company (“Curiosity”) pursuant to a membership interest purchase agreement (the “Curiosity MIPA”). Under the terms of the Curiosity MIPA, we issued 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.
Additionally, 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, members of Curiosity.
Under the terms of the purchase agreement, the Note is convertible into shares of common stock of the Company at a conversion price of $98.40 per share but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The 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.
Business Strategy
We hope to grow our business through a combination of marketing initiatives and synergistic acquisitions in an effort to increase our Grom Social user base to a large enough size to enable us to attract advertisers and paid users for our premium content. However, there can be no assurance that our strategy will be successful or that our revenues will increase as a result of our business strategies.
Our Growth Strategy
Our current growth strategy is as follows:
· Increase the size of our database of users of Grom Social. Comparable to other successful social media companies, we believe the key strategy to our future success is to grow the size of our database. Although the revenue from Grom Social is now nominal, we believe that our database will continue to increase due to our production of original content. We intend to launch a marketing campaign, subject to raising sufficient capital, to increase awareness of the Grom Social platforms. There can be no assurance that we can continue to grow the Grom platforms, and if we are successful in doing so, that we will be able to generate revenues from the website and mobile app.
· Marketing initiatives. We plan to use celebrities and high-profile athletes as role models, content providers and overall brand ambassadors. In January 2021, the Company entered into a long-term marketing agreement with American professional surfer and 2020 US Olympic surfing team member, 20-year-old Caroline Marks.
· Expand Core Products. We manage our brands through strategic product development initiatives, including introducing new products and modifying our existing intellectual property. Our marketing team and development teams strive to develop enhanced products to offer added technological, aesthetic and functional improvements to our portfolio of products.
· Pursue Strategic Acquisitions. We supplement our internal growth with strategic and synergistic acquisitions.
Competition
Grom Social, Inc.
The markets in which we compete are characterized by innovation and new and rapidly evolving technologies. We believe we will face significant and intense competition in every aspect of our intended business, including from Facebook, YouTube, Twitter, and Google, which offer a variety of Internet products, services, and content that will compete for our user's Internet time and spending dollars. In addition to facing general competition from these large, well-funded companies, we also face competition from smaller Internet companies that offer products and services that may compete directly with Grom Social for users, such as TikTok, SnapChat, Video Star and Zoomerang. Additionally, as we introduce new services and products, as our existing services and products evolve, or as other companies introduce new products and services, we may become subject to additional competition from:
· Companies that offer products that replicate either partial or the full range of capabilities we intend to provide.
· Companies that develop applications, particularly mobile applications, that provide social or other communications functionality, such as messaging, photo-and video-sharing, and micro-blogging.
· Companies that provide web-and mobile-based information and entertainment products and services that are designed to engage our target audience and capture time spent on mobile devices and online.
Many of these companies have substantially greater resources than us.
We believe that the following features differentiate us from our competitors and provide us with a possible competitive advantage with respect to our target market:
· We provide children with a social media experience in a safe and controlled environment;
· We encourage direct parental involvement and oversight;
· We produce content developed by “kids and for kids”;
· We have developed a registration process to safely register children on the website;
· We provide live monitoring of the website by trained individuals to help protect children from malicious content that may be found on other social networking sites available to children, supplemented by standard “bad word” filtering software; and
· We have developed the only COPPA compliant app that offers live commenting, hashtags, streaming video content and the ability to record and share videos.
We believe that Grom Social is one of the only social media platforms that offers games, chatrooms, educational services, social interaction, exclusive content, global connectivity, and group collaboration to develop new content and activities based on user behavior in one platform.
TD Holdings Limited and Subsidiaries
We have extensive competition in our animation business from production companies in Korea, Taiwan, Canada, India and, to a lesser degree, China, Malaysia, Singapore, and Thailand. Businesses in these countries, such as Malaysia, may receive government subsidies which can increase competitive pressure.
Our intention is for Top Draw Philippines to remain competitive for the production of family-oriented, animated television series and movies and other family-oriented entertainment products produced by major movie studios, including Disney, DreamWorks Animation, Warner Bros. Entertainment, Netflix, Nickelodeon, and numerous other independent motion picture production companies.
The primary competitors of Top Draw Philippines in the Philippines are Toon City Animation, Snipple Animation Studio, and Synergy 88 Digital.
Growth in the television industry is being driven by larger streaming companies such as Netflix, Disney Plus, NBC, Amazon Prime, and Facebook. Competition is primarily based on the ability to reach an audience directly and deliver products that meet consumer demand. The success of these streaming companies is primarily related to the size and reach of their user or subscriber base.
Grom Educational Services, Inc.
We believe our primary competitors for web filtering products and services are iBoss, Lightspeed, Go Guardian and Securly. There are other large companies that offer web filtering products including Forcepoint (Websense), Bluecoat, Palo Alto Networks, Barracuda and Cisco. However, we believe these companies are enterprise focused whereby they sell numerous products with web filtering representing a minimal component of their portfolio.
Grom Nutritional Services, Inc.
We believe that consumer awareness regarding the benefits of dietary supplements and new product availability are the major drivers for the market worldwide. The global nutritional supplements market size was valued at $273.9 billion in 2018 and is anticipated to expand at a compound annual growth rate of 6.4% over the forecast period from 2019 to 2025, according to Grand View Research. The largest of our competitors are Axxess Pharma Inc., Celsius Holdings, Inc., GNC Holdings Inc., and Pfizer Inc.
Curiosity Ink Media, LLC
We have extensive competition in our publication and animated series and movies are Disney, DreamWorks Animation, Warner Bros. Entertainment, Netflix and Nickelodeon. Growth in the publication and animated series and movies are driven by the large streaming and production companies.
Government Regulation
We are subject to several U.S. federal and state and foreign laws and regulations that affect companies conducting business on the Internet. Many of these laws and regulations are still evolving and being tested in courts and could be interpreted in ways that could harm our business. These may involve user privacy and data protection, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, personal information, electronic contracts and other communications, competition, protection of minors, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions, securities law compliance, and online payment services. In particular, we are subject to federal, state, and foreign laws regarding privacy and protection of data. Foreign data protection, privacy, and other laws and regulations can be more restrictive than those in the United States. U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. In addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. There are also a number of legislative proposals pending before federal, state, and foreign legislative and regulatory bodies. including data protection regulation.
In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
Our platforms follow the guidelines of the Children's Online Privacy Protection Act of 1998, 15 U.S.C. 6501-6505. COPPA imposes certain requirements on operators of websites or online services directed to children under 13 years of age, and on operators of other websites or online services that have actual knowledge that they are collecting personal information online from a child under 13 years of age.
Additionally, our K-12 NetSpective web filter clients are subject to CIPA, which was enacted by Congress in 2000 to address concerns about children's access to obscene or harmful content over the Internet. CIPA imposes certain requirements on schools or libraries that receive discounts for Internet access or internal connections through the E-rate program - a program that makes certain communications services and products more affordable for eligible schools and libraries. In early 2001, the FCC issued rules implementing CIPA and provided updates to those rules in 2011.
The nutritional supplements that we intend to market to children are governed by the US Food and Drug Administration (“FDA”). The FDA defines supplements as a product intended to increase its levels in the diet. These may include vitamins, minerals, herbs, amino acids, or other plant-based substances. Over-the-counter supplements do not undergo the same formal approval process as prescription and over-the-counter drugs. The FDA does not require supplement manufacturers to submit their products to the FDA for review nor receive FDA approval, however, before marketing, companies must ensure they are not making false claims on the product label to mislead consumers. Like other food substances, dietary supplements are not subject to the safety and efficacy testing requirements imposed on drugs, and unlike drugs they do not require prior approval by the FDA; however, they are subject to the FDA regulations regarding adulteration and misbranding.
Intellectual Property
To establish and protect our proprietary rights we rely on a combination of trademarks, copyrights, trade secrets, including know-how, license agreements, confidentiality procedures, non-disclosure agreements with third parties, employee non-disclosure and invention assignment agreements, and other contractual rights. We do not believe that our proprietary website is dependent on any single copyright or groups of related patents or copyrights.
Trademarks
We currently own nine trademarks as follows:
Country
Mark
Status
Class
Serial Number
Filing Date
Registration Number
Registration Date
Owner Name
Expiration Date
US
GROM
Registered
12/20/2012
01/14/2014
Grom Social, Inc.
01/14/2024
US
GROM SKATE
Registered
009, 041
2/16/2021
1/25/2022
Grom Social, Inc.
1/25/2028
US
GROM SOCIAL
Registered
03/07/2012
11/06/2012
Grom Social, Inc.
11/06/2032
US
GROM SOCIAL AND DESIGN
Registered
042, 045
01/10/2019
12/08/2020
Grom Social Enterprises Inc.
12/08/2026
US
GROMPOUND
Registered
03/04/2013
08/06/2013
Grom Social, Inc.
08/06/2023
US
MAKING HAPPY HAPPEN
Pending
035, 041
09/14/2022
N/A
N/A
Grom Social Enterprises, Inc.
N/A
US
MAMABEAR
Registered
05/22/2012
06/11/2013
Grom Holdings Inc.
06/11/2023
US
NOGGIN JOGGIN LOGO
Pending Application
09/21/2020
N/A
N/A
Grom Nutritional Services, Inc.
05/11/2023
US
TECHTOPIA
Registered
07/24/2014
09/29/2015
Grom Social, Inc.
09/29/2025
Copyrights
We currently own twelve copyrights as follows:
Title
Claimant
Filing Date
Registration Number
Registration Date
CoCo
Grom Social Enterprises, Inc.
05/03/2022
VA 2-302-486
05/03/2022
Drone 2
Grom Social Enterprises, Inc.
05/03/2022
VA 2-302-307
05/03/2022
Drone 3
Grom Social Enterprises, Inc.
05/03/2022
VA 2-302-305
05/03/2022
Grom Social Characters
Grom Social, Inc.
07/20/2012
VA 1-861-879
07/20/2012
Grom Social Characters - Fall 2015
Grom Social, Inc.
01/12/2016
VA 2-000-079
01/12/2016
Hall
Grom Social Enterprises, Inc.
02/24/2022
VA 2-294-237
04/06/2022
Noswad
Grom Social, Inc.
04/09/2014
VAu 1-171-758
04/09/2014
Ollie
Grom Social, Inc.
03/11/2014
VAu 1-160-606
03/11/2014
Santa Claus
Grom Social Enterprises, Inc.
02/24/2022
VA 2-294-243
04/06/2022
Santa.com North Pole
Grom Social, Inc.
02/24/2022
VA 2-293-035
04/06/2022
YoYo
Grom Social Enterprises, Inc.
05/03/2022
VA 2-302-477
05/03/2022
Herbert Henry and Santa’s Secret Socitey
Curiosity Ink Media, LLC
11/28/2018
TX0008682635
03/05/2019
Employees
As of April 7, 2023, the Company had 22 full-time employees, 3 part-time employees and 2 independent contractors in the United States and 68 full-time employees and 37 part-time and 198 contracted employees in the Philippines.

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ITEM 1A. RISK FACTORS
Item 1A Risk Factors
Investing in our securities involves a high degree of risk. Before investing in our common stock, you should carefully consider the risks described below, as well as the other information in this Annual Report, including our consolidated financial statements and the related notes. In addition, we may face additional risks and uncertainties not currently known to us, or which as of the date of this Annual Report we might not consider significant, which may adversely affect our business. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case the trading price of our common stock and warrants could decline due to any of these risks or uncertainties, and you may lose part or all of your investment.
Risks Related to Our Business
Our independent auditors concurred with our management’s assessment that raises concern as to our ability to continue as a going concern.
On a consolidated basis, we have incurred significant operating losses since inception. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. As of December 31, 2022, we have an accumulated deficit of $83.5 million.
Because we do not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, we will need to raise additional funds and are currently exploring alternative sources of financing. Historically, we have raised capital through private placements of our equity securities and convertible notes and through officer loans as an interim measure to finance working capital needs and may continue to raise additional capital through the sale of common stock or other securities and by obtaining short-term loans. We will be required to continue to do so until our consolidated operations become profitable.
These factors, among others, raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern.
Our future performance will depend on the continued engagement of key members of our management team.
Our future performance depends to a large extent on the continued services of members of our current management and other key personnel. While we have employment agreements with certain of our executive officers and key employees, the failure to secure the continued services of these or other key personnel for any reason, could have a material adverse effect on our business, operations, and prospects. We currently do not carry “key man insurance” on any of our executives.
Failure to manage our growth effectively could cause our business to suffer and have an adverse effect on our financial condition and operating results.
Failure to manage our growth effectively could cause our business to suffer and have an adverse effect on our financial condition and operating results. To manage our growth effectively, we must continually evaluate and evolve our business and manage our employees, operations, finances, technology and development, and capital investments efficiently. Our efficiency, productivity and the quality of our Grom Social platform, original content and intellectual properties, animation business and web filtering user services and content may be adversely impacted if we fail to appropriately coordinate across our business operations. Additionally, rapid growth may place a strain on our resources, infrastructure, and ability to maintain the quality of our Grom Social platform. If and when our structure becomes more complex as we add additional staff, we will need to improve our operational, financial and management controls as well as our reporting systems and procedures. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating revenues.
Future business acquisitions, strategic investments or alliances, if any, as well as business acquisition transactions, could disrupt our business and may not succeed in generating the intended benefits and may, therefore, adversely affect our business, revenue and results of operations.
We completed the acquisition of TD Holdings in 2016, and acquired 80% of Curiosity Ink Media, LLC in 2021. In the future, we may explore potential acquisitions of companies or technologies, strategic investments, or alliances to strengthen our business. Acquisitions involve numerous risks, any of which could harm our business, including:
· our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or architecture, regulatory compliance practices, accounting practices or employee issues;
· failure to successfully integrate acquired businesses;
· diversion of management’s attention from operating our business to addressing acquisition integration challenges;
· difficulties in coordinating geographically disparate organizations and corporate cultures and integrating management personnel with different business backgrounds;
· anticipated benefits may not materialize;
· retention of employees from the acquired company;
· integration of the acquired company’s accounting, management information, human resources, and other administrative systems;
· coordination of product development and sales and marketing functions;
· liability for activities of the acquired company before the acquisition, including patent and trademark infringement, claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and
· litigation or other claims in connection with the acquired company, including claims from terminated employees, users, former stockholders or other third parties.
Failure to appropriately mitigate these risks or other issues related to such strategic investments and acquisitions could result in reducing or completely eliminating any anticipated benefits of transactions and harm our business generally. Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses or the impairment of goodwill, any of which could harm our business, financial condition, and operating results.
We face intense competition in all aspects of our business including competition in the animation and web filtering businesses. If we do not provide features and content that will engage and attract users, advertisers and developers we may not remain competitive, and our potential revenues and operating results could be adversely affected.
We face intense competition in almost every aspect of our business, including from companies such as Facebook, YouTube, Twitter and Google, which offer a variety of Internet products, services, content, and online advertising offerings, as well as from mobile companies and smaller Internet companies that offer products and services that may compete directly with Grom Social for users, such as Yoursphere, Fanlala, Franktown Rocks and Sweety High. As we introduce new services and products, as our existing services and products evolve, or as other companies introduce new products and services, we may become subject to additional competition.
Some of our current and potential competitors have significantly greater resources and better competitive positions than we do. These factors may allow our competitors to respond more effectively than us to new or emerging technologies and changes in market requirements. Our competitors may develop products, features, or services that are similar to ours or that achieve greater market acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. In addition, our users, content providers or application developers may use information shared by our users through Grom Social in order to develop products or features that compete with us. Certain competitors, including Facebook, could use strong or dominant positions in one or more markets to gain a competitive advantage against us in areas where we operate, including by creating a social networking experience similar to ours with similar content and features. As a result, our competitors may acquire and engage users at the expense of the growth or engagement of our user base, which may negatively affect our business and financial results.
We believe that our ability to compete effectively depends upon many factors, including:
· the age appropriateness, attractiveness, safety, ease of use, performance, and reliability of the Grom Social platform, our content and products compared to our competitors;
· the size and composition of our user base;
· the engagement of our users with our products;
· the timing and market acceptance of content, services, and products, including developments and enhancements to our or our competitors’ content, services and products;
· our ability to monetize our products, including our ability to successfully monetize mobile usage;
· the frequency, size, and relative prominence of the ads and other commercial content displayed by us or our competitors;
· customer service and support efforts;
· marketing and selling efforts;
· responding to changes mandated by legislation or regulatory authorities, some of which may have a disproportionate effect on us;
· acquisitions or consolidation within our industry, which may result in more formidable competitors;
· our ability to attract, retain, and motivate talented employees, particularly programmers;
· our ability to cost-effectively manage and grow our operations; and
· our ability to cost-effectively manage and grow our operations; and
If we are not able to effectively compete, our user base and level of user engagement may decrease, which could make us less attractive to developers and advertisers and materially and adversely affect our revenue and results of operations.
We are a holding company organized in Florida, with no operations of our own, and we depend on our subsidiaries, incorporated in Hong Kong, Manila and Florida for cash to fund our operations.
Our operations are conducted entirely through our subsidiaries and our ability to generate cash to fund operations or to meet debt service obligations is dependent on the earnings and the receipt of funds from our subsidiaries. Deterioration in the financial condition, earnings or cash flow of TD Holdings and its subsidiaries for any reason could limit or impair their ability to make payments to us. Additionally, to the extent that we need funds and our subsidiaries are restricted from making such distributions under applicable law or regulation or are otherwise unable to provide such funds, it could materially adversely affect our business, financial condition, results of operations or prospects.
Our intellectual property rights are critical to our success, and the loss of such rights or the ability to obtain, maintain and protect our intellectual property rights could materially adversely affect our business.
We regard our trademarks, copyrights, and other intellectual property rights as critical to our success and attempt to obtain, maintain and protect such intellectual property with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to prevent infringement. Our success will depend in part on our ability to obtain and maintain patent and other intellectual property protection in the United States and other countries with respect to our property and technology. We rely on a combination of copyright, trade secret and trademark laws, to protect our proprietary technology and prevent others from duplicating our products. However, there can be no assurance that other third parties will not infringe or misappropriate our trademarks and similar proprietary rights. If we lose some or all of our intellectual property rights, our business may be materially adversely affected.
If our trademarks and tradenames are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected.
Our trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these trademarks or trade names, which we need to build name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement, or dilution claims brought by owners of other trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively, and our business may be adversely affected. Our efforts to enforce or protect our rights related to trademarks, trade secrets, domain names or other intellectual property rights may be ineffective, could result in substantial costs and diversion of resources and could adversely affect our business, financial condition and results of operations.
We may be subject to claims alleging the intellectual property subject to our licensing agreements is violating the intellectual property rights of others.
We may face significant expense and liability as a result of litigation or other proceedings relating to patents and intellectual property rights of others. We could be required to participate in interference proceedings involving issued patents and pending applications of another entity. The cost to us of any such proceeding could be substantial. An adverse outcome in an interference proceeding could require us to cease using the technology, to substantially modify it or to license rights from prevailing third parties. There is no guarantee that any prevailing patent owner would offer us a license so that we could continue to engage in activities claimed by the patent, or that such a license is made available to us or could be acquired on commercially acceptable terms. In addition, third parties may, in the future, assert other intellectual property infringement claims against us with respect to our services, technologies or other matters.
Risks Related to Grom Social
If we fail to retain existing users or add new users, or if our users decrease their level of engagement, our revenue, financial results, and business may be significantly harmed.
The size of our user base and our users’ level of engagement are critical to our success. We have over 28 million Grom Social users under the age of 13 and an almost equal number of parents in our database as of October 2022.. Our future financial performance will be significantly determined by our success in adding, retaining, and engaging users. We define a “user” as any child under the age of 13 who joins Grom Social through the website or downloads the Grom Social app from a mobile app store, and any parent who joins Grom Social and any student or faculty that uses our NetSpective web filtering platform. If people do not perceive our site and the content that we offer to be enjoyable, engaging, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their interaction on our website. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our user base or engagement levels. A decrease in user retention, growth, or engagement could render us less attractive to developers and advertisers, which may have a material and adverse impact on our revenue, business, financial condition, and results of operations. Any number of factors could potentially negatively affect our ability to attract and retain user and to increase their engagement on the website, including, if:
· our users decide to spend their time on competing sites;
· we fail to introduce new and improved content or if we introduce new content or services that are not favorably received;
· we are unable to successfully balance our efforts to provide a compelling user experience with the decisions we make with respect to the frequency, prominence, and size of ads and other commercial content that we display;
· we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
· there are changes in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors;
· we are unable to manage and prioritize information to ensure users are presented with content that is interesting, useful, and relevant to them;
· there are adverse changes in our products that are mandated by legislation or regulatory authorities;
· technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience;
· we adopt policies or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public; or
· we fail to provide adequate customer service to users, developers, or advertisers;
If we are unable to maintain and increase our user base and user engagement, our revenue, financial results, and future growth potential may be adversely affected.
Our strategy at Grom Social to create new and original content, charge users for that content and attempt to secure advertisers to pay to advertise on our app, could fail to attract or retain users or generate revenue.
Our ability to retain, increase, and engage our user base and to increase our revenue will depend heavily on our ability to create successful new content, both independently and in conjunction with third parties. If new or enhanced content fails to engage users, developers, or advertisers, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may be adversely affected. In the future, we may invest in new products and initiatives to generate revenue, but there is no guarantee these approaches will be successful. If we are not successful with new approaches to monetization, we may not be able to maintain or grow our revenue as anticipated or recover any associated development costs, and our financial results could be adversely affected.
If we are not able to maintain and enhance our brand, or if events occur that damage our reputation and brand, our ability to expand our user base may be impaired, and our business and financial results may be harmed.
We believe that maintaining and enhancing the Grom Social brand is central to expanding our base of users and advertisers. Many of our new users are referred by existing users, and therefore we strive to ensure that our users remain favorably inclined towards our brand. Maintaining and enhancing our brand will depend largely on our ability to continue to provide age-appropriate, enjoyable, reliable, trustworthy, and innovative content and services, which we may not do successfully. We may introduce new content or terms of service that users do not like, which may negatively affect our brand. Additionally, the actions of third-party developers may affect our brand if users do not have a positive experience using third-party apps and websites integrated with our website. We also may fail to provide adequate customer service, which could erode confidence in our brand. Our brand may also be negatively affected by the actions of users that are deemed to be hostile or inappropriate to other users, or by users acting under false or inauthentic identities. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to successfully promote and maintain the Grom Social brand or if we incur excessive expenses in this effort, our business and financial results may be adversely affected.
Our Grom Social platform may be misused by users, despite the safeguards we have in place to protect against such behavior.
Users may be able to circumvent the controls we have in place to prevent abusive, illegal or dishonest activities and behavior on our website, and may engage in such activities and behavior despite these controls. For example, our Grom Social platform could be used to exploit children and to facilitate individuals seeking to engage in improper communications or contact with children. Such potential behavior of such users would injure our other users and would jeopardize the reputation and integrity of our Grom Social platform. Fraudulent users could also post fraudulent profiles or create false or unauthorized profiles on behalf of other, non-consenting parties. This behavior could expose us to liability or lead to negative publicity that could injure the reputation of our Grom Social platform and materially adversely affect our brand.
We could experience system failures or capacity constraints that could negatively impact our Grom Social platform and business.
Our ability to provide reliable service to our users largely depends on the efficient and uninterrupted operation of our Grom Social platform, relying on people, processes, and technology to function effectively. Any significant interruption to, failure of, or security breaches affecting, our Grom Social platform could result in significant expense, a loss of users, and harm to our business and reputation. Interruptions, system failures or security breaches could result from a wide variety of causes, including disruptions to the Internet, malicious attacks or cyber incidents such as unauthorized access, loss or destruction of data (including confidential and/or personal customer information), account takeovers, computer viruses or other malicious code, and the loss or failure of systems over which we have no control. The failure of our Grom Social platform, or the loss of data, could result in disruption to our operations, damage to our reputation and remediation costs, which could individually or in the aggregate adversely affect our business and brand.
Improper access to or disclosure of our users’ information, or violation of our terms of service or policies, could harm our reputation and adversely affect our business.
Our efforts to protect the information that our users have chosen to share using Grom Social may be unsuccessful due to the actions of third parties, software bugs or other technical malfunctions, employee error or malfeasance, or other factors. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users’ data. If any of these events occur, our users’ information could be accessed or disclosed improperly. We have a privacy policy that governs the use of information that users have chosen to share using the Grom Social website and how that information may be used by us and third parties. Some third-party developers may store the information provided by our users through apps on the Grom Social platform or websites. If these third parties or developers fail to adopt or adhere to adequate data security practices or fail to comply with our terms and policies, or in the event of a breach of their networks, our users’ data may be improperly accessed or disclosed.
Any incidents involving unauthorized access to or improper use of the information of our users or incidents involving violation of our terms of service or policies, including our privacy policy, could damage our reputation and our brand and diminish our competitive position. In addition, the affected users or government authorities could initiate legal or regulatory action against us in connection with such incidents, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Any of these events could have a material and adverse effect on our business, reputation, or financial results.
We collect, process, share, retain and use personal information and other data, which subjects us to governmental regulations and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
A variety of federal, state and foreign laws and regulations govern privacy and the collection, use, retention, sharing and security of personal information. We collect, process, use, share and retain personal information and other user data, including information about our users as they interact with our platform, and we have a privacy policy concerning our use of data on our platform. We are subject to COPPA which regulates the collection, use, and disclosure of personal information from children under 13 years of age and CIPA, which addresses concerns about children’s access to obscene or harmful content over the Internet.
Any failure or perceived failure by us to comply with COPPA, CIPA, or other applicable privacy laws and regulations or with our privacy policy or any compromise of security that results in the unauthorized release or transfer of sensitive information, which may include personally identifiable information or other user data, may result in governmental enforcement actions or litigation, which could be costly to defend and may require us to pay significant fines or damages. Such failures or perceived failures could also result in public statements against us by consumer advocacy groups, our users or others, which could harm our brand and could cause our users, and parents to lose trust in us which in turn could have an adverse effect on our business. Additionally, if third parties we work with, such as advertisers, vendors, content or platform providers, violate applicable laws or our policies, such violations may also put the information of our users at risk and could, in turn, have an adverse effect on our business.
We also are or may become required to comply with varying and complex privacy laws and regulations in multiple jurisdictions, and laws and regulations in foreign jurisdictions are sometimes more restrictive than those in the United States. Complying with these laws as they evolve could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
As a result of our collection, retention, and use of personal data, we are or may become subject to diverse laws and regulations in the United States and foreign jurisdictions mandating notification to affected individuals in the event that personal data (as defined in the various governing laws) is accessed or acquired by unauthorized persons. Complying with such numerous and complex regulations in the event of unauthorized access would be expensive and difficult, and failure to comply with these regulations could subject us to regulatory scrutiny and additional liability.
User trust regarding privacy and data security is very important to our brand and the growth of our business, and privacy or data security concerns relating to our Grom Social platform could damage our reputation and brand and deter current and potential users from using our platform, even if we are in compliance with applicable privacy and data security laws and regulations.
Users may curtail or stop their use of our Grom Social platform if our security measures are compromised, if our platform is subject to attacks that degrade or deny the ability of users to access our platform or if our member data is compromised.
Our Grom Social platform collects, processes, stores, shares, discloses and uses the information of our users and their communications. We are vulnerable to computer viruses, break-ins, phishing attacks, and attempts to overload our servers with denial-of-service and other cyber-attacks and similar disruptions from unauthorized use of our computer systems. Our security measures may also be breached due to employee error, malfeasance or otherwise. Several recent, highly publicized data security breaches and denial of service attacks at other companies have heightened public awareness of this issue and may embolden individuals or groups to target our systems. Any of the foregoing could lead to interruptions, delays or platform shutdowns, causing loss of critical data or the unauthorized disclosure or use of personally identifiable or other confidential or sensitive information, such as credit card information or information about our members. If our security is compromised, we could experience platform performance or availability problems, the complete shutdown of our platform or the loss or unauthorized disclosure of confidential or sensitive information. We could be subject to liability and litigation and reputational harm, and our users may be harmed, lose confidence in us and decrease or terminate the use of our platform.
We also rely on certain third parties to provide critical services and to store sensitive customer information. For example, our platform is hosted using data centers operated by third parties. However, we have little or no control over the security measures implemented by these parties, and if these measures are compromised, we could be exposed to similar risks and liabilities to those described above.
Unauthorized parties may also fraudulently induce employees or members to disclose sensitive information in order to gain access to our information or the information of our members or access this information through other means. They might also abuse our systems in other ways, such as by sending spam, which could diminish or otherwise degrade the experience of our members or by compromising or gaining unauthorized access to member accounts. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and are becoming increasingly sophisticated, they often are not recognized until launched against a target. Furthermore, such attacks may originate from less regulated and remote areas around the world, and we may be unable to proactively address these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new members and increase engagement by existing members, cause existing members to stop using our platform or subject us to lawsuits, regulatory fines or other action or liability, thereby harming our business and operating results.
Moreover, if a high-profile security breach occurs with respect to another social media provider, our users and potential users may lose trust in the security of our platform generally, which could adversely impact our ability to retain existing users or attract new ones.
If any of our relationships with internet search websites terminate, if such websites’ methodologies are modified or if we are outbid by competitors, traffic to our websites could decline.
We depend in part on various internet search websites, such as Google.com, Bing.com, Yahoo.com, and other websites to direct a significant amount of traffic to our websites. Search websites typically provide two types of search results, algorithmic and purchased listings. Algorithmic listings generally are determined and displayed as a result of a set of unpublished formulas designed by search engine companies in their discretion. Purchased listings generally are displayed if particular word searches are performed on a search engine. We rely on both algorithmic and purchased search results, as well as advertising on other internet websites, to direct a substantial share of visitors to our websites and to direct traffic to the advertiser customers we serve. If these internet search websites modify or terminate their relationship with us or we are outbid by our competitors for purchased listings, meaning that our competitors pay a higher price to be listed above us in a list of search results, traffic to our websites could decline. Such a decline in traffic could affect our ability to generate advertising revenue and could reduce the desirability of advertising on our websites.
We may have difficulty scaling and adapting our existing network infrastructure to accommodate increased traffic and technology advances or changing business requirements, which could cause us to incur significant expenses and lead to the loss of users and advertisers.
To be successful, our network infrastructure has to perform well and be reliable. The greater the user traffic and the greater the complexity of our products and services, the more computer power we will need. We could incur substantial costs if we need to modify our websites or our infrastructure to adapt to technological changes. If we do not maintain our network infrastructure successfully, or if we experience inefficiencies and operational failures, the quality of our products and services and our users’ experience could decline. Maintaining an efficient and technologically advanced network infrastructure is particularly critical to our business because of the pictorial nature of the products and services provided on our websites. A decline in quality could damage our reputation and lead us to lose current and potential users and advertisers. Cost increases, loss of traffic or failure to accommodate new technologies or changing business requirements could harm our operating results and financial condition.
Risks Related to Top Draw Animation
Since Top Draw’s business operations are located in the Philippines, our results of operations or financial condition could be materially adversely affected by economic or political developments in the Philippines.
Top Draw’s business operations are located in the Philippines. As a result, we are subject to certain risks presented by the Philippine economy and regulatory environment. We believe that the Philippine government exercises substantial control over virtually every sector of the Philippine economy through regulations and, in some cases, state-ownership. Our ability to operate Top Draw’s business in the Philippines may be harmed by changes in the local laws and regulations, including those relating to employment, taxation, business regulation, intellectual property rights, property, and other matters.
In the event of adverse weather conditions, calamity or epidemic that may occur in the Philippines, the lack of a fully developed infrastructure could have a material adverse impact on Top Draw’s business.
The vast majority of Top Draw’s employees do not own an automobile and must commute to work using public transportation. Additionally, the power grid in the Philippines is considered substandard compared to developed countries. Any negative event that impacts public transportation or power generation could result in Top Draw’s employees not being able to go to the office to perform their work thus potentially delaying projects.
Operating Top Draw in the Philippines subjects us to challenges and risks unique to operating a business in the Philippines and if we are unable to manage those challenges and risks, the growth of our business could be limited, and our business could suffer.
Operating Top Draw in the Philippines subjects us to a number of risks and challenges that specifically relate to our Philippine operations. Our Philippine operations may not be successful if we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse effect on our revenue and operating results. These risks and challenges include:
· difficulties and costs of staffing and managing foreign operations, including any impairment to our relationship with employees caused by the change in ownership;
· restrictions imposed by local labor practices and laws on our business and operations;
· exposure to different business practices and legal standards;
· unexpected changes in regulatory requirements;
· the imposition of government controls and restrictions;
· political, social and economic instability and the risk of war, terrorist activities or other international incidents;
· the failure of telecommunications and connectivity infrastructure;
· natural disasters and public health emergencies;
· potentially adverse tax consequences; and
· lack of intellectual property protection.
Although we report our results of operations in U.S. dollars, approximately 88% of our revenue is currently denominated in foreign currencies. We do not hedge against currency fluctuations and unfavorable fluctuations in foreign currency exchange rates. Such fluctuations could have a material adverse effect on our results of operations.
Because our consolidated financial statements are presented in U.S. dollars, we must translate our Top Draw’s revenues, expenses, and income, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, changes in the value of the U.S. dollar against other currencies will affect our revenues, operating income and the value of balance-sheet items, including intercompany payables and receivables, originally denominated in other currencies. These changes cause our growth in consolidated earnings stated in U.S. dollars to be higher or lower than our growth in other currencies when compared against other periods.
An increase in the value of other currencies, against the U.S. dollar could increase costs for delivery of our digital animation services by increasing labor and other costs that are denominated in other currencies. Conversely, a decrease in the value of other currencies, against the U.S. dollar could place us at a competitive disadvantage compared to service providers that benefit to a greater degree from such a decrease and can, as a result, deliver services at a lower cost.
Historically, Top Draw’s business has been reliant and concentrated upon a limited number of key clients, the loss of any one of which could have a material adverse effect on Top Draw’s and our revenue and financial condition.
During the year ended December 31, 2022, Top Draw accounted for approximately 88.4% of our consolidated revenue. During the same period, four of Top Draw’s clients accounted for approximately 70.8% of our consolidated revenue. Although the relative percentages by client may change from quarter to quarter, the reliance upon a limited number of clients is not expected to change for the foreseeable future. As a result, a decrease in business or revenue from any one or more of these key clients could materially negatively impact Top Draw’s and our revenue, results of operation, and financial condition.
The success of Top Draw, and consequently our success, depends on certain key employees.
The success of Top Draw, and consequently our success depends to a significant extent on the performance of certain senior management personnel and other key employees. In particular, we are dependent upon the services of Russell Hicks or Jared Wolfson to operate and manage Top Draw. The loss of the services of Russell Hicks or Jared Wolfson could have a material adverse effect on our business, revenue, and results of operations.
In order for our digitally animated content and related products to be successful, we must develop appealing creative content.
The success of each digitally animated feature developed and produced by Top Draw depends in large part upon our ability to develop and produce compelling stories and characters that will appeal to our target audience. Traditionally, this process has been extremely difficult. While we believe Top Draw has enjoyed success with its digitally animated features, there can be no assurance that similar levels of success will be achieved by Top Draw’s subsequent features and our other future projects.
We expect to experience intense competition with respect to Top Draw’s digitally animated features and related content.
We expect that Top Draw’s digitally animated features will compete with family-oriented, animated and live-action feature films and other family-oriented entertainment products produced by major movie studios, including Disney, DreamWorks Animation SKG, Inc., Warner Bros. Entertainment, Sony Pictures Entertainment, Fox Entertainment Group Inc., Paramount Pictures, Lucasfilm Ltd., Universal Studios, Inc., MGM/UA, and Studio Ghibli as well as numerous other independent motion picture production companies.
We believe competition from animated feature films and family-oriented feature films will likely continue to intensify over the next several years. Some of the other movie studios with which we compete have significantly greater financial, marketing and other resources than we do. In addition to the box office and home video competition, other family-oriented features and films will compete with Top Draw Animation’s digital features.
If we are not able to produce digital features and content that can compete successfully with offerings from our competitors, it could have a material adverse impact on our business, revenue, and results of operations.
Risks Related to Our Corporate Structure and Ownership of Our Securities
If we are unable to maintain compliance with all applicable continued listing requirements and standards of Nasdaq, our common stock could be delisted from Nasdaq.
Our common stock is listed on The Nasdaq Capital Market under the symbol “GROM.” In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to remain in compliance with Nasdaq’s listing standards or if we do later fail to comply and subsequently regain compliance with Nasdaq’s listing standards, that we will be able to continue to comply with the applicable listing standards. If we are unable to maintain compliance with these Nasdaq requirements, our common stock will be delisted from Nasdaq.
In the event that our common stock is delisted from Nasdaq due to our failure to continue to comply with any requirement for continued listing on Nasdaq, and is not eligible for quotation on another market or exchange, trading of our common stock could, again, be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the OTC Pink or the OTCQB tiers of the OTC marketplace. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and it would likely be more difficult to obtain coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a national exchange.
Future capital raises may dilute our existing stockholders’ ownership and/or have other adverse effects on our operations.
If we raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership may decrease, and these stockholders may experience substantial dilution. If we raise additional funds by issuing debt instruments, these debt instruments could impose significant restrictions on our operations, including liens on our assets. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or products, or to grant licenses on terms that are not favorable to us or could diminish the rights of our stockholders.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future; therefore, capital appreciation, if any, of our common stock, will be your sole source of gain for the foreseeable future.
We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, future loan arrangements, if any, may contain, terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock, will be your sole source of gain for the foreseeable future.
Our board of directors may authorize and issue shares of new classes of stock that could be superior to or adversely affect you as a holder of our common stock.
Our Board has the power to authorize and issue shares of classes of stock, including preferred stock that have voting powers, designations, preferences, limitations and special rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights without further shareholder approval which could adversely affect the rights of the holders of our common stock. In addition, our board could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing shareholders.
Any of these actions could significantly adversely affect the investment made by holders of our common stock. Holders of our common stock could potentially not receive dividends that they might otherwise have received. In addition, holders of our common stock could receive less proceeds in connection with any future sale of the Company, whether in liquidation or on any other basis.
The voting and conversion rights of our issued and outstanding shares of Series C Stock will have the effect of diluting the voting power of existing common stockholders.
Our authorized capital stock includes 25,000,000 shares of preferred stock, of which 2,000,000 shares are designated as Series A Stock, 10,000,000 shares are designated as Series B Stock, and 10,000,000 shares are designated as Series C Stock. As of April 7, 2023, no shares of our Series A Stock or Series B Stock, and 9,281,809 shares of Series C Stock, are issued and outstanding. The holders of our outstanding shares of Series C Stock may at any time, after the 6-month anniversary of the issuance of their shares of Series C Stock, convert such shares into shares of our common stock at a conversion price equal to $57.60. In addition, the Company may, at any time, require conversion of all or any of the Series C Stock then outstanding at a conversion price equal to $57.60. The conversion of shares of our Series C Stock will dilute your interests. If all of the shares of our Series C Stock were converted, we would have 161,143 additional shares of common stock issued and outstanding, which, based on the 7,288,177 shares outstanding as of April 7, 2023, would represent approximately 2.2% of our shares of common stock outstanding, if all of the shares of our Series C Stock were converted.
In addition, the holders of shares of our Series C Stock vote together as a single class with the holders of shares of our common stock, with each share entitling the holder to 1.5625 votes per share. Therefore, as of April 7, 2023, the holders of our 9,281,809 shares of Series C Stock, have an aggregate of approximately 14,502,828 votes, representing approximately 56% of our voting power.
The effects of the voting and conversion rights tied to shares of our Series C Stock may affect the rights of our common stockholders by, among other things, restricting dividends on our common stock, diluting the voting power of our common stockholders, reducing the market price of our common stock, or impairing the liquidation rights of our common stock.
Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.
The market price of shares of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, or a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares.
The market price of our shares of common stock is subject to fluctuation.
The market prices of our shares may fluctuate significantly in response to factors, some of which are beyond our control, including:
· The announcement of new products by our competitors;
· The release of new products by our competitors;
· Developments in our industry or target markets; and
· General market conditions including factors unrelated to our operating performance.
Recently, the stock market, in general, has experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme market volatility in the price of our shares of common stock which could cause a decline in the value of our shares.
In the event that our common stock is delisted from Nasdaq, U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock because they may be considered penny stocks and thus be subject to the penny stock rules.
The SEC has adopted a number of rules to regulate “penny stock” that restricts transactions involving stock which is deemed to be penny stock. These rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on Nasdaq if current price and volume information with respect to transactions in such securities is provided by the exchange or system). Our shares of common stock constitute, “penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares of common stock and impede their sale in the secondary market.
A U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally, an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the “penny stock” regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a “penny stock,” a disclosure schedule prepared in accordance with SEC standards relating to the “penny stock” market, unless the broker-dealer or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing recent price information with respect to the “penny stock” held in a customer’s account and information with respect to the limited market in “penny stocks”.
Stockholders should be aware that, according to the SEC, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Several analysts may cover our stock. If one or more of those analysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
The market price for our common stock is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float, and lack of profits, which could lead to wide fluctuations in our share price.
The market for our common stock is characterized by significant price volatility when compared to the shares of larger, more established companies that have large public floats, and we expect that our share price will continue to be more volatile than the shares of such larger, more established companies for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common stock is, compared to the shares of such larger, more established companies, sporadically and thinly traded. The price for our common stock could, for example, decline precipitously in the event that a large number of our common stock is sold on the market without commensurate demand. Secondly, we are a speculative or “risky” investment due to our lack of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares of common stock on the market more quickly and at greater discounts than would be the case with the stock of a larger, more established company that has a large public float. Many of these factors are beyond our control and may decrease the market price of our common stock regardless of our operating performance.
If and when a larger trading market for our common stock develops, the market price of our common stock is still likely to be highly volatile and subject to wide fluctuations.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including, but not limited to:
· variations in our revenues and operating expenses;
· actual or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally;
· market conditions in our industry, the industries of our customers and the economy as a whole;
· actual or expected changes in our growth rates or our competitors’ growth rates;
· developments in the financial markets and worldwide or regional economies;
· announcements of innovations or new products or services by us or our competitors;
· announcements by the government relating to regulations that govern our industry;
· sales of our common stock or other securities by us or in the open market;
· changes in the market valuations of other comparable companies; and
· other events or factors, many of which are beyond our control, including those resulting from such events, or the prospect of such events, including war, terrorism and other international conflicts, public health issues including health epidemics or pandemics, such as the recent outbreak of COVID-19, and natural disasters such as fire, hurricanes, earthquakes, tornados or other adverse weather and climate conditions, whether occurring in the United States or elsewhere, could disrupt our operations, disrupt the operations of our suppliers or result in political or economic instability.
In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our common stock. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, operating results and financial condition.
Being a public company is expensive and administratively burdensome.
As a public reporting company, we are subject to the information and reporting requirements of the Securities Act, the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and other federal securities laws, rules and regulations related thereto, including compliance with the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley Act”). Complying with these laws and regulations requires the time and attention of our board of directors and management and increases our expenses. Among other things, we are required to:
· maintain and evaluate a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board (“PCAOB”);
· maintain policies relating to disclosure controls and procedures;
· prepare and distribute periodic reports in compliance with our obligations under federal securities laws;
· institute a more comprehensive compliance function, including with respect to corporate governance; and
· involve, to a greater degree, our outside legal counsel and accountants in the above activities.
The costs of preparing and filing annual and quarterly reports, proxy statements, when required, and other information with the SEC and furnishing audited reports to stockholders is expensive and much greater than that of a privately-held company, and compliance with these rules and regulations may require us to hire additional financial reporting, internal controls and other finance personnel, and will involve a material increase in regulatory, legal and accounting expenses and the attention of management. There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all. In addition, being a public company makes it more expensive for us to obtain director and officer liability insurance. In the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage.
We have identified a material weakness in our internal control over financial reporting. This material weakness could continue to adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management is likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation in those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As described elsewhere in this Annual Report, we identified a material weakness in our internal control over financial reporting related to functional controls and segregation of duties. As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective as of December 31, 2022.
Any failure to maintain such internal control could adversely impact our ability to report our financial position and results from operations on a timely and accurate basis, which could result in a material adverse effect on our business. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. In addition, we would likely incur additional accounting, legal and other costs in connection with any remediation steps. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
To respond to this material weakness, we have devoted, and plan to continue to devote, significant effort and resources to the remediation and improvement of our internal control over financial reporting. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to enhance these processes to better evaluate our research and understanding of the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include providing enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. Additionally, we have hired, and plan to continue to hire, as resources permit, qualified accounting personnel to better manage our functional controls and segregate responsibilities. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes Oxley Act could prevent us from producing reliable financial reports or identifying fraud. In addition, current and potential stockholders could lose confidence in our financial reporting, which could have an adverse effect on our stock price.
We are subject to Section 404 of the Sarbanes-Oxley Act. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud, and a lack of effective controls could preclude us from accomplishing these critical functions. We are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, in connection with, PCAOB Auditing Standard No. 5 which requires annual management assessments of the effectiveness of our internal controls over financial reporting. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, and concluded that our internal controls and procedures were not effective.
Risks Related to COVID-19
The uncertainty and extent of the COVID-19 pandemic may continue to have an adverse effect on our operations and on the global capital markets.
The current outbreak of COVID-19 could continue to have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel or to distribute our products, as well as temporary closures of production facilities. Any such disruption or delay would likely impact our sales and operating results. In addition, COVID-19 has resulted in a widespread health crisis that could adversely affect the economies and financial markets of many other countries, resulting in an economic downturn that could affect demand for our products and significantly impact our operating results.
As the result of current restrictions put in place to address COVID-19, we have limited access to our corporate and Manila offices, cannot efficiently and fully access our data and records, and many of our corporate and administrative staff is required to work remotely, disrupting interactions among our staff, with our customers and suppliers, and with our accountants, consultants and advisors. The extent to which our results continue to be affected by COVID-19 will largely depend on future developments which cannot be accurately predicted, including the duration and scope of the pandemic, governmental and business responses to the pandemic and the impact on the global economy, demand for our products, and our ability to provide our products, particularly as result of our employees working remotely and/or the closure of certain offices and production facilities. While these factors are uncertain, the COVID-19 pandemic or the perception of its effects could continue to have a material adverse effect on our business, financial condition, results of operations, or cash flows.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
We lease approximately 2,100 square feet of office space as our principal executive offices in Boca Raton, Florida for approximately $4,000 per month pursuant to a two-year lease expiring on March 31, 2024.
Our animation business leases an aggregate of approximately 26,600 square feet in the West Tower of the Philippine Stock Exchange Centre in Pasig City, Manila for administration and production purposes. We currently pay approximately $20,500 per month for such space (which increases by approximately 5% per year). These leases expire in December 2027.
Our web filtering business leases approximately 1,400 square feet in Norcross, Georgia, for approximately $2,250 per month pursuant to a five-year lease which expires in May 2023. The lease payments increase by approximately 3% annually.
Our original content business leases approximately 1,700 square feet in Los Angeles, California, for approximately $4,800 per month pursuant to a two-year lease which expires in October 2023. The lease payments increase by approximately 3.5% annually.
We believe our leased space for the present time is adequate and additional space at comparable prices is available at all locations.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which we are a party or in which any director, officer or affiliate of ours, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
None
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our shares of our common stock are quoted on the Nasdaq Capital Market under the symbol “GROM.” Such quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and do not necessarily represent actual transactions.
The last reported sales price of our common stock on the Nasdaq Capital Market on April 14, 2023, was $0.63.
Holders
As of April 7, 2022, there were 444 shareholders of record of our common stock.
Dividends
We have never declared or paid any cash dividends on our common stock. We intend to retain future earnings, if any, to finance the expansion of our business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plan
The following table provides information regarding our equity compensation plans as of December 31, 2022:
Equity Compensation Plan Information
Plan category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
6,950 (1)
$ 89.40
50,285
Equity compensation plans not approved by security holders (1)
7,251 (2)
$ 460.80
-
______________
(1) Represents options to purchase an aggregate of 6,950 shares of common stock issued to officers and employees for services provided to the Company at an exercise price of $89.40.
(2) Represents (i) options to purchase an aggregate of 5,622 shares of common stock issued to officers and employees for services provided to the Company at exercise prices between $230.40 and $748.80 and (ii) options to purchase an aggregate of 1,629 shares of common stock issued to consultants and contractors for services provided to the Company at an exercise price of $230.40.
Unregistered Sales of Equity Securities
Except as set forth below, there were no sales of equity securities during the period covered by this Annual Report that were not registered under the Securities Act and were not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K filed by the Company.
On November 21, 2022, we sold 18,727 shares of common stock for gross proceeds of $100,000 to an accredited investor in a private offering.
On November 29, 2022, we sold an aggregate of 32,771 shares of common stock for aggregate gross proceeds of $175,000 to two accredited investors in a private offering.
The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe are exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof and/or Regulation D promulgated thereunder. The investors represented to us that they were accredited investor and were acquiring the shares for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof and that they could bear the risks of the investment.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto. The management's discussion and analysis contain forward-looking statements, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect" and the like, and/or future tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under "Risk Factors," which appear in elsewhere in this Annual Report, that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report.
The share and per share information in the following discussion reflects a reverse stock split of our outstanding common stock at a 1-for-30 ratio, effective as of December 9, 2022.
Overview
We were incorporated in the State of Florida on April 14, 2014 under the name Illumination America, Inc.
On August 17, 2017, we acquired Grom Holdings, Inc., a Delaware corporation (“Grom Holdings”), pursuant to a share exchange agreement (the “Share Exchange Agreement”) entered into on May 15, 2017 (the “Share Exchange”). In connection with the Share Exchange, the Company acquired 100% of the outstanding shares of capital stock of Grom Holdings from Grom Holdings’ stockholders in exchange for an aggregate of 115,473 shares of common stock, par value $0.001 per share, of the Company. As a result of the Share Exchange, the stockholders of Grom Holdings acquired approximately 92% of the Company’s then-issued and outstanding shares of common stock and Grom Holdings became a wholly-owned subsidiary of the Company. In connection with the Share Exchange, on August 17, 2017, we changed our name to Grom Social Enterprises, Inc.
We are a media, technology and entertainment company that focuses on (i) delivering content to children under the age of 13 years in a safe secure platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of Kids & Family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content. We conduct our business through our following subsidiaries:
· Grom Social, Inc. (“Grom Social”), incorporated in the State of Florida on March 5, 2012, operates our social media network designed for children under the age of 13 years.
· TD Holdings Limited (“TD Holdings”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited, a Hong Kong corporation (“Top Draw HK”), and (ii) Top Draw Animation, Inc., a Philippines corporation (“Top Draw Philippines”). The group’s principal activities are the production of animated films and television series.
· Grom Educational Services, Inc. (“GES”), incorporated in the State of Florida on January 17, 2017, operates our web filtering services provided to schools and government agencies.
· Grom Nutritional Services, Inc. (“GNS”), incorporated in the State of Florida on April 19, 2017, intends to market and distribute nutritional supplements to children. It has been nonoperational since its inception.
· Curiosity Ink Media, LLC (“CIM”), organized in the State of Delaware on January 5, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and family entertainment properties and associated business opportunities.
We own 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity.
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 affect the United States and global economies.
We experienced significant disruptions to our business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings and travel restrictions, which affect both us and our service providers. We have 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, our animation studio, located in Manila, Philippines, which accounts for approximately 88% of our total revenues on a consolidated basis, was forced to close its offices for significant periods of time from March 2020 through December 2021.
In response to the outbreak and business disruption, we 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 our administrative offices and production studio. We also implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, we started to recall artist and employees to return to the studio which is currently operating at 50% seat capacity.
While restrictions have eased, the risk continues as new variants are being discovered. The full extent of potential impacts on our 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 our business, operations, financial condition and results of operations.
Recent Developments
PIPE Offering and Related Waiver
On January 25, 2023, we consummated a private investment in public equity financing (the “PIPE Offering”) pursuant to the terms of the Securities Purchase Agreement, dated January 25, 2023, as amended (the “2023 SPA”), by and between us and the purchaser named therein (the “2023 SPA Selling Stockholder”) and issued (i) 100,000 shares of common stock; (ii) 1,327,434 warrants (the “Purchase Warrants”) to purchase an aggregate of 2,323,010 shares of common stock; and (iii) 1,227,434 prefunded warrants (the “Pre-Funded Warrants,” and together with the Purchase Warrants, the “Warrants”) to purchase an aggregate of 1,227,434 shares of common stock. The purchase price of each share of common stock and associated Purchase Warrant was $2.26. The purchase of each Pre-Funded Warrant and associated Purchase Warrant was $2.25. The aggregate gross proceeds of the PIPE Offering was approximately $3 million, before deducting fees to the placement agent and other expenses payable by us. EF Hutton, division of Benchmark Investments, LLC, acted as the exclusive placement agent in connection with the PIPE Offering.
In connection with the PIPE Offering, we entered into a waiver agreement (the “Waiver”) with L1 Capital Global Opportunities Master Fund (“L1”) waiving certain provisions of the Securities Purchase Agreement, dated as of September 14, 2021 (the “2021 SPA”), by and between us and L1. Pursuant to the terms of the Waiver, L1 waived certain provisions of the 2021 SPA and in consideration thereof, we (i) issued 150,000 purchase warrants substantially similar to the Purchase Warrants issued in connection with the 2023 SPA; and (ii) paid a cash fee of $50,000 to L1.
The Purchase Warrants are immediately exercisable for $2.26 per share of common stock, subject to certain adjustments, including with respect to stock dividends, splits, subsequent rights offerings, pro rata distributions and a Fundamental Transaction (as defined in the purchase warrant agreement (the “Purchase Warrant Agreement”)), until the fifth anniversary of the original issuance date (the “Expiration Date”). The Prefunded Warrants are immediately exercisable for $0.01 per share of common stock, subject to certain adjustments, including with respect to stock dividends, splits, subsequent rights offerings, pro rata distributions and a Fundamental Transaction (as defined in the Prefunded Warrant), until all of the Prefunded Warrants are exercised in full. The exercise of the Warrants is subject to beneficial ownership limitations.
Pursuant to the 2023 SPA, the Company is obligated to hold a special stockholders’ meeting no later than 60 days following the date of the 2023 SPA to solicit the approval of the issuance of the shares of common stock, Warrants and the shares of common stock underlying the Warrants in compliance with the rules of the Nasdaq Stock Market (without regard to any limitations on exercise set forth in the Purchase Warrant Agreement or the prefunded warrant agreement (the “Prefunded Warrant Agreement”). On March 27, 2023, we held a virtual special meeting of stockholders, and at the meeting, the issuance of the securities in compliance with the rules of the Nasdaq Stock Market has been approved.
In connection with the PIPE Offering, we entered into a Registration Rights Agreement with the Purchasers, dated January 25, 2023 (the “Registration Rights Agreement”). The Registration Rights Agreement provides that we shall file a registration statement covering the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) with the SEC no later than the 7th calendar day following the date of the Registration Rights Agreement, and have the registration statement declared effective by the SEC as promptly as possible after the filing thereof, but in any event no later than the 30th calendar day following the date of the Registration Rights Agreement, or in the event of a “full review” by the SEC, the 45th day following the date of the Registration Rights Agreement. On February 2, 2023, we filed the registration statement, and on February 9, 2023, the registration statement was declared effective by the SEC.
Potential Strategic Partnerships in the Pipeline
We continue to evaluate strategic acquisition opportunities to help accelerate our growth and complement our existing business. We are currently in various levels of negotiations with three potential strategic partners.
1. We are in active negotiations with a Hollywood director to partner with CIM to direct a feature film with one of our properties.
2. We are in discussion with a Canada-based 20-year-old company to acquire a 30% stake in the full service animation studio which we believe will provide a strategic advantage for Top Draw Philippines.
3. We are in active negotiations to acquire a stake in a European kids entertainment property that has broadcast, buyer and distribution commitments in various parts of the world.
Notice of Delisting of Failure to Satisfy a Continued Listing Rule or Standard
On May 24, 2022, we received a deficiency letter (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying us that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we were not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). The Notice had no immediate effect on the continued listing status of our common stock on Nasdaq, and, therefore, our listing remained fully effective. We were provided initial and extended compliance periods of 360 calendar days from the date of the Notice, or until May 22, 2023, to regain compliance with Nasdaq Listing Rule 5550(a)(2).
On December 23, 2022, we received a compliance letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying us that the closing bid price of our common stock has been at $1.00 per share or greater for the last 10 consecutive business days and thus we have regained compliance with Listing Rule 5550(a)(2) and the matter is now closed.
On April 10, 2023, we received a second deficiency letter (the “Second Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying us that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we were not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). The Second Notice has no immediate effect on the continued listing status of our common stock on Nasdaq, and, therefore, our listing remains fully effective. We have been provided an initial compliance period of 180 calendar days from the date of the Second Notice, or until October 9, 2023, to regain compliance with Nasdaq Listing Rule 5550(a)(2).
Reverse Stock Split
On October 4, 2022, the Board and shareholders approved the granting of authority to the Board to amend our articles of incorporation to effect a reverse stock split of the issued and outstanding shares of our common stock, by a ratio of no less than 1-for-2 and no more than 1-for-30, with the exact ratio to be determined by the Board in its sole discretion, and with such reverse stock split to be effective at such time and date, if at all, as determined by the Board in its sole discretion. On December 9, 2022, the Board effected a 1-for-30 reverse stock split in connection with our continued listing of our common stock on Nasdaq.
The reverse stock split did not have any impact on the number of authorized shares of common stock, which remains at 500,000,000 shares. All share and per share information in this Annual Report reflects the reverse stock split of our outstanding common stock at a ratio of 1-for-30.
Resignation and Appointment of Executive Officers and Directors
On April 22, 2022, we entered into an Executive Separation Agreement with Melvin Leiner (the “Separation Agreement”), pursuant to which Mr. Leiner retired from his positions as our Executive Vice President and Chief Operating Officer. Pursuant to the Separation Agreement, Mr. Leiner’s employment with us ended on April 22, 2022, and Mr. Leiner is to receive separation payments over a 9-month period equal to his base salary, as well as certain limited health benefits.
On the same day, Mr. Leiner resigned from our board of directors, effective immediately. Mr. Leiner did not resign as a result of any disagreement with us on any matter relating to our operations, policies or practices.
Results of Operations
For the years ended December 31, 2022 and December 31, 2021
Revenue
Revenue for the year ended December 31, 2022 was $5,426,501, compared to revenue of $6,297,922 during the year ended December 31, 2021, representing a decrease of $871,421 or 13.8%.
Animation revenue for the year ended December 31, 2022 was $4,931,776, compared to animation revenue of $5,602,466 during the year ended December 31, 2021, representing a decrease of $670,690 or 12.0%. The decrease in animation revenue is primarily attributable to client delays in providing us with necessary productions materials and content and in the execution and commencement of previously negotiated contracts.
Web filtering revenue for the year ended December 31, 2022 was $482,861, compared to web filtering revenue of $594,996 during the year ended December 31, 2021, representing a decrease of $112,135 or 18.8%. The decrease is primarily due to a decline in organic sales growth, and the timing or loss of multi-year contract renewals.
Produced and licensed content revenue for the year ended December 31, 2022 was $0, compared to produced and licensed content revenue of $98,301 during the year ended December 31, 2021. The decrease in produced and licensed content revenue is attributable to revenue fluctuations in our original content business at Curiosity Ink Media LLC. Many of our properties are in the development stage, at various points, and approaching monetization. Revenue fluctuations will be anticipated until such time that we release multiple saleable properties into the marketplace.
Other revenue is generated from royalties received from our publishing activities, sales and commissions through our Santa.com e-commerce website, and subscription and advertising revenue from our Grom Social mobile application. Other revenue for the year ended December 31, 2022 was $11,864 compared to other revenue of $2,159 during the year ended December 31, 2021, representing an increase of $9,705 or 449.5%, primarily attributable to ecommerce sales and commissions.
Gross Profit
Our gross profits vary significantly by subsidiary. In recent years, our animation business has realized gross profits between 35% and 40%, while our web filtering business has realized gross profits between 91% and 94%. Our gross profits may vary from period to period due to the nature of the business of each subsidiary, and the timing and volume of customer contracts and projects. Current gross margins percentages may not be indicative of future gross margin performance.
Gross profit for the years ended December 31, 2022 and 2021 were $1,761,735, or 32.5%, and $2,590,654, or 41.1%, respectively. The decrease in gross profit is primarily attributable lower contract margins realized in our animation business due to the absorption of fixed overhead expenses against reduced revenue levels and certain projects exceeding budgeted costs.
Operating Expenses
Operating expenses for the year ended December 31, 2022 were $20,432,157, compared to operating expenses of $9,463,580 during the year ended December 31, 2021, representing an increase of $10,968,577 or 115.9%. The increase is primarily attributable to impairment charges of approximately $11.3 million against the goodwill of our animation and original content businesses. Additionally, we incurred higher selling, general and administrative costs, specifically in research and development; employee headcount, compensation and benefits from the acquisition of Curiosity; and stock-based compensation from the grant of stock option awards.
Selling, general and administrative (“SG&A”) expenses are comprised of selling, marketing and promotional expenses, compensation and benefits, insurance, rent and related facility costs, research and development, and other general expenses. SG&A expenses were $7,313,145 for the year ended December 31, 2022, compared to $5,811,792 for the year ended December 31, 2021, representing an increase of $1,501,353 or 25.8%.
Professional fees are comprised of accounting and compliance services, legal services, investor relations and other advisory fees. Professional fees were $1,467,323 for the year ended December 2022, compared to $2,773,510 for the year ended December 31, 2021, representing a decrease of $1,306,187 or 47.1%.
At December 31, 2022, we performed our annual impairment tests as prescribed by ASC 350 on the carrying value of our goodwill and recorded an aggregate impairment charge of $11,340,115; of which $6,202,888 was attributed to the carrying value of goodwill related to our TD Holdings Ltd animation business acquired in 2016, and $5,137,227 was attributed to the carrying value of goodwill related to our Curiosity Ink Media original content business acquired in 2021. The determination was made as the result of our qualitative assessment of each business unit, including the decline in our animation revenues and delay in monetization of our original content properties. Comparatively, at December 31, 2021, we performed our annual impairment tests on the carrying value of our goodwill and recorded an impairment charge totaling $382,798; of which $276,448 was attributed to the carrying value of goodwill and $106,350 of intangible assets related to the NetSpective webfiltering business acquired in 2017. The determination was made as the result of our qualitative assessment of our webfiltering business, including a multi-year decline in sales revenue and the unexpected loss of certain renewal customer accounts.
Other Income (Expense)
Net other income for the year ended December 31, 2022 was $2,349,862, compared to a net other expense of $3,329,015 for the year ended December 31, 2021, representing an increase of $5,678,877 or 170.6%. The increase in net other income is primarily attributable to a gain of $5,586,493 recorded for the change in fair value of our contingent purchase consideration, offset in part by increased interest expense of $1,052,350 related to the recognition of a derivative liability and a loss of $143,598 on the settlement of a substantial portion of the derivative liability recognized during the year ended December 31, 2022.
Interest expense is comprised of interest accrued and paid on our convertible notes and recorded from the amortization of note discounts. Interest expense was $3,348,867 for the year ended December 31, 2022, compared to $2,556,689 during the year ended December 31, 2021, representing an increase of $792,178 or 31.0%. The increase is attributable to both an increase in amortization expense associated with debt discounts and the derivative liability expense.
During the year ended December 31, 2021, we recorded a one-time extinguishment loss of $947,179 related to the exchange of $1,447,996 in principal and interest accrued under certain convertible notes for 2,395,175 shares of our Series B Stock and gain on loan forgiveness of the paycheck protection program loan of $228,912.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $17,068,222, or $23.17 per share, for the year ended December 31, 2022, compared to a net loss attributable to common stockholders of $10,612,267, or $34.21 per share, during the year ended December 31, 2021 representing an increase in net loss attributable to common stockholders of $6,455,946 or 60.8%.
Liquidity and Capital Resources
At December 31, 2022, we had cash and cash equivalents of $3,871,176.
Net cash used in operating activities for the year ended December 31, 2022 was $6,976,120, compared to net cash used in operating activities of $7,856,243 during the year ended December 31, 2021 representing a decrease in cash used of $880,123, primarily due to the increase in our loss from operations, offset by the recognition of a derivative liability, impairment to goodwill of our animation business, change in the fair value of our contingent purchase consideration, and change in our working capital assets and liabilities.
Net cash used in investing activities for the year ended December 31, 2022 was $91,297, compared to net cash used in investing activities of $417,096 during the year ended December 31, 2021 representing a decrease in cash used of $325,799. This decrease is directly attributable to $373,592 of net cash consideration paid for the acquisition of Curiosity Ink Media during the year ended December 31, 2021, offset in part by an increase of $61,211 in the amount of fixed assets purchased and/or leasehold improvements made primarily by our animation studio in Manilla, Philippines during the year ended December 31, 2022.
Net cash provided by financing activities for the year ended December 31, 2022 was $4,471,967, compared to net cash provided by financing activities of $14,673,567 for the year ended December 31, 2021 representing an increase in cash provided of $10,201,600. The primary reason for the decrease is attributable to the amount of proceeds received from of our public equity offering and issuance of convertible notes completed in 2021 as compared to proceeds received from our follow-on offering completed in 2022.
Our primary sources of cash from financing activities during the year ended December 31, 2022 were attributable to $4,360,330 in proceeds from the sale of our common stock and $1,444,000 in proceeds from the sale of senior secured convertible notes, as compared to $10,220,351 in proceeds from the sale of our common stock, $1,050,000 in proceeds from the sale of our preferred stock, and $4,516,700 in proceeds from the sale of senior secured convertible notes during the year ended December 31, 2021. These sources of cash were offset, in part, by the repayment of convertible notes and loans payable of $185,741 and cash settlement of a derivative liability of $1,146,901 in accordance with note conversions during the year ended December 31, 2022, as compared to repayments of convertible notes and loans for $1,146,485 during the year ended December 31, 2021.
Going Concern
On a consolidated basis, we have incurred significant operating losses since inception. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. As of December 31, 2022, we have an accumulated deficit of $83.5 million. During the year ended December 31, 2022, we used approximately $7.0 million in cash from operating activities.
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Based on current operating levels, we will need to raise additional funds by selling additional equity or incurring debt. To date, we have funded our operations primarily through sales of our common stock in public markets, proceeds from the exercise of warrants to purchase common stock, and the sale of convertible notes. Additionally, future capital requirements will depend on many factors, including the rate of revenue growth, the selling price of our products and services, the expansion of sales and marketing activities, the timing and extent of spending on content development efforts, and the continuing market acceptance of our products and services. These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months.
Our management intends to raise additional funds through the issuance of equity securities or debt. It is probable that our management will continue to obtain new sources of financing that will enable us to meet our obligations for the twelve-month period. There can be no assurance that, in the event we require additional financing, such financing will be available at terms acceptable to us, if at all. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending could have a material adverse effect on our ability to achieve our intended business objectives. As a result, the substantial doubt about our ability to continue as a going concern has not been alleviated. Our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to revenue recognition, valuation of accounts receivable and inventories, purchase price allocation of acquired businesses, impairment of long-lived assets and goodwill, valuation of financial instruments, income taxes, and contingencies. We base our estimates on historical experience, known or expected trends and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Segment and Related Information
We operate as a single segment. Our chief operating decision maker is our Chief Executive Officer, who manages operations for purposes of allocating resources.
Business Combinations
We generally account for business combinations using the acquisition method of accounting. The method requires the acquirer to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Any transaction costs are expenses as incurred. The results of operations of businesses acquired by the Company have been included in the consolidated income statement since their respective date of acquisition. The Company may use independent valuation services to assist in determining the estimated fair values.
Revenue Recognition
The Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance provided in Accounting Standards Codification (“ASC”) Topic 606 ("ASC 606") requires entities to use a five-step model to recognize revenue by allocating the consideration from contracts to performance obligations on a relative standalone selling price basis. Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The standard also requires new disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer.
Animation Revenue
Animation revenue is primarily generated from contracts with customers for preproduction and production services related to the development of animated movies and television series. Preproduction activities include producing storyboards, location design, model and props design, background color and color styling. Production focuses on library creation, digital asset management, background layout scene assembly, posing, animation and after effects. We provide services under fixed-price contracts. Under fixed-price contracts, we agree to perform the specified work for a pre-determined price. To the extent actual costs vary from estimated costs, our profit may increase, decrease, or result in a loss.
We identify a contract under ASC 606 once (i) it is approved by all parties, (ii) the rights of the parties are identified, (iii) the payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable.
We evaluate the services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The services in our contracts are distinct from one another as the referring parties typically can direct all, limited, or single portions of the various preproduction and production activities required to create and design and entire episode to us and we therefore have a history of developing standalone selling prices for all of these distinct components. Accordingly, our contracts are typically accounted for as containing multiple performance obligations.
We determine the transaction price for each contract based on the consideration we expect to receive for the distinct services being provided under the contract.
We recognize revenue as performance obligations are satisfied and the customer obtains control of the services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of our revenue is recognized over time as we perform under the contract due to the contractual terms present in each contract which irrevocably transfer control of the work product to the customer as the services are performed.
For performance obligations recognized over time, revenue is recognized based on the extent of progress made towards completion of the performance obligation. We use the percentage-of-completion cost-to-cost measure of progress because it best depicts the transfer of control to the customer as we incur costs against its contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. The percentage-of-completion cost-to-cost method requires management to make estimates and assumptions that affect the reported amounts of contract assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the total estimated amount of costs that will be incurred for a project or job.
Web Filtering Revenue
Web filtering revenue from subscription sales is recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases computer hardware and a software and support service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale. We immediately recognize revenue attributable to the computer hardware as it is non-refundable and control passes to the customer. The advanced billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue on a straight-line basis over the subscription period.
Produced and Licensed Content Revenue
Produced and licensed content revenues are generated from the licensing of internally-produced films and television programs.
Licensed internally-produced films and television programming, each individual film or episode delivered represents a separate performance obligation and revenues are recognized when the episode is made available to the licensee for exhibition. For license agreements containing multiple deliverables, revenues are allocated based on the relative standalone selling price of each film or episode of a television series, which is based on licenses for comparable films or series within the marketplace. Agreements to license programming are often long term, with collection terms ranging from one to five years.
The advanced billing component for licensed content is initially recorded as deferred revenue and subsequently recognized as revenue upon completion of the performance obligation in accordance with the terms of licensing agreement.
Publishing Revenue
Publishing revenues are recognized when merchandise is shipped or electronically delivered to the consumer. Consumer print books are generally sold with a right of return. The Company records a returns reserve and corresponding decrease in revenue at the time of sale based upon historical trends. For publishing revenues, payments are due shortly after shipment or electronic delivery.
Fair Value Measurements
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.
Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2022 and December 31, 2021. We use the market approach to measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The respective carrying value of certain balance sheet financial instruments approximates its fair value. These financial instruments include cash, trade receivables, related party payables, accounts payable, accrued liabilities and short-term borrowings. Fair values were estimated to approximate carrying values for these financial instruments since they are short term in nature, and they are receivable or payable on demand.
The estimated fair value of assets and liabilities acquired in business combinations and reporting units and long-lived assets used in the related asset impairment tests utilize inputs classified as Level 3 in the fair value hierarchy.
We determine the fair value of contingent consideration based on a probability-weighted discounted cash flow analysis. The fair value remeasurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in the fair value hierarchy. In each period, we reassess our current estimates of performance relative to the stated targets and adjusts the liability to fair value. Any such adjustments are included as a component of Other Income (Expense) in the Consolidated Statements of Operations and Comprehensive Loss.
Prepublication Costs
Prepublication costs include costs incurred to create and develop the art, prepress, editorial, digital conversion and other content required for the creation of the master copy of a book or other media. Prepublication costs are amortized on a straight-line basis over a two- to five-year period based on expected future revenue. The Company regularly reviews the recoverability of the capitalized costs based on expected future revenues.
Produced and Licensed Content Costs
Produced and licensed content costs include capitalizable direct costs, production overhead, interest and development costs and are stated at the lower of cost, less accumulated amortization, or fair value. Marketing, distribution and general and administrative costs are expensed as incurred.
Film, television and direct to consumers through streaming services production and residual costs are expensed over the product life cycle based upon the ratio of the current period’s revenues to estimated remaining total revenues (Ultimate Revenues) for each production. For film productions and direct to consumer services, Ultimate Revenues include revenues from all sources that will be earned within ten years from the date of the initial release. For television series, Ultimate Revenues include revenues that will be earned within ten years from delivery of the first episode, or if still in production, five years from delivery of the most recent episode, if later. Costs of film, television and direct to consumer productions are subject to regular recoverability assessments, which compare the estimated fair values with the unamortized costs. The Company bases these fair value measurements on the Company’s assumptions about how market participants would price the assets at the balance sheet date, which may be different than the amounts ultimately realized in future periods. The amount by which the unamortized costs of film and television productions exceed their estimated fair values is written off. Costs for projects that have been abandoned are written off. Projects that have not been set for production within three years are also written off unless management has committed to a plan to proceed with the project and is actively working on and funding the project.
Capitalized Website Development Costs
The Company capitalizes certain costs associated with the development of its Santa.com website after the preliminary project stage is complete and until the website is ready for its intended use. Planning and operating costs are expensed as incurred. Capitalization begins when the preliminary project stage is complete, project plan is defined, functionalities are determined and internal and external resources are identified. Qualified costs incurred during the operating stage of our software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs that cannot be separated between maintenance of, and minor upgrades and enhancements to the websites are expensed as incurred.
Capitalized website costs are amortized on a straight-line basis over their estimated useful life of three years beginning with the time when it is ready for intended use. Amounts amortized are presented through cost of sales. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Goodwill and Intangible Assets
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets consist of customer relationships and non-compete agreements. Their useful lives range from 1.5 to 10 years. The Company’s indefinite-lived intangible assets consist of trade names.
Goodwill and indefinite-lived assets are not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. The evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If, after assessing qualitative factors, the Company determines it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the quantitative goodwill impairment test is performed.
The quantitative goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of the reporting unit represents the price a market participant would be willing to pay in a potential sale of the reporting unit and is determined by considering both the income approach and market approaches. The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the discount rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest rate, the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s size and industry and other Company-specific risks. Other significant assumptions used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use key multiples from guideline businesses that are comparable and are traded on a public market.
If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any impairment identified is included within "goodwill impairment" in the consolidated statements of operations.
Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans, and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions and estimates could cause the Company to perform an impairment test prior to scheduled annual impairment tests.
We performed our annual fair value assessment at December 31, 2022 on our subsidiaries with material goodwill and intangible asset amounts on their respective balance sheets and determined that an impairment charge of $11,340,115 was necessary.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. The long-lived asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying value of the assets, the assets are written down to the estimated fair value.
We evaluated the recoverability of our long-lived assets at December 31, 2022, respectively on its subsidiaries with material amounts on their respective balance sheets and determined that no impairment exists.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations except as noted below:
In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company, delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Early adoption is permitted for interim and annual reporting periods. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements but does not expect that the adoption of this standard will have a material impact.
On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 amends the effective date for ASU 2017-04 to fiscal years beginning after December 15, 2022, and interim periods therein.
Early adoption continues to be permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on its financial statements for both annual and interim reporting periods.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment wase effective for public companies with fiscal years beginning after December 15, 2020. The Company adopted this ASU on January 1, 2021, which did not result in a material impact to the consolidated financial statements and disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815 - 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is evaluating the impact of this guidance on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. ASU 2021-04 provides guidance on modifications or exchanges of freestanding equity-classified written call options that are not within the scope of another Topic. Entities should treat a modification of the terms or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after modification or exchange, as an exchange of the original instrument for a new instrument. ASU 2021-04 provides further guidance on measuring the effect of such modifications or exchanges, and also provides guidance on the recognition of such modifications or exchanges on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. Management is evaluating the effect of the adoption of ASU 2021-04 on the consolidated financial statements. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company adopted this ASU on January 1, 2022, which did not result in a material impact to the consolidated financial statements and disclosures.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GROM SOCIAL ENTERPRISES, INC.
Page
Report of Independent Registered Accounting Firm (PCAOB ID: 89)
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2022 and 2021
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Grom Social Enterprises, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Grom Social Enterprises, Inc. (the “Company”) as of December 31, 2022 and 2021, and the related statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s significant operating losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Evaluation
As discussed in Notes 2 and 9 to the financial statements, management conducts a goodwill impairment assessment annually at December 31, and when events or changes in circumstances indicate that the carrying value of a reporting unit exceeds its fair value. The fair value of a reporting unit is determined through the use of the income approach using estimates of future cash flows attributable to the respective reporting units. As a result of the annual impairment assessment, the Company recognized $11.3 million of goodwill impairment related to the reporting unit.
We identified the impairment of goodwill as a critical audit matter because of significant judgments required by management to estimate the fair value of its reporting unit, including forecasted cash flows, revenue growth rates and discount rate. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s assumptions used in the model.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of management’s estimates of future cash flows, the selection of cash flow multiples for the Company’s reporting unit, and the evaluation of the discount rate included the following, among others:
- Tested the mathematical accuracy of the calculations and evaluated significant assumptions and the underlying data used by the Company by performing procedures to test the projected revenues, projected direct costs, projected operating expenses, and projected capital expenditures by comparing them with the historical forecasted results of the respective reporting unit and assessing the impacts of internal and/or external economic factors.
- We assessed management’s ability to forecast by comparing historical projections to actual results and comparing current forecasted projections to historical trends, industry data, and underlying business strategies.
- The work of managements specialists was used in performing the procedures to evaluate the reasonableness of the fair value of the reporting unit as well as the assumptions used in the model. As a basis for using this work, management’s specialist qualifications were understood and the business relationship with managements specialists was assessed. The procedures performed also included evaluation of the methods and assumptions used by managements specialists, tests of the data used by managements specialists, and an evaluation of their findings.
/s/ Rosenberg Rich Baker Berman, P.A.
We have served as the Company’s auditor since 2022.
Somerset, New Jersey
April 17, 2023
GROM SOCIAL ENTERPRISES, INC.
Consolidated Balance Sheets
December 31, December 31,
ASSETS
Current assets:
Cash and cash equivalents $ 3,871,176 $ 6,530,161
Accounts receivable, net 1,162,230 968,579
Inventory, net 92,303 91,361
Prepaid expenses and other current assets 605,497 457,578
Total current assets 5,731,206 8,047,679
Operating lease right of use assets 1,069,222 593,405
Property and equipment, net 285,676 577,988
Goodwill, net of accumulated impairment 10,567,484 22,376,025
Intangible assets, net 5,364,231 5,073,074
Deferred tax assets, net - 465,632
Other assets 1,627,078 721,160
Total assets $ 24,644,897 $ 37,854,963
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 839,679 $ 467,711
Accrued liabilities 378,954 400,329
Dividend payable 371,799 459,068
Advanced payments and deferred revenues 576,338 404,428
Convertible notes, net - current 503,465 2,604,346
Loans payable - current - 36,834
Related party payables 50,000 50,000
Lease liabilities - current 269,681 333,020
Total current liabilities 2,989,916 4,755,736
Convertible notes, net of loan discounts 68,199 716,252
Lease liabilities 803,958 284,848
Contingent purchase consideration - 5,586,493
Other noncurrent liabilities 434,976 390,833
Total liabilities 4,297,049 11,734,162
Commitments and contingencies (Note 18) - -
Stockholders' Equity:
Series A preferred stock, $0.001 par value. 2,000,000 shares authorized; zero 0 shares issued and outstanding as of December 31, 2022 and 2021, respectively - -
Series B preferred stock, $0.001 par value. 10,000,000 shares authorized; zero 0 shares issued and outstanding as of December 31, 2022 and 2021, respectively - -
Series C preferred stock, $0.001 par value. 10,000,000 shares authorized; 9,281,759 and 9,400,259 shares issued and outstanding as of December 31, 2022 and 2021, respectively 9,282 9,400
Common stock, $0.001 par value. 500,000,000 shares authorized; 2,515,290 and 433,518 shares issued and outstanding as of December 31, 2022 and 2021, respectively 2,515
Additional paid-in capital 101,726,355 89,863,573
Accumulated deficit (83,472,412 ) (66,404,190 )
Accumulated other comprehensive loss (166,129 ) (30,755 )
Total Grom Social Enterprises, Inc. stockholders' equity 18,099,611 23,438,462
Noncontrolling interests 2,248,237 2,682,339
Total stockholders' equity 20,347,848 26,120,801
Total liabilities and equity $ 24,644,897 $ 37,854,963
The accompanying notes are an integral part of the consolidated financial statements.
GROM SOCIAL ENTERPRISES, INC.
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31, 2022 and 2021
Sales $ 5,426,501 $ 6,297,922
Cost of goods sold 3,664,766 3,707,267
Gross profit 1,761,735 2,590,655
Operating expenses:
Depreciation and amortization 311,574 495,480
Selling, general and administrative 7,313,145 5,811,792
Professional fees 1,467,323 2,773,510
Impairment of goodwill 11,340,115 276,448
Impairment of intangible assets - 106,350
Total operating expenses 20,432,157 9,463,580
Loss from operations (18,670,422 ) (6,872,925 )
Other income (expense)
Interest expense, net (3,348,867 ) (2,556,689 )
Loss on settlement of debt - (947,179 )
Loss on settlement of derivative liability (143,598 ) -
Unrealized gain on change in fair value of derivative liability 49,047 -
Unrealized gain on change in fair value of contingent purchase consideration 5,586,493 -
Other gains 206,787 174,853
Total other income (expense) 2,349,862 (3,329,015 )
Loss before income taxes (16,320,560 ) (10,201,940 )
Provision for income taxes 446,178 21,042
Net loss (16,766,738 ) (10,222,982 )
Loss attributable to noncontrolling interest (434,102 ) (69,775 )
Net loss attributable to Grom Social Enterprises, Inc. stockholders (16,332,636 ) (10,153,207 )
Preferred stock dividend payable on Series C convertible preferred stock (735,586 ) (459,069 )
Net loss attributable to Grom Social Enterprises, Inc. common stockholders $ (17,068,222 ) $ (10,612,276 )
Basic and diluted loss per common share $ (23.17 ) $ (34.21 )
Weighted-average number of common shares outstanding:
Basic and diluted 736,522 310,247
Comprehensive loss:
Net loss $ (16,766,738 ) $ (10,222,982 )
Foreign currency translation adjustment (135,374 ) 8,579
Comprehensive loss (16,902,112 ) (10,214,403 )
Comprehensive loss attributable to noncontrolling interests (434,102 ) (69,775 )
Comprehensive loss attributable to Grom Social Enterprises, Inc. common stockholders $ (16,468,010 ) $ (10,144,628 )
The accompanying notes are an integral part of the consolidated financial statements.
GROM SOCIAL ENTERPRISES, INC.
Consolidated Statement of Changes in Shareholders’ Equity
For the Years Ended December 31, 2022 and 2021
Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
Shares Value Shares Value Shares Value
Balance, January 1, 2021 - $ - 5,625,884 $ 5,626 - $ -
Net loss - - - - - -
Change in foreign currency translation - - - - - -
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings - - 950,000 - -
Issuance of Series B preferred stock in exchange for consulting, professional and other services - - 75,000 - -
Exchange of convertible notes and accrued interest for Series B preferred stock - - 2,564,175 2,564 - -
Exchange of Series B preferred stock for Series C preferred stock - - (9,215,059 ) (9,215 ) 9,215,059 9,215
Exchange of convertible notes and accrued interest for Series C preferred stock - - - - 85,200
Issuance of Series C preferred stock with common stock in connection with sales made under private offerings - - - - 100,000
Preferred stock dividend payable on Series C preferred stock - - - - - -
Issuance of common stock in connection with sales made under public offerings - - - - - -
Issuance of common stock in connection with the exercise of common stock purchase warrants - - - - - -
Issuance of common stock as compensation to employees, officers and/or directors - - - - - -
Issuance of common stock in exchange for consulting, professional and other services - - - - - -
Issuance of common stock in connection with the issuance of convertible note(s) - - - - - -
Issuance of common stock warrants in connection with the issuance of convertible notes - - - - - -
Issuance of common stock in connection with the acquisition of a business - - - - - -
Conversion of convertible notes and accrued interest into common stock - - - - - -
Fair value of noncontrolling interest in an acquired business - - - - - -
Recognition of beneficial conversion features related to convertible notes - - - - - -
Stock based compensation expense related to stock options - - - - - -
Balance, December 31, 2021 - $ - - $ - 9,400,259 $ 9,400
Net loss - - - - - -
Change in foreign currency translation - - - - - -
Preferred stock dividend payable on Series C preferred stock - - - - - -
Issuance of common stock in connection with Series C preferred stock dividend - - - - - -
Conversion of Series C preferred stock into common stock - - - - (118,500 ) (118 )
Issuance of common stock in connection with sales made under public offerings - - - - - -
Issuance of common stock in connection with the exercise of common stock purchase warrants - - - - - -
Issuance of common stock in connection with sales made under private offerings - - - - - -
Issuance of common stock in exchange for consulting, professional and other services - - - - - -
Conversion of convertible notes and accrued interest into common stock - - - - - -
Recognition of beneficial conversion features related to convertible notes - - - - - -
Stock based compensation expense related to stock options - - - - - -
Balance, December 31, 2022 - $ - - $ - 9,281,759 $ 9,282
(continued)
GROM SOCIAL ENTERPRISES, INC.
Consolidated Statement of Changes in Shareholders’ Equity (continued)
For the Years Ended December 31, 2022 and 2021
Accumulated
Additional
Other
Total
Common Stock Paid-in Accumulated Comprehensive Noncontrolling Stockholders'
Shares Value Capital Deficit Loss Interest Equity
Balance, January 1, 2021 206,560 $ 207 $ 64,422,897 $ (55,791,914 ) $ (39,334 ) $ - $ 8,597,482
Net loss - - - (10,153,207 ) - (69,775 ) (10,222,982 )
Change in foreign currency translation - - - - 8,579 - 8,579
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings - - 949,050 - - - 950,000
Issuance of Series B preferred stock in exchange for consulting, professional and other services - - 74,925 - - - 75,000
Exchange of convertible notes and accrued interest for Series B preferred stock - - 2,561,611 - - - 2,564,175
Exchange of Series B preferred stock for Series C preferred stock - - - - - - -
Exchange of convertible notes and accrued interest for Series C preferred stock - - 85,165 - - - 85,250
Issuance of Series C preferred stock with common stock in connection with sales made under private offerings - - 99,900 - - - 100,000
Preferred stock dividend payable on Series C preferred stock - - - (459,069 ) - - (459,069 )
Issuance of common stock in connection with sales made under public offerings 92,369 10,220,259 - - - 10,220,351
Issuance of common stock in connection with the exercise of common stock purchase warrants 6,965 32,994 - - - 33,001
Issuance of common stock as compensation to employees, officers and/or directors 5,265 410,647 - - - 410,652
Issuance of common stock in exchange for consulting, professional and other services 9,656 1,199,125 - - - 1,199,135
Issuance of common stock in connection with the issuance of convertible note(s) 39,749 - - - 39,750
Issuance of common stock warrants in connection with the issuance of convertible notes - - 1,895,078 - - - 1,895,078
Issuance of common stock in connection with the acquisition of a business 59,063 5,421,903 - - - 5,421,962
Conversion of convertible notes and accrued interest into common stock 53,161 2,048,744 - - - 2,048,797
Fair value of noncontrolling interest in an acquired business - - - - - 2,752,114 2,752,114
Recognition of beneficial conversion features related to convertible notes - - 318,616 - - - 318,616
Stock based compensation expense related to stock options - - 82,910 - - - 82,910
Balance, December 31, 2021 433,631 $ 434 $ 89,863,573 $ (66,404,190 ) $ (30,755 ) $ 2,682,339 $ 26,120,801
Net loss - - - (16,332,636 ) - (434,102 ) (16,766,738 )
Change in foreign currency translation - - - - (135,374 ) - (135,374 )
Preferred stock dividend payable on Series C preferred stock - - - (735,586 ) - - (735,586 )
Issuance of common stock in connection with Series C preferred stock dividend 27,033 833,712 - - - 833,739
Conversion of Series C preferred stock into common stock 2,057 - - - -
Issuance of common stock in connection with sales made under public offerings 1,415,682 1,416 4,083,914 - - - 4,085,330
Issuance of common stock in connection with the exercise of common stock purchase warrants 279,069 - - - -
Issuance of common stock in connection with sales made under private offerings 51,498 274,949 - - - 275,000
Issuance of common stock in exchange for consulting, professional and other services 5,950 116,730 - - - 116,736
Conversion of convertible notes and accrued interest into common stock 299,938 5,874,700 - - - 5,875,000
Recognition of beneficial conversion features related to convertible notes - - 363,329 - - - 363,329
Stock based compensation expense related to stock options - - 315,332 - - - 315,332
Balance, December 31, 2022 2,514,857 $ 2,515 $ 101,726,355 $ (83,472,412 ) $ (166,129 ) $ 2,248,237 $ 20,347,848
The accompanying notes are an integral part of the consolidated financial statements.
GROM SOCIAL ENTERPRISES, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2022 and 2021
Cash flows from operating activities of continuing operations:
Net loss $ (16,766,738 ) $ (10,222,982 )
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 593,438 814,849
Amortization of debt discount 2,194,302 2,061,470
Provision for doubtful accounts - 2,195
Provision for excess or obsolete inventory 5,321 -
Common stock issued for financing costs - 10,000
Common stock issued in exchange for fees and services 116,737 1,274,135
Convertible notes issued for financing costs - 59,633
Deferred taxes 466,089 65,925
Derivative expense 1,052,350 -
Goodwill impairment 11,340,115 276,448
Intangible asset impairment - 106,350
Stock based compensation 315,332 493,563
Amortization of rights-of-use assets 365,636 304,560
Loss on disposal of property and equipment 2,237 2,692
Loss on extinguishment of debt - 718,267
Loss on settlement of derivative liability 143,598 -
Gain on change in fair value of derivative liability (49,047 ) -
Gain on change in fair value of contingent purchase consideration (5,586,493 ) -
Changes in operating assets and liabilities:
Accounts receivable (192,730 ) (382,843 )
Inventory (6,253 ) 22,571
Prepaid expenses and other current assets (147,545 ) (37,523 )
Other assets (974,380 ) (457,065 )
Accounts payable 342,182 (770,656 )
Accrued liabilities (21,375 ) (1,149,202 )
Advanced payments and deferred revenues 170,937 (562,625 )
Income taxes payable and other noncurrent liabilities 44,055 (79,581 )
Operating lease liability (383,888 ) (310,683 )
Related party payables - (95,741 )
Net cash used in operating activities (6,976,120 ) (7,856,243 )
Cash flows from investing activities:
Cash consideration for acquisition of business - (373,592 )
Purchase of fixed assets (104,715 ) (43,504 )
Proceeds from sale of property and equipment 13,418 -
Net cash used in investing activities (91,297 ) (417,096 )
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs - 1,050,000
Proceeds from exercise of common stock purchase warrants, net of issuance costs 33,001
Proceeds from issuance of common stock, net of issuance costs 4,360,330 10,220,351
Proceeds from issuance of convertible notes 1,444,000 4,516,700
Repayments of convertible notes (148,907 ) (1,092,447 )
Repayments of loans payable (36,834 ) (54,038 )
Repayment of settlement of derivative liability upon note conversion (1,146,901 ) -
Net cash provided by financing activities 4,471,967 14,673,567
Effect of exchange rates on cash and cash equivalents (63,535 ) 9,633
Net increase (decrease) in cash and cash equivalents (2,658,985 ) 6,409,861
Cash and cash equivalents at beginning of period 6,530,161 120,300
Cash and cash equivalents at end of period $ 3,871,176 $ 6,530,161
Supplemental disclosure of cash flow information:
Cash paid for interest $ 41,763 $ 139,627
Cash paid for income taxes $ - $ -
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued related to acquisition of business $ - $ 5,421,962
Common stock issued related to Series C preferred stock dividend $ 833,739 $ -
Common stock issued for financing costs incurred in connection with convertible and promissory notes $ - $ 29,750
Common stock warrants issued in connection with convertible promissory notes $ 363,329 $ 1,895,078
Contingent purchase consideration $ - $ 5,586,493
Conversion of convertible notes and accrued interest into common stock $ - $ 2,048,797
Conversion of convertible notes and accrued interest into preferred stock $ - $ 1,702,246
Debt issued related to acquisition of a business $ - $ 278,000
Discount for beneficial conversion features on convertible notes $ - $ 318,616
Preferred stock dividend payable on convertible preferred stock $ 371,799 $ -
The accompanying notes are an integral part of the consolidated financial statements.
GROM SOCIAL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
1. NATURE OF OPERATIONS
Grom Social Enterprises, Inc. (the “Company”, “Grom” “we”, “us” or “our”), a Florida corporation f/k/a Illumination America, Inc. (“Illumination”), is a media, technology and entertainment company that focuses on (i) delivering content to children under the age of 13 years in a safe secure platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians, (ii) creating, acquiring, and developing the commercial potential of Kids & Family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content. We conduct our business through our following subsidiaries:
· Grom Social, Inc. (“Grom Social”), incorporated in the State of Florida on March 5, 2012, operates our social media network designed for children under the age of 13 years.
· TD Holdings Limited (“TD Holdings”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited, a Hong Kong corporation (“Top Draw HK”), and (ii) Top Draw Animation, Inc., a Philippines corporation (“Top Draw Philippines”). The group’s principal activities are the production of animated films and television series.
· Grom Educational Services, Inc. (“GES”), incorporated in the State of Florida on January 17, 2017, operates our web filtering services provided to schools and government agencies.
· Grom Nutritional Services, Inc. (“GNS”), incorporated in the State of Florida on April 19, 2017, intends to market and distribute nutritional supplements to children. It has been nonoperational since its inception.
· Curiosity Ink Media, LLC (“CIM”), organized in the State of Delaware on January 5, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term commercial potential of kids and family entertainment properties and associated business opportunities.
The Company owns 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
On a consolidated basis, the Company has incurred significant operating losses since inception. Its financial statements do not include any adjustments that might result from the outcome of this uncertainty. As of December 31, 2022, the Company had an accumulated deficit of $83.5 million. During the year ended December 31, 2022, the Company used approximately $7.0 million in cash from operating activities.
The consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Based on current operating levels, the Company will need to raise additional funds by selling additional equity or incurring debt. To date, the Company has funded its operations primarily through sales of its common stock in public markets, proceeds from the exercise of warrants to purchase common stock, and the sale of convertible notes. Additionally, future capital requirements will depend on many factors, including the rate of revenue growth, the selling price of the Company’s products and services, the expansion of sales and marketing activities, the timing and extent of spending on content development efforts, and the continuing market acceptance of the Company’s products and services. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months from the date of this report.
Management of the Company intends to raise additional funds through the issuance of equity securities or debt. It is probable that management will continue to obtain new sources of financing that will enable the Company to meet its obligations for the twelve-month period. There can be no assurance that, in the event the Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. As a result, the substantial doubt about the Company’s ability to continue as a going concern has not been alleviated. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Impact of COVID-19
On January 30, 2020, the World Health Organization announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 has and continues to significantly affect the United States and global economies.
The Company experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings and travel restrictions, which affect both the Company’s and its service providers. The Company has significant operations in Manila, Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result of the Philippines government’s call to contain COVID-19, the Company’s animation studio, located in Manila, Philippines, which accounts for approximately 88% of the Company’s total revenues on a consolidated basis, was forced to close its offices for significant periods of time from March 2020 through December 2021.
In response to the outbreak and business disruption, the Company has instituted employee safety protocols to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices and production studio. The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, the Company started to recall artist and employees to return to the studio which is currently operating at 50% seat capacity.
While restrictions have eased, the risk continues as new variants are being discovered. The full extent of potential impacts on the Company’s business, financing activities and the global economy will depend on future developments, which cannot be predicted due to the uncertain nature of the continued COVID-19 pandemic, government mandated shut downs, and its adverse effects, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. These effects could have a material adverse impact on the Company’s business, operations, financial condition and results of operations.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and are expressed in United States dollars. For the years ended December 31, 2022 and 2021, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Grom Social, TD Holdings, GES, and GNS. The Company recognizes noncontrolling interest related to its 80% owned subsidiary, Curiosity, as equity in the consolidated financial statements separate from the parent entity’s equity. The net income (loss) attributable to noncontrolling interest is included in net income (loss) in the consolidated statements of operations and comprehensive loss. All intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to revenue recognition, valuation of accounts receivable and inventories, purchase price allocation of acquired businesses, impairment of long-lived assets and goodwill, valuation of financial instruments, valuation of derivative liabilities, pension plan obligations related to the Company's defined benefit pension plan, stock-based compensation, income taxes, and contingencies. The Company bases its estimates on historical experience, known or expected trends and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Segment and Related Information
The Company operates as a single segment. The Company’s chief operating decision maker is its Chief Executive Officer, who manages operations for purposes of allocating resources.
Business Combinations
We generally account for business combinations using the acquisition method of accounting. The method requires the acquirer to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Any transaction costs are expenses as incurred. The results of operations of businesses acquired by the Company have been included in the consolidated income statement since their respective date of acquisition.
Revenue Recognition
The guidance provided in Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”) requires entities to use a five-step model to recognize revenue by allocating the consideration from contracts to performance obligations on a relative standalone selling price basis. Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The standard also requires disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Animation Revenue
For years ended December 31, 2022 and 2021, the Company recorded a total of $4,931,776 and $5,602,466, respectively, of animation revenue from contracts with customers.
Animation revenue is primarily generated from contracts with customers for preproduction and production services related to the development of animated movies and television series. Preproduction activities include producing storyboards, location design, model and props design, background color and color styling. Production focuses on library creation, digital asset management, background layout scene assembly, posing, animation and after effects. The Company provides services under fixed-price contracts. Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined price. To the extent actual costs vary from estimated costs, the Company’s profit may increase, decrease, or result in a loss.
The Company identifies a contract under ASC 606 once (i) it is approved by all parties, (ii) the rights of the parties are identified, (iii) the payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable.
The Company evaluates the services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The services in the Company’s contracts are distinct from one another as the referring parties typically can direct all, limited, or single portions of the various preproduction and production activities required to create and design and entire episode to us and we therefore have a history of developing standalone selling prices for all of these distinct components. Accordingly, our contracts are typically accounted for as containing multiple performance obligations.
The Company determines the transaction price for each contract based on the consideration it expects to receive for the distinct services being provided under the contract.
The Company recognizes revenue as performance obligations are satisfied and the customer obtains control of the services. In determining when performance obligations are satisfied, the Company considers factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of the Company’s revenue is recognized over time as it performs under the contract due to the contractual terms present in each contract which irrevocably transfer control of the work product to the customer as the services are performed.
For performance obligations recognized over time, revenue is recognized based on the extent of progress made towards completion of the performance obligation. The Company uses the input method to measure of progress because it best depicts the transfer of control to the customer as the Company incurs costs against its contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. The input method requires management to make estimates and assumptions that affect the reported amounts of contract assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the total estimated amount of costs that will be incurred for a project or job.
Web Filtering Revenue
For years ended December 31, 2022 and 2021, the Company recorded a total of $482,861 and $594,996, respectively, of web filtering revenue from contracts with customers.
Web filtering revenue from subscription sales is recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases a computer appliance and a software and support service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale. The Company immediately recognizes revenue attributable to the computer appliance as it is non-refundable and control passes to the customer. The advanced billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue on a straight-line basis over the subscription period.
Produced and Licensed Content Revenue
For years ended December 31, 2022 and 2021, the Company recorded a total of $0 and $98,301, respectively, of produced and licensed content revenue from contracts with customers.
Produced and licensed content revenues are generated from the licensing of internally-produced films and television programs.
Licensed internally-produced films and television programming, each individual film or episode delivered represents a separate performance obligation and revenues are recognized when the episode is made available to the licensee for exhibition. For license agreements containing multiple deliverables, revenues are allocated based on the relative standalone selling price of each film or episode of a television series, which is based on licenses for comparable films or series within the marketplace. Agreements to license programming are often long term, with collection terms ranging from one to five years.
The advanced billing component for licensed content is initially recorded as deferred revenue and subsequently recognized as revenue upon completion of the performance obligation in accordance with the terms of licensing agreement.
Other Revenue
For years ended December 31, 2022 and 2021, the Company recorded a total of $11,864 and $2,159, respectively, in other revenue.
Other revenue corresponds to ecommerce sales, publishing revenue, and subscription and advertising revenue from the Grom Social mobile application.
All revenue recognized in the consolidated statements of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregated revenue listed above within the Sales caption in the consolidated statements of operations:
Schedule of disaggregated revenue
Year Ended December 31, 2022 Year Ended December 31, 2021
Animation $ 4,931,776 $ 5,602,466
Web Filtering 482,861 594,996
Produced and Licensed Content - 98,301
Other 11,864 2,159
Total Sales $ 5,426,501 $ 6,297,922
Contract Assets and Liabilities
Animation revenue contracts vary with movie contracts typically allowing for progress billings over the contract term while other episodic development activities are typically billable upon delivery of the performance obligation for an episode. These episodic activities typically create unbilled contract assets between episode delivery dates while movies can create contract assets or liabilities based on the progress of activities versus the arranged billing schedule. Revenues from web filtering contracts are all billed in advance and therefore represent contract liabilities until fully recognized on a ratable basis over the contract life.
Fair Value Measurements
FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
· Level 1: Quoted prices in active markets for identical assets or liabilities.
· Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.
· Level 3: Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2022 and 2021. The Company uses the market approach to measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The respective carrying value of certain balance sheet financial instruments approximates its fair value. These financial instruments include cash, trade receivables, related party payables, accounts payable, accrued liabilities and short-term borrowings. Fair values were estimated to approximate carrying values for these financial instruments since they are short term in nature, and they are receivable or payable on demand.
The estimated fair value of assets and liabilities acquired in business combinations, reporting units and long-lived assets used in the related asset impairment tests, contingent consideration, and derivatives utilize inputs classified as Level 3 in the fair value hierarchy.
The Company determines the fair value of contingent consideration based on a probability-weighted discounted cash flow analysis. The fair value remeasurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in the fair value hierarchy. In each period, the Company reassesses its current estimates of performance relative to the stated targets and adjusts the liability to fair value. Any such adjustments are included as a component of Other Income (Expense) in the Consolidated Statements of Operations and Comprehensive Loss.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible and other promissory notes are reviewed to determine whether they contain embedded derivative instruments that are required to be accounted for separately from the host contract and recorded on the balance sheet at fair value. The fair value of derivative liabilities is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
Beneficial Conversion Features
In accordance with FASB ASC 470-20, Debt with Conversion and Other Options the Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt or preferred stock instruments that have conversion features at fixed rates that are in-the-money when issued. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value is generally calculated at the commitment date as the difference between the conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible. If certain other securities are issued with the convertible security, the proceeds are allocated among the different components. The portion of the proceeds allocated to the convertible security is divided by the contractual number of the conversion shares to determine the effective conversion price, which is used to measure the BCF. The effective conversion price is used to compute the intrinsic value. The value of the BCF is limited to the basis that is initially allocated to the convertible security.
Stock Purchase Warrants
The Company accounts for warrants issued to purchase shares of its common stock as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
Cash and Cash Equivalents
The Company’s cash and cash equivalents are exposed to concentration of credit risk. The Company maintains cash at various regulated financial institutions which, at times, may be in excess of the federal depository insurance limit. The Company’s management regularly monitors these institutions and believes that the potential for future loss is remote. The Company considers liquid investments with original or acquired maturities of three months or less to be cash equivalents. At December 31, 2022 and 2021, the Company did not have any cash equivalents.
Accounts Receivable
Accounts receivable are customer obligations due under normal trade terms which are recorded at net realizable value. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a specific allowance will be required.
Recovery of bad debt amounts previously written off is recorded as a reduction of bad debt expense in the period the payment is collected. If the Company’s actual collection experience changes, revisions to its allowance may be required. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
Accounts receivable includes unbilled accounts receivable. Unbilled accounts receivable is a contract asset related to amounts that are unbilled due to agreed-upon contractual terms in which billing occurs subsequent to revenue recognition. This situation typically occurs when the Company recognizes revenue for episodic development activities performed but not yet billed. Episodic development activities are typically billable upon delivery.
Inventory
Inventory primarily consists of costs incurred to produce animated content for third party customers. Costs incurred to produce the animated content to customers, which include direct production costs, production overhead and supplies are recognized as work-in-progress inventory. As animated content is completed in accordance with the terms stated by the customer, inventory is classified as finished products and subsequently recognized as cost of services as animated content is accepted by and available to the customer. Carrying amounts of animated content are recorded at the lower of cost or net realizable value. Cost is determined using a weighted average cost method for direct production costs, productions overhead and supplies used for completing animation projects.
At December 31, 2022 and 2021, the Company’s inventory totaled $92,303 and $91,361, respectively, and was comprised of work-in-progress of $85,324 and $77,501, respectively, and finished goods of $6,979 and $13,860, respectively.
Prepublication Costs
Prepublication costs include costs incurred to create and develop the art, prepress, editorial, digital conversion and other content required for the creation of the master copy of a book or other media. Prepublication costs are amortized on a straight-line basis over a two- to five-year period based on expected future revenue. The Company regularly reviews the recoverability of the capitalized costs based on expected future revenues.
Produced and Licensed Content Costs
Produced and licensed content costs include capitalizable direct costs, production overhead, interest and development costs and are stated at the lower of cost, less accumulated amortization, or fair value. Marketing, distribution and general and administrative costs are expensed as incurred.
Film, television and direct to consumers through streaming services production and residual costs are expensed over the product life cycle based upon the ratio of the current period’s revenues to estimated remaining total revenues (Ultimate Revenues) for each production. For film productions and direct to consumer services, Ultimate Revenues include revenues from all sources that will be earned within ten years from the date of the initial release. For television series, Ultimate Revenues include revenues that will be earned within ten years from delivery of the first episode, or if still in production, five years from delivery of the most recent episode, if later. Costs of film, television and direct to consumer productions are subject to regular recoverability assessments, which compare the estimated fair values with the unamortized costs. The Company bases these fair value measurements on the Company’s assumptions about how market participants would price the assets at the balance sheet date, which may be different than the amounts ultimately realized in future periods. The amount by which the unamortized costs of film and television productions exceed their estimated fair values is written off. Costs for projects that have been abandoned are written off. Projects that have not been set for production within three years are also written off unless management has committed to a plan to proceed with the project and is actively working on and funding the project.
Capitalized Website Development Costs
The Company capitalizes certain costs associated with the development of its Santa.com website after the preliminary project stage is complete and until the website is ready for its intended use. Planning and operating costs are expensed as incurred. Capitalization begins when the preliminary project stage is complete, project plan is defined, functionalities are determined and internal and external resources are identified. Qualified costs incurred during the operating stage of our software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs that cannot be separated between maintenance of, and minor upgrades and enhancements to the websites are expensed as incurred.
Capitalized website costs are amortized on a straight-line basis over their estimated useful life of three years beginning with the time when it is ready for intended use. Amounts amortized are presented through cost of sales. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
The following tables set forth the components of the Company’s capitalized website development costs at December 31, 2022 and 2021:
Schedule of website development costs
December 31, 2022 December 31, 2021
Gross Carrying Value Accumulated
Amortization Net Book
Value Gross Carrying Value Accumulated
Depreciation Net Book
Value
Prepublication costs $ 165,524 $ (1,482 ) $ 164,042 $ 152,286 $ - $ 152,286
Produced and licensed content costs 325,966 - 325,966 76,701 - 76,701
Capitalized website development costs 1,123,772 (66,460 ) 1,057,312 411,800 - 411,800
Total $ 1,615,262 $ (67,942 ) $ 1,547,320 $ 640,787 $ - $ 640,787
Property and Equipment
Property and equipment are stated at cost or fair value if acquired as part of a business combination. Depreciation is computed by the straight-line method and is charged to operations over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. The carrying amount and accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal and any resulting gain or loss is included in results of operations. The estimated useful lives of property and equipment are as follows:
Property and equipment useful lives
Computers, software, and office equipment 1 - 5 years
Capitalized website development cost 3 years
Machinery and equipment 3 - 5 years
Vehicles 5 years
Furniture and fixtures 5 - 10 years
Leasehold improvements Lesser of the lease term or estimated useful life
Construction in process is not depreciated until the construction is completed and the asset is placed into service.
Goodwill and Intangible Assets
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets consist of customer relationships and non-compete agreements. Their useful lives range from 1.5 to 10 years. The Company’s indefinite-lived intangible assets consist of trade names and goodwill.
Goodwill and indefinite-lived assets are not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. The evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If, after assessing qualitative factors, the Company determines it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the quantitative goodwill impairment test is performed.
The quantitative goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of the reporting unit represents the price a market participant would be willing to pay in a potential sale of the reporting unit and is determined by considering both the income approach and market approaches. The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the discount rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest rate, the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s size and industry and other Company-specific risks. Other significant assumptions used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use key multiples from guideline businesses that are comparable and are traded on a public market.
If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any impairment identified is included within "goodwill impairment" in the consolidated statements of operations.
Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans, and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions and estimates could cause the Company to perform an impairment test prior to scheduled annual impairment tests.
The Company performed its annual fair value assessment at December 31, 2022 on its subsidiaries with material goodwill and intangible asset amounts on their respective balance sheets and determined that an impairment charge of $11,340,115 was necessary. See Note 9 - Goodwill and Intangible Assets for more information.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. The long-lived asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying value of the assets, the assets are written down to the estimated fair value.
The Company evaluated the recoverability of its long-lived assets on December 31, 2022, respectively on its subsidiaries with material amounts on their respective balance sheets and determined that no impairment exists.
Income Taxes
The Company accounts for income taxes under FASB ASC 740, Accounting for Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ASC 740-10-05, Accounting for Uncertainty in Income Taxes prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company assesses the validity of its conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause it to change its judgment regarding the likelihood of a tax position’s sustainability under audit.
Right of Use Assets and Lease Liabilities
FASB ASU No. 2016-02, “Leases” (ASC 842) requires lessees to recognize almost all leases on the balance sheet as a right of use (“ROU”) asset and a lease liability and requires leases to be classified as either an operating or a finance type lease. The standard excludes leases of intangible assets or inventory, and permits the exclusion of leases with an original lease term of less than one year.
Under ASC 842, the Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the Company's leases do not provide an implicit rate, the Company estimated the incremental borrowing rate in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. The Company lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.
Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current on the Company's consolidated balance sheets.
Foreign Currency Translation
The functional and reporting currency of TD Holdings and TDAHK is the Hong Kong Dollar. The functional and reporting currency of Top Draw is the Philippine Peso. Management applies the guidance within FASB ASC 830, Foreign Currency Matters for transactions that occur in foreign currencies. Monetary assets denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Average monthly rates are used to translate revenues and expenses.
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
Assets and liabilities of the Company’s operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded at the historical rate when the transaction occurred. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate component of stockholders' equity in the statement of stockholders' equity.
Differences may arise in the amount of bad debt expense, depreciation expense and amortization expense reported in the Company's operating results as compared to the corresponding change in the allowance for doubtful accounts, accumulated depreciation, and accumulated amortization, respectively, due to foreign currency translation. These translation adjustments are reflected in accumulated other comprehensive income, a separate component of the Company's stockholders' equity.
Comprehensive Gain or Loss
FASB ASC 220, Comprehensive Income establishes standards for the reporting and display of comprehensive income and its components in the financial statements. At December 31, 2022 and 2021, the Company determined that it had items that represented components of comprehensive income (loss), which include accumulated foreign currency translation adjustments, and, therefore, has included a statement of comprehensive income (loss) in the financial statements.
Advertising Expenses
Advertising costs are expensed as incurred and included in selling, general and administrative expenses.
Interest
Cost associated with the refinancing or issuance of debt, as well as debt discounts or premiums, are recorded as interest over the term of the related debt using the effective interest method.
Shipping and Handling Costs
Shipping and handling costs related to the acquisition of goods from vendors are included in the cost of sales.
Stock-Based Compensation
The Company calculates share-based compensation expense for option awards (“Share-based Award(s)”) based on the estimated grant/issue date fair value using the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) and recognizes the expense on a straight-line basis over the vesting period. It accounts for forfeitures as they occur. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the vesting period in determining the fair value of Share-based Awards. The expected term is based on the “simplified method”, due to the Company’s limited option exercise history. Under this method, the term is estimated using the weighted average of the service vesting period and contractual term of the option award. As the Company does not yet have sufficient history of its own volatility, the Company has identified several public entities of similar size, complexities and industry and calculates historical volatility based on the volatilities of these companies. Although the Company believes its assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to its assumptions could significantly impact the amount of expense recorded in a given period.
The Company recognizes restricted stock unit expense over the period of vesting or period that services will be provided. Compensation associated with shares of common stock issued or to be issued to consultants and other non-employees is recognized over the expected service period beginning on the measurement date, which is generally the time the Company and the service provider enter into a commitment whereby the Company agrees to grant shares in exchange for the services to be provided.
Basic and Diluted Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with FASB ASC 260, Earnings per Share which requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period using the treasury stock method, and convertible preferred stock and convertible debt using the if-converted method. These potentially dilutive shares include 5,507 shares from convertible notes, 161,143 shares from convertible preferred stock, 9,568 shares from vested stock options and 4,101,827 shares from stock purchase warrants. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations except as noted below:
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company, delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Early adoption is permitted for interim and annual reporting periods. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements but does not expect that the adoption of this standard will have a material impact.
On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 amends the effective date for ASU 2017-04 to fiscal years beginning after December 15, 2022, and interim periods therein. The Company adopted this ASU on January 1, 2022, which did not result in a material impact to the consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment wase effective for public companies with fiscal years beginning after December 15, 2020. The Company adopted this ASU on January 1, 2021, which did not result in a material impact to the consolidated financial statements and disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815 - 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is evaluating the impact of this guidance on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. ASU 2021-04 provides guidance on modifications or exchanges of freestanding equity-classified written call options that are not within the scope of another Topic. Entities should treat a modification of the terms or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after modification or exchange, as an exchange of the original instrument for a new instrument. ASU 2021-04 provides further guidance on measuring the effect of such modifications or exchanges, and also provides guidance on the recognition of such modifications or exchanges on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. Management is evaluating the effect of the adoption of ASU 2021-04 on the consolidated financial statements. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company adopted this ASU on January 1, 2022, which did not result in a material impact to the consolidated financial statements and disclosures.
3. ACCOUNTS RECEIVABLE, NET
The following table sets forth the components of the Company’s accounts receivable at December 31, 2022 and 2021:
Schedule of accounts receivable
December 31,
December 31,
Billed accounts receivable $ 607,524 $ 822,536
Unbilled accounts receivable 592,932 187,751
Allowance for doubtful accounts (38,226 ) (41,708 )
Total accounts receivable, net $ 1,162,230 $ 968,579
During the year ended December 31, 2022, the Company had three customers that accounted for 84.5% of revenues and two customers that accounted for 73.6% of accounts receivable. During the year ended December 31, 2021, the Company had four customers that accounted for 69.1% of revenues and two customers that accounted for 61.3% of accounts receivable.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table sets forth the components of the Company’s prepaid expenses and other current assets at December 31, 2022 and 2021:
Schedule of prepaid expenses and other current assets
December 31,
December 31,
Prepaid rent $ 14,850 $ 32,139
Vendor advances 5,365 6,631
Prepaid service agreements 410,373 139,670
Employee advance and other payroll related items 66,428 192,339
Other prepaid expenses and current assets 108,481 86,799
Total prepaid expenses and other current assets $ 605,497 $ 457,578
Prepaid expenses and other assets represent advances or prepayments made in the normal course and in which the economic benefit is expected to be realized within twelve months.
5. PROPERTY AND EQUIPMENT
The following table sets forth the components of the Company’s property and equipment at December 31, 2022 and 2021:
Schedule of property and equipment
December 31, 2022 December 31, 2021
Cost Accumulated
Depreciation Net Book
Value Cost Accumulated
Depreciation Net Book
Value
Capital assets subject to depreciation:
Computers, software and office equipment $ 2,774,308 $ (2,651,872 ) $ 122,436 $ 2,698,172 $ (2,399,978 ) $ 298,194
Machinery and equipment 189,641 (182,180 ) 7,461 183,618 (162,647 ) 20,971
Vehicles 41,112 (35,504 ) 5,608 101,674 (76,497 ) 25,177
Furniture and fixtures 409,996 (391,783 ) 18,213 401,862 (365,075 ) 36,787
Leasehold improvements 1,172,501 (1,065,148 ) 107,353 1,086,518 (955,547 ) 130,971
Total fixed assets 4,587,558 (4,326,487 ) 261,071 4,471,844 (3,959,744 ) 512,100
Capital assets not subject to depreciation:
Construction in progress 24,605 - 24,605 65,888 - 65,888
Total fixed assets $ 4,612,163 $ (4,326,487 ) $ 285,676 $ 4,537,732 $ (3,959,744 ) $ 577,988
For the years ended December 31, 2022 and 2021, the Company recorded depreciation expense of $347,727 and $426,654 respectively.
6. OTHER ASSETS
The following table sets forth the components of the Company’s other assets at December 31, 2022 and 2021:
Schedule Of Other Assets
December 31,
December 31,
Capitalized website development costs $ 1,057,312 $ 411,799
Prepublication costs 164,042 152,286
Produced and licensed content costs 325,966 76,701
Deposits 72,027 76,052
Other noncurrent assets 7,731 4,321
Total other assets $ 1,627,078 $ 721,160
Other noncurrent assets are comprised solely of guarantee deposits at TDA which are refundable upon termination of contract or delivery of subject matter of the contract. These are initially recorded at cost which is the fair value at the time of the transaction and are subsequently measured at amortized cost
7. LEASES
The Company has entered into operating leases primarily for office space. These leases have terms which range from two years to six years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment. During the year ended December 31, 2022, $798,075 of right of use assets and leases liabilities were added related to new operating leases.
The Company leases approximately 2,100 square feet of office space in Boca Raton, Florida at the rate of $4,000 per month pursuant to a three-year lease which was renewed for six months and expired in March 2022. The Florida office space is the location of the Company’s corporate headquarters and administrative staff. In January 2022, the Company signed a new lease agreement to extend the term until March 2024. The total legally binding minimum lease payments for this lease are approximately $94,898.
In September 2021, the Company signed a new lease to secure approximately 1,300 square feet of office space in Manila. The initial term of the lease is 72 months from the commencement date, January 1, 2022. The Company has the option to renew the lease term for an additional 12 months. The renewal option is not included in the future minimum lease payments used in determining the ROU liability as management is not reasonably certain to execute the option. The total legally binding minimum lease payments for this lease are approximately $270,293.
In October 2021, the Company signed a new lease to secure 1,720 square feet of office space in Los Angeles. The initial term of the lease is 24 months from the commencement date, November 29, 2021 and no renewal option. The total legally binding minimum lease payments for this lease are approximately $117,607.
In August and September 2022, the Company signed new lease agreements to extend approximately 25,300 square feet of office space in Manila. The lease agreements expire in December 2027. The total legally binding minimum lease payments for these leases are approximately $1,044,644.
The future minimum payment obligations at December 31, 2022 for operating leases are as follows:
Schedule of future minimum lease payment
$ 377,045
273,690
274,921
223,320
234,488
Thereafter
-
Total
$ 1,383,464
These operating leases are listed as separate line items on the Company's Consolidated Balance Sheets and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's Consolidated Balance Sheets.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating right-of-use assets and related lease liabilities were as follows:
Schedule of operating right-of-use assets
Year Ended
December 31, 2022
Cash paid for operating lease liabilities $ 458,048
Weighted-average remaining lease term (in years) 3.47
Weighted-average discount rate 10%
Total rent expense related to lease obligations, reflected in general and administrative costs line items on the consolidated income statements, for the years ended December 31, 2022 and 2021, were $398,754 and $380,297, respectively.
The following table presents the amortization of the Company’s lease liabilities under ASC 842 at December 31, 2022:
Schedule of amortization of lease liabilities
$ 269,681
$ 193,294
$ 213,854
$ 183,639
$ 213,171
Thereafter
$ -
8. BUSINESS COMBINATIONS
Acquisition of Curiosity Ink Media, LLC
On July 29, 2021, the Company entered into a membership interest purchase agreement (the “Purchase Agreement”) with Curiosity Ink Media LLC, a Delaware limited liability company (“Curiosity”) and the holders of all of Curiosity’s outstanding membership interests (the “Sellers”), for the purchase of 80% of Curiosity’s outstanding membership interests (the “Purchased Interests”) from the Sellers (the “Acquisition”).
On August 19, 2021, pursuant to the terms of the Purchase Agreement, the Company consummated the Acquisition and acquired the Purchased Interests in consideration for the issuance to the Sellers of an aggregate of 1,771,883 shares of the Company’s common stock to the Sellers, pro rata to their membership interests immediately prior to the closing of the Acquisition. The shares were valued at $2.82 per share which represents the 20-day volume-weighted average price of the Company’s common stock on August 19, 2021.
Pursuant to the Purchase Agreement, the Company also paid $400,000 and issued an 8% eighteen-month convertible promissory note in the principal amount $278,000 (the “Note”) to pay-down and refinance certain outstanding loans and advances previously made to Curiosity by Russell Hicks and Brett Watts, its co-founders, and current chief content officer and chief creative officer, respectively.
The Note is convertible into shares of common stock of the Company at a conversion price of $98.40 per share, or 29,574 shares, but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The Note may be prepaid at any time, in whole or in part. The Note is subordinate to the Company’s senior indebtedness.
The Sellers also have the ability to earn up to $17,500,000 (payable 50% in cash and 50% in stock) upon the achievement of certain performance milestones as of December 31, 2025.
In addition to the tangible assets, goodwill total $14,271,969 was recorded in connection to the acquisition. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents potential future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is not expected to be deductible for tax purposes.
Schedule of consideration paid
Consideration Paid:
Cash consideration $ 400,000
Common stock issued 5,421,962
Convertible notes 278,000
Contingent purchase consideration 5,586,493
Total consideration $ 11,686,455
The amounts in the table below represent the allocation of the purchase price. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
Schedule of Recognized Identified Assets Acquired and Liabilities Assumed
Cash and cash equivalents $ 26,408
Inventory 65,734
Produced and licensed content cost 187,920
Goodwill and intangible assets 14,271,969
Accounts payable (113,462 )
Noncontrolling interest (2,752,114 )
Total identifiable assets acquired, and liabilities assumed $ 11,686,455
During the year ended December 31, 2022, the Company finalized the purchase price allocation, during the permissible measurement period, and obtained new fair value information for certain identifiable intangible assets related to its acquisition of Curiosity. The revised purchase price allocation decreased goodwill by $468,426 and increased intangible assets by $468,426. Additionally, the Company recorded amortization expense of $24,641 related to intangible assets subject to amortization during the year ended December 31, 2022 (of which $7,247 corresponded to the year ended December 31, 2021). See Note 9 - Goodwill and Intangible Assets for more detail. These adjustments did not have a significant impact on the Company’s operations for the year ended December 31, 2022. The following table summarizes the individually identifiable intangible assets recognized:
Schedule of identifiable intangible assets
Licensing agreements $ 341,728
Books and stories content 126,698
Total identifiable intangible assets $ 468,426
The Company’s results of operations include results of operations for Curiosity for the year ended December 31, 2022. No pro forma information is presented for the Company’s results of operations as if the acquisition of Curiosity had occurred on January 1, 2021 as results of its operations are not considered material to the consolidated financial statements as of and for the year ended December 31, 2021.
9. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
The following table sets forth the changes in the carrying amount of the Company’s goodwill for the years ended December 31, 2022 and 2021:
Schedule of goodwill
Balance, January 1, 2021 $ 8,380,504
Acquisition of Curiosity 14,271,969
Impairment charge (276,448 )
Balance, December 31, 2021 22,376,025
Measurement Period Adjustment (468,426 )
Impairment charge (11,340,115 )
Balance, December 31, 2022 $ 10,567,484
At December 31, 2022, the Company performed its annual impairment tests as prescribed by ASC 350 on the carrying value of its goodwill and recorded aggregate impairment charges of $11,340,115; of which $6,202,888 was attributed to its TD Holdings Ltd animation business acquired in 2016, and $5,137,227 was attributed to its Curiosity Ink Media original content business acquired in 2021. The determination was made as the result of the Company’s qualitative assessment of each business unit, including the decline in animation revenues and delay in monetization of original content properties.
At December 31, 2021, the Company performed its annual impairment tests as prescribed by ASC 350 on the carrying value of its goodwill and recorded an impairment charge totaling $276,448; all of which was attributed to the assets of its NetSpective Webfilter business acquired in 2017. The determination was made as the result of the Company’s qualitative assessment of its webfiltering business, including a multi-year decline in sales revenue and the unexpected loss of certain renewal customer accounts.
At December 31, 2022 and 2021, the carrying amount of the Company’s goodwill was $10,567,484 and $22,376,025, respectively.
The following table sets forth the components of the Company’s intangible assets at December 31, 2022 and 2021:
Schedule of intangible assets
December 31, 2022 December 31, 2021
Amortization Period (Years) Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Accumulated Impairment Net Book Value
Intangible assets subject to amortization:
Customer relationships 10.00 1,526,282 (992,083 ) 534,199 1,600,286 (876,457 ) (37,002 ) 686,827
Mobile software applications 2.00 - - - 282,500 (282,500 ) - -
NetSpective webfiltering software 2.00 - - - 1,134,435 (1,134,435 ) - -
Noncompete agreements 1.50 - - - 846,638 (846,638 ) - -
Licensing agreement 19.60 341,728 (24,641 ) 317,087 - - - -
Subtotal
1,868,010 (1,016,724 ) 851,286 3,863,859 (3,140,030 ) (37,002 ) 686,827
Intangible assets not subject to amortization:
Books and stories content
126,698 - 126,698 - - - -
Trade names
4,386,247 - 4,386,247 4,455,595 - (69,348 ) 4,386,247
Total intangible assets
6,380,955 (1,016,724 ) 5,364,231 8,319,454 (3,140,030 ) (106,350 ) 5,073,074
For the years ended December 31, 2022 and 2021, the Company recorded amortization expense for intangible assets subject to amortization of $170,022 and $386,916, respectively.
At December 31, 2021, the Company performed its annual impairment tests as prescribed by ASC 350 on the carrying value of its intangible assets and recorded an impairment charge totaling $106,350; all of which was attributed to the assets of its NetSpective Webfilter business acquired in 2017.
The following table provides information regarding estimated amortization expense for intangible assets subject to amortization for each of the following years ending December 31:
Schedule of amortization
$ 170,022
170,022
170,022
93,708
17,394
Thereafter 230,118
Total $ 851,286
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Trade payables are recognized initially at the transaction price and subsequently measured at the undiscounted amount of cash or other consideration expected to be paid. Accrued expenses are recognized based on the expected amount required to settle the obligation or liability.
The following table sets forth the components of the Company’s accrued liabilities at December 31, 2022 and 2021:
Schedule accrued liabilities
December 31,
December 31,
Executive and employee compensation $ 102,151 $ 238,669
Interest on convertible promissory notes 84,292 31,997
Other accrued expenses and liabilities 192,511 129,663
Total accrued liabilities $ 378,954 $ 400,329
11. RELATED PARTY PAYABLES AND ACTIVITY
At December 31, 2022 and 2021, the aggregate related party payables were $50,000 and $50,000, respectively.
Darren Marks’s Family
The Company has engaged the family of Darren Marks, its Chief Executive Officer, to assist in the development of the Grom Social mobile application. These individuals have created over 1,450 hours of original short form content. Sarah Marks, the wife of Darren Marks, our President and Chief Executive Officer, Zach Marks, Luke Marks, Jack Marks, Dawson Marks, Caroline Marks and Victoria Marks, each Darren Marks’s children, are, or have been, by the Company employed or independently contracted.
During the years ended December 31, 2022 and 2021, the Marks family was paid a total of $76,094 and $36,026, respectively.
Compensation for services provided by the Marks family is expected to continue for the foreseeable future. Each member of the Marks family is actively involved in the creation of content for the mobile app, including numerous videos focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special events.
Liabilities Due to Officers and/or Directors
On July 13, 2018, our director Dr. Thomas Rutherford loaned the Company $50,000. The loan bears interest at a rate of 10% per annum and was due on August 11, 2018. No notice of default or demand for payment has been received by the Company.
12. EMPLOYEE BENEFIT PLAN
The Company’s subsidiary, Top Draw Animation, has an unfunded, non-contributory defined benefit plan covering its permanent employees.
Under the existing regulatory framework, the Company is required to pay eligible employees at least the minimum regulatory benefit upon retirement, which provides a retirement benefit equal to 22.5 days’ pay for every year of credited service, subject to age and service requirements. The regulatory benefit is paid in a lump sum upon retirement. The existing regulatory framework does not require minimum funding of the plan.
Retirement benefit expenses and liabilities are determined in accordance with an actuarial study made for the plan utilizing the net interest approach which disaggregates the defined benefit cost into the following components: service costs (cost of services received); net interest (financing effect of paying for benefits in advance or in arrears); and remeasurements (period-to-period fluctuations in the amounts of defined benefit obligations and plan assets).
Under the net interest approach, service cost and net interest on the defined benefit liability (asset) are both recognized in the statement of operations, while remeasurements of the defined benefit liability (asset) are recognized in other comprehensive income. Remeasurements recognized in other comprehensive income shall not be reclassified to profit or loss in a subsequent period.
The amount of the defined benefit liability reported under other noncurrent liabilities in the consolidated balance sheet is determined as follows:
Defined benefit liability
December 31, 2022
December 31, 2021
Benefit obligation
$ 434,974
$ 390,833
Plan assets
-
-
Total
$ 434,974
$ 390,833
The components of the accumulated benefit cost to be recognized under selling, general and administrative expense in consolidated statement of operations are the service cost (current service cost, past service cost or credit and settlement gains or losses) and net interest expense on the net defined benefit liability:
Components of accumulated benefit cost
December 31, 2022
December 31, 2021
Current service cost
$ 86,357
$ 23,549
Net interest expense
12,785
14,164
Total
$ 99,142
$ 37,713
The change in the accumulated benefit cost in the consolidated balance sheet are as follows:
Schedule of accumulated benefit cost
December 31,
December 31,
Balance, beginning of year
$ 390,833
$ 470,414
Foreign currency translation
(29,641 )
(20,252 )
Expense recognized in other comprehensive income
99,142
37,713
Remeasurement on actuarial gain (loss) recognized
24,552
(87,094 )
Contributions paid
(49,912 )
(9,948 )
Balance, end of year
$ 434,974
$ 390,833
The cumulative amount of actuarial gains recognized in other comprehensive income is as follows:
Schedule of actuarial gains
December 31,
December 31,
Balance, beginning of year
$ 60,518
$ (28,415 )
Foreign currency translation
(803 )
1,839
Actuarial gain (loss)
(24,552 )
87,094
Balance, end of year
35,163
60,518
Tax effect
(8,802 )
(12,439 )
Cumulative actuarial gain (loss), net of tax
$ 26,261
$ 48,079
The assumptions used to determine retirement benefits for the years ended December 31 are as follows:
Assumption used to determine retirement benefits
December 31, 2022
December 31, 2021
Discount rate
7.17%
5.04%
Salary increase rate
2.00%
2.00%
The average duration of the accrued retirement benefit cost as at December 31, 2022 and 2021 is 7.3 years and 7.4 years, respectively.
13. DEBT
Convertible Notes
The following tables set forth the components of the Company’s convertible notes at December 31, 2022 and 2021:
Schedule of convertible debt
December 31,
December 31,
8% Unsecured Convertible Notes (Curiosity) $ 278,000 $ 278,000
10% Senior Secured Convertible Note with Original Issuance Discount (L1 Capital Global Master Fund or “L1”) - 4,125,000
10% Secured Convertible Notes with Original Issuance Discounts (OID Notes) 75,000 75,000
12% Senior Secured Convertible Notes (TDH Secured Notes) 204,907 330,039
12% Senior Secured Convertible Notes (Additional Secured Notes) 38,932 63,099
Loan discounts (25,164 ) (1,550,540 )
Total convertible notes, net 571,664 3,320,598
Less: current portion of convertible notes, net (503,465 ) (2,604,346 )
Convertible notes, net $ 68,199 $ 716,252
8% Unsecured Convertible Notes (Curiosity)
On July 29, 2021, the Company entered into a membership interest purchase agreement with Curiosity and the holders of all of Curiosity’s outstanding membership interests, for the purchase of 80% of Curiosity’s outstanding membership interests from the sellers. Pursuant to the purchase agreement, the Company issued 8% eighteen-month convertible promissory notes in the aggregate principal amount $278,000 to pay-down and refinance certain outstanding loans and advances previously made by certain of its principals. The notes are convertible into shares of common stock of the Company at a conversion price of $98.40 per share but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The notes may be prepaid at any time, in whole or in part. The notes are subordinate to the Company’s senior indebtedness.
At December 31, 2022 and 2021, the principal balance of the Curiosity notes was $278,000.
8% Convertible Promissory Notes (Bridge Notes)
On November 30, 2020, the Company entered into a securities purchase agreement with EMA Financial, LLC (“EMA”) pursuant to which the Company issued to EMA a nine-month 8% convertible promissory note in the principal amount of $260,000 (the “EMA Note”) for a $234,000 investment. The term of the EMA Note may be extended by EMA up to an additional year. The EMA Note is convertible into common stock of the Company at any time after 180 days from issuance. The conversion price of the EMA Note is equal to the lower of: (i) $57.60 per share, or (ii) 70% of the lowest trading price of the common stock during the ten consecutive trading days including and immediately preceding the conversion date.
On February 17, 2021, the terms of the EMA financing were amended to (i) reduce the conversion rate to $38.40, and (ii) add a three-year warrant to purchase up to 2,708 shares of the Company’s common stock, at an exercise price of $48.00 per share. On May 19, 2021, the terms of the EMA financing were further amended to (i) increase the interest rate to 12%, and (ii) add a three-year warrant (the “EMA Warrant”) to purchase up to 1,295 shares of the Company’s common stock, at an exercise price of $57.60 per share.
ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. In connection with the EMA warrant issuance, the Company allocated an aggregate fair value of $104,760 to the stock warrants and recorded a debt discount which will be amortized to interest expense over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of the warrants at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant ranging between $48.00 and $134.40, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate of 0.19% and (iv) an expected volatility of the price of the underlying common stock ranging between 224.9% and 258.6%.
On May 24, 2021, EMA Warrant was amended to delete the full-ratchet anti-dilution provision and the EMA Note was amended to delete the variable conversion price feature.
On June 2, 2021, the Company issued 333 shares of common stock to EMA upon the conversion of $11,800 in note principal and $1,000 in conversion fees. On June 17, 2021, the Company issued 3,333 shares of common stock to EMA upon the conversion of $127,000 in note principal and $1,000 in conversion fees. On August 20, 2021, the Company issued 3,633 shares of common stock to EMA upon the conversion of $121,200 in note principal and $17,292 in accrued interest and conversion fees.
At December 31, 2022 and 2021, the principal balance of the EMA Note was $0 and all associated loan discounts were fully amortized.
On December 17, 2020, the Company entered into a note purchase agreement with Quick Capital, LLC (“Quick Capital”) pursuant to which the Company issued Quick Capital a nine-month convertible promissory note in the principal amount of $113,587 (the “Quick Note”) for a $100,000 investment, which included an original issuance discount of 8% and a $4,500 credit for Quick Capital’s transaction expenses. The Quick Note may be converted into shares of common stock at (i) a 30% discount to the lowest price per share of any debt or securities offering by the Company if the Company’s common stock is listed on NASDAQ or NYSE within 90 days of the Quick Note issuance; (ii) the lesser of (A) $38.40 or (B) a 30% discount to the average of the two lowest closing prices during the ten trading days prior to the conversion date; (iii) $38.40 per share, upon an event of default as described in the Note.
The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its fair value was determined to be $12,621. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
In connection with the Quick Note issuance, the Company also issued a three-year warrant to purchase up to an aggregate of 1,233 shares of the Company’s common stock at an exercise price of $48.00 per share. ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. This resulted in the debt being recorded at a discount which will be amortized to interest expense over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $48.00, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate of 0.19% and (iv) an expected volatility of the price of the underlying common stock of 224.3%. As a result, the Company allocated a fair value of $33,056 to the stock warrants.
On May 21, 2021, the Quick Note was amended to replace the variable conversion price with a fixed conversion price of $38.40 per share and the Quick Warrant was amended to delete the full-ratchet anti-dilution provision.
On June 21, 2021, the Company issued 9,667 shares of common stock to Quick Capital upon the conversion of $27,487 in note principal and $65,313 in penalties and accrued interest. On June 28, 2021, the Company issued 8,969 shares of common stock to Quick Capital upon the conversion of $86,100 in note principal.
At December 31, 2022 and 2021, the principal balance of the Quick Note was $0 and all associated loan discounts were fully amortized.
On February 9, 2021, the Company entered into a securities purchase agreement with Auctus Fund, LLC (“Auctus”) pursuant to which the Company issued to Auctus a twelve-month 12% convertible promissory note in the principal amount of $500,000 (the “Auctus Note”). The note is convertible into shares common stock at a conversion price of $57.60 per share. The Company received net proceeds of $428,000 after deducting fees and expenses related to the transaction.
The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $155,875. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
In connection with the note issuance, Auctus was also issued a five-year warrant (the “Auctus Warrant”) to purchase up to an aggregate of 6,510 shares of the Company’s common stock, at an exercise price of $57.60 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $134.40, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.48% and (iv) an expected volatility of the price of the underlying common stock of 259.2%. As a result, the Company allocated a fair value of $272,125 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.
On May 25, 2021, Auctus Warrant was amended to delete the full-ratchet anti-dilution provision.
On July 14, 2021, the Company issued 9,148 shares of common stock to Auctus upon the conversion of $500,000 in note principal and $26,900 in accrued interest and conversion fees.
At December 31, 2022 and 2021, the principal balance of the Auctus Note was $0 and all associated loan discounts were fully amortized.
On March 11, 2021, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”) pursuant to which the Company issued to FirstFire a twelve-month 12% convertible promissory note in the principal amount of $300,000 (the “FirstFire Note”). The first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. At any time after 180 days from the date of issuance, FirstFire may convert any amount due under the note into shares of the Company’s common stock at a conversion price of $57.60 per share. The Company received net proceeds of $238,500 after deducting fees and expenses related to the transaction.
The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $93,220. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
In connection with the issuance of the note, FirstFire was also issued a five-year warrant (the “FirstFire Warrant”) to purchase up to an aggregate of 3,906 shares of the Company’s common stock, at an exercise price of $57.60 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $124.80, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.78% and (iv) an expected volatility of the price of the underlying common stock of 258.6%. As a result, the Company allocated a fair value of $145,280 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.
On May 20, 2021, the FirstFire Note was amended to replace the variable conversion feature price with a fixed conversion price of $57.60 and the FirstFire Warrant was amended to delete the full ratchet anti-dilution provision.
On June 17, 2021, the Company issued 5,833 shares of common stock to FirstFire upon the conversion of $300,000 in note principal and $36,000 in accrued interest.
At December 31, 2022 and 2021, the principal balance of the FirstFire Note was $0 and all associated loan discounts were fully amortized.
On April 16, 2021, the Company entered into a securities purchase agreement with Labrys Fund, LP (“Labrys”), pursuant to which the Company issued to Labrys a one-year convertible promissory note in the principal amount of $300,000 (the “Labrys Note”). The Labrys Note bears interest at a rate of 12% per annum. The first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. Labrys may convert any amount due under the Labrys Note into shares of the Company’s common stock at a conversion price of $57.60 per share. The Company received net proceeds of $266,000, after deducting fees and expenses related to the transaction.
In connection with the issuance of the note, Labrys was also issued a five-year warrant to purchase up to an aggregate of 3,906 shares of the Company’s common stock (the “Labrys Warrant”), at an exercise price of $57.60 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $191.10, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.84% and (iv) an expected volatility of the price of the underlying common stock of 251.2%. As a result, the Company allocated a fair value of $172,479 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.
On May 22, 2021, the Labrys Warrant was amended to delete the full-ratchet anti-dilution provision.
On June 17, 2021, the Company issued 5,833 shares of common stock to Labrys upon the conversion of $300,000 in note principal and $36,000 in accrued interest.
At December 31, 2022 and 2021, the principal balance of the Labrys Note was $0 and all associated loan discounts were fully amortized.
10% Unsecured Convertible Redeemable Note - Variable Conversion Price
On March 1, 2020, the Company issued a convertible redeemable note to an unrelated party in the principal amount of $100,000. The note accrues interest at a rate of 10% per annum, was due on August 31, 2020 and is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.
The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its fair value was determined to be $44,129. This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.
In connection with the note issuance, the Company also issued a five-year warrant to purchase up to an aggregate of 521 shares of the Company’s common stock at an exercise price of $96.00 per share. ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. This resulted in the debt being recorded at a discount which will be amortized to interest expense over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $96.00, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.89% and (iv) an expected volatility of the price of the underlying common stock of 144.4%. As a result, the Company allocated a fair value of $30,935 to the stock warrants.
On April 14, 2021, the Company issued 2,083 shares of common stock to the noteholder upon the conversion of $100,000 in note principal and $11,205 of accrued interest.
At December 31, 2022 and 2021, the principal balance of this note was $0 and all associated loan discounts were fully amortized.
On November 20, 2020, the Company issued a convertible redeemable note to an unrelated party in the principal amount of $165,000 less a $15,000 original issuance discount resulting in net cash proceeds to the Company of $150,000. The note accrues interest at a rate of 10% per annum, is due on February 15, 2021 and is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.
The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its fair value was determined to be $50,871. This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.
On February 17, 2021, the Company entered into a debt exchange agreement with the holder of the convertible promissory note, in the aggregate amount of $169,000 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreement, the holder exchanged the outstanding note, and all amounts owed by the Company thereunder, for 169,000 shares of the Company’s 8% Series B convertible preferred stock. At the time of the exchange, all amounts due under the note was deemed to be paid in full and the note was cancelled. No extinguishment gain or loss was recognized as a result of the exchange.
At December 31, 2022 and 2021, the principal balance of this note was $0 and all associated loan discounts were fully amortized.
10% Senior Secured Convertible Note with Original Issuance Discount (L1)
On September 14, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with L1 Capital Global Master Fund (“L1”) pursuant to which it issued (i) a 10% original issue discount senior secured convertible note in the principal amount of $4,400,000 to L1 (the “L1 Note”) and (ii) a 5 five-year warrant to purchase 27,109 shares of the Company’s common stock at an exercise price of $126.00 per share (“Warrant Shares”) in exchange for $3,960,000 (the “First Tranche Financing”). The Purchase Agreement also provided, subject to shareholder approval, for the issuance, subject to certain conditions, of an additional $1,500,000 of notes and warrants to purchase 9,259 shares of common stock (the “Second Tranche Financing”) on the same terms.
The L1 Note is convertible by L1 into common stock of the Company at a price of $126.00 per share, or approximately 34,921 shares. It is repayable in equal monthly installments of $275,000 with certain deferments or an acceleration of up to three months' payments. The Company may repay the L1 Note in cash or shares of common stock at a price equal to the lesser of the then conversion price or 95% of the lowest daily VWAP during the ten consecutive trading days immediately preceding the monthly payment date, but in no event less than $57.60. In the event that VWAP drops below $57.60, the Company will have the right to pay at such VWAP with any shortfall paid in cash. The L1 Note is senior to all other Company indebtedness and the Company’s obligations under the note are secured by all of the assets of the Company’s subsidiaries.
The Company estimated the fair value of the warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $81.00, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.79% and (iv) an expected volatility of the price of the underlying common stock of 299.8%. As a result, the Company allocated a fair value of $1,200,434 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.
On October 20, 2021, the Company and L1 entered into an amended and restated purchase agreement which increased the amount of the Second Tranche Financing from $1,500,000 to $6,000,000 and provides (i) for an amended and restated 10% original issue discount senior secured convertible note to be issued in exchange for the L1 Note pursuant to the Purchase Agreement and (ii) for the issuance of a five-year warrant to purchase 34,706 shares of the Company’s common stock at an exercise price of $126.00 per share.
In the event the principal amount of the L1 Note issued in the First Tranche Financing, when aggregated with the L1 Note to be issued in the Second Tranche Financing, exceeds 25% of the market capitalization of the Company’s common stock as reported by Bloomberg L.P, then the principal amount to be issued in the Second Tranche Financing will be limited to 25%, in the aggregate of both L1 Notes, unless waived in the sole discretion of the Purchaser.
On November 30, 2021, the Company issued 4,329 shares of common stock to L1 upon the conversion of $275,000 in principal and $5,500 in financing costs for the repayment of monthly installments required under the L1 Note.
During the three months ended March 31, 2022, the Company issued an aggregate 191,912 shares of common stock to L1 upon the conversion of $4,125,000 of outstanding principal.
As of December 31, 2022 and 2021, the principal balance of these notes was $0 and $4,125,000, respectively, and the remaining balance on the associated loan discounts was $0 and $1,504,552, respectively.
10% Senior Secured Convertible Note with Original Issuance Discount (L1- Second Tranche)
On January 20, 2022 (the “Second Tranche Closing”), the Company and L1 Capital closed on the Second Tranche of the offering, resulting in the issuance of (i) a $1,750,000 10% Original Issue Discount Senior Secured Convertible Note, due July 20, 2023, (the “Second Tranche Note”); and (ii) a five year warrant to purchase 10,123 shares of Common Stock of the Company at an exercise price of $126.00 per share (the “Second Tranche Warrants”), in exchange for consideration of $1,575,000 (i.e. the face amount less the 10% Original Issue Discount of $175,000).
In connection with the Second Tranche Closing, the Company paid to EF Hutton a fee of $126,000.
The Second Tranche Note is convertible into common stock of the Company at a rate of $126.00 per share (the “Conversion Price”) into 13,889 shares of common stock (the “Second Tranche Conversion Shares”) and, is repayable in equal monthly installments of $111,563 commencing on the date that the SEC declares a registration statement with respect to the resale of such shares effective, with all remaining amounts due on July 20, 2023. The Second Tranche Note is repayable by payment of cash, or, at the discretion of the Company and if the below listed “Equity Conditions” are met, by issuance of shares of the common stock at a price of 95% of the lowest daily VWAP during the ten-trading day period prior to the respective monthly redemption dates (with a floor of $57.60) multiplied by 102% of the amount due on such date. In the event that the ten-trading day VWAP drops below $57.60 the Company will have the right to pay in stock at such ten-trading day VWAP with any shortfall paid in cash. The Conversion Price may be adjusted in the event of dilutive issuances but in no event to less than $16.20 (the “Monthly Conversion Price”).
The Company’s right to make monthly payments in stock in lieu of cash for the Second Tranche Note is conditioned on certain conditions (the “Equity Conditions”). The Equity Conditions required to be met each month in order to redeem the Second Tranche Note with stock in lieu of a monthly cash payment, among other conditions set forth therein, include without limitation, that a registration statement be in effect with respect to the resale of the shares issuable upon conversion or redemption of the Second Tranche Note (or, that an exemption under Rule 144 is available), that no default be in effect, that the average daily trading volume of the Company’s common stock would have to be at least $550,000 during the five trading days prior to the respective monthly redemption and that the outstanding principal amounts of the First Tranche Note and Second Tranche Note combined, shall not exceed 30% of the market capitalization of the Company’s common stock as reported on Bloomberg L.P., which percentage is subject to increase by L1 Capital at its sole discretion.
Other provisions of the Second Tranche Note, which is similar in terms to the First Tranche Note, include that the Second Tranche Note Conversion Price is subject to full anti-dilution price protections in the event of financings that are below the Conversion Price with a floor of $16.20.
In the event of an Event of Default as defined in the notes, if the stock price is below the Conversion Price at the time of default and only for so long as a default is continuing, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the default is cured the default conversion rate elevates back to the normal Conversion Price
As part of the Second Tranche Closing, the Company issued Second Tranche Warrants exercisable for five years from the date of issuance, at $126.00 per share which carry the same anti-dilution protection as the Second Tranche Notes, subject to the same adjustment floor. The Second Tranche Warrants are exercisable via cashless exercise only for so long as no registration statement covering resale of the shares is in effect.
The Second Tranche Note continues to be subject to (i) the repayment and performance guarantees by the subsidiaries of the Company pursuant to a subsidiary guaranty and, (ii) the Security Agreement pursuant to which the L1 Capital was granted a security interest in all of the assets of the Company and certain of its subsidiaries, each as entered into in connection with the First Tranche closing on September 14, 2021.
During the year ended December 31, 2022, the Company issued an aggregate 108,025 shares of common stock and repaid $1,146,901 in cash to L1 upon the conversion of $1,750,000 of outstanding principal.
As of December 31, 2022, the principal balance of these notes was $0 and all associated loan discounts were fully amortized.
10% Secured Convertible Notes with Original Issuance Discounts (OID Notes)
On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of 647,954 shares of the Company’s Series B preferred stock (“Series B Stock) were issued to noteholders for an aggregate of $411,223 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $185,448 as a result of the exchange.
On November 30, 2020, the Company entered into a debt exchange agreement with the remaining holder of these 10% convertible notes pursuant to which an aggregate of 158,000 shares of Series B Stock were issued to the noteholder for an aggregate of $111,250 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $46,750 as a result of the exchange.
On July 19, 2021, the Company repaid $6,329 of outstanding principal and accrued and unpaid interest to a 10% secured convertible noteholder.
At December 31, 2022 and 2021, the principal balance of these notes was $75,000 and all associated loan discounts were fully amortized. No notices of default or demands for payment have been received by the Company.
12% Senior Secured Convertible Notes (Original TDH Notes)
On June 20, 2016, the Company issued $4,000,000 of senior secured promissory notes to the shareholders of TD Holdings (the “TDH Sellers”) in connection with a share sale agreement pursuant to which the Company acquired 100% of the common stock of TD Holdings (“the TDH Share Sale Agreement”). The notes bear interest at 5.0% per annum and are due on the earlier of (i) June 20, 2018 or (ii) the date on which the Company successfully completes a qualified initial public offering as defined in the agreement. The notes are collateralized by all of the assets of TD Holdings.
First Amendment to the TDH Share Sale Agreement
On January 3, 2018, the Company entered into an amendment to the TDH Share Sale Agreement (the “First Amendment”). Under the terms of the First Amendment:
· The maturity date of the notes was extended from July 1, 2018 until July 1, 2019.
· The interest rate on the notes during for one-year extension period from July 2, 2018 to July 1, 2019 was increased to 10%.
· Interest is payable quarterly in arrears during the one-year extension period, instead of annually in arrears. The first such quarterly interest payment of $100,000 is due on September 30, 2018.
· Under the terms of the terms of TDH Share Sale Agreement, the TDH Sellers could earn up to an additional $5.0 million in contingent earnout payments. The original earnout period ended on December 31, 2018. The First Amendment extended the earnout period by one year to December 31, 2019.
As consideration to enter into the First Amendment, the Company issued 833 shares of its common stock valued at $480,000 to the TDH Sellers.
Second Amendment to the TDH Share Sale Agreement
On January 15, 2019, the Company entered into a second amendment to the TDH Share Sale Agreement (the “Second Amendment”). Under the terms of the Second Amendment:
· The maturity date of the notes was extended from July 1, 2019 to April 2, 2020.
· The TDH Sellers shall have the right to convert the notes at a conversion price of $259.20 per share, either in whole or in part at any time prior to the maturity, subject to the terms and conditions set forth in the Second Amendment.
· In the event that the notes are not repaid prior to July 2, 2019, no funds will be transferred by TDH to the Company.
· The payment terms of the contingent earnout was modified from 50% payable in cash and 50% payable in stock to 75% payable in cash and 25% payable in stock.
As consideration to enter into the Second Amendment, the Company issued an additional 833 shares of its common stock valued at $220,000 to the TDH Sellers.
Due to the inclusion of a conversion feature, the Second Amendment was considered an extinguishment and subsequent reissuance of the notes under the guidelines of ASC 470-20-40-7 through 40-9. As a result, the Company recorded a loss on the extinguishment of debt of $363,468 related to the Second Amendment during the year ended December 31, 2019.
The principal value of the notes was reclassified to convertible notes, net - current on the Company’s consolidated financial statements.
Third Amendment to the TDH Share Sale Agreement
On March 16, 2020, the Company entered into a third amendment (the “Third Amendment”) to the TDH Share Sale Agreement, pursuant to which the Company’s subsidiary, Grom Holdings, had acquired 100% of the common stock of TDH (representing ownership of the animation studio) from certain individuals (the “TDH Sellers”). The Company used the proceeds received from the TDH Secured Notes Offering to pay the TDH Sellers $3,000,000 of the principal due under the Original TDH Notes, leaving a principal amount due to the TDH Sellers of $1,000,000 (plus accrued interest and costs). In addition, the accrued interest of $361,767 due to the TDH Sellers pursuant to the Original TDH Notes was paid in three monthly payments of $93,922, commencing April 16, 2020, and twelve-monthly installments of $6,667 commencing April 16, 2020.
Pursuant to the Third Amendment, the TDH Sellers and the Company agreed, among other things:
· To extend the maturity date of the remaining Original TDH Notes by one year to June 30, 2021;
· To increase the interest rate on the remaining Original TDH Notes to 12%;
· To grant a first priority security interest on the shares of TDH and TDAHK to the TDH Sellers, pari passu with the holders of the TDH Secured Notes; and
· To pay the balance of the Original TDH Notes monthly in arrears, amortized over a four-year period.
On August 18, 2021, the Company paid the TDH Sellers an aggregate of $834,760, representing all remaining amounts due and payable under the TDH Secured Notes. As a result, the TDH Sellers released the pledged shares of TDH and its subsidiary, Top Draw Animation Hong Kong Limited from escrow. The TDH Sellers have no further security interest in the assets of the Company or its subsidiaries.
At December 31, 2022 and 2021, the principal balance of the Original TDH Notes was $0.
12% Senior Secured Convertible Notes (“TDH Secured Notes”)
On March 16, 2020, the Company sold (the “TDH Secured Notes Offering”) an aggregate $3,000,000 of its 12% senior secured convertible notes (the “TDH Secured Notes”), to eleven accredited investors (the “TDH Secured Note Lenders”), pursuant to a subscription agreement with the TDH Secured Note Lenders. Interest on the TDH Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the TDH Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024. Pursuant to the TDH Secured Notes, TD Holdings will pay amounts due under the TDH Secured Notes. Prepayment of amounts due under TDH Secured Notes is subject to a prepayment penalty in an amount equal to 4% of the amount prepaid.
The TDH Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $96.00 per share.
The Company’s obligations under the TDH Secured Notes, are secured by Grom Holdings’ shares of stock of TDH, and of its wholly owned subsidiary, TDAHK. The TDH Secured Notes rank equally and ratably on a pari passu basis with (i) the other TDH Secured Notes and (ii) the Original TDH Notes issued by the Company pursuant to TDH Share Sale Agreement.
If the Company sells the animation studio located in Manila, Philippines, which is currently owned by TDH through TDAHK (the “Animation Studio”), for more than $12,000,000, and so long as any amount of principal is outstanding under the TDH Secured Notes, the Company will pay the TDH Secured Notes holders from the proceeds of the sale (i) all amounts of principal outstanding under the TDH Secured Notes, (ii) such amount of interest which would be due and payable assuming the TDH Secured Notes were held to maturity (minus any amounts of interest previously paid hereunder), and (iii) an additional 10% of the amount of principal outstanding under the TDH Secured Notes within five days of the closing of such sale.
In connection with the issuance of the TDH Secured Notes, the Company issued to each TDH Secured Note holder shares of common stock equal to 20% of the principal amount of such holder’s TDH Secured Note, divided by $96.00. Accordingly, an aggregate of 6,250 shares of common stock were issued to the TDH Secured Note holders on March 16, 2020. These shares were valued at $420,000, or $67.20 per share, which represents fair market value. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the notes.
On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 1,739,580 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $1,101,000 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $598,042 as a result of the exchange.
On November 30, 2020, the Company entered into a debt exchange agreement with another holder of these 12% TDH Secured Notes pursuant to which an aggregate of 158,000 shares of Series B Stock were issued to the noteholder for an aggregate of $99,633 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $58,367 as a result of the exchange.
On February 17, 2021, the Company entered into debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 2,106,825 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $1,256,722 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $850,103 as a result of the exchange.
At December 31, 2022 and 2021, the principal balance of these notes was $204,907 and $330,030, respectively, and the remaining balance on the associated loan discounts was $21,246 and $38,646, respectively.
12% Senior Secured Convertible Notes (Additional Secured Notes)
On March 16, 2020, the Company issued to seven accredited investors (the “Additional Secured Note Lenders”) an aggregate of $1,060,000 of its 12% senior secured convertible notes (the “Additional Secured Notes”) in a private offering pursuant to a subscription agreement with substantially the same terms as the TDH Secured Notes except that the Additional Secured Notes are secured by all of the assets of the Company other than the shares and other assets of TDH and TDAHK, pursuant to a security agreement by and among the Company and the Additional Secured Note Lenders.
Interest on the Additional Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the Additional Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024. Prepayment of the amounts due under the Additional Secured Notes is subject to a prepayment penalty of 4% of the amount prepaid.
The Additional Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $96.00 per share.
In connection with the issuance of the Additional Secured Notes, the Company issued to each Additional Secured Note Lender shares of common stock equal to 20% of the principal amount of such holder’s Additional Secured Note, divided by $96.00. Accordingly, an aggregate of 2,208 shares of common stock were issued. These shares were valued at $148,000, or $67.20 per share, which represents fair market value. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.
On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of 1,236,350 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $782,500 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $424,375 as a result of the exchange.
On February 17, 2021, the Company entered into debt exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of 288,350 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $182,500 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $97,077 as a result of the exchange.
At December 31, 2022 and 2021, the principal balance of these notes was $38,932, and $63,098, respectively, and the remaining balance on the associated loan discounts was $4,018 and $7,343, respectively.
Future Minimum Principal Payments
The principal repayments based upon the maturity dates of the Company’s borrowings for each of the next five years are as follows:
Schedule of future debt maturity payments
$ 520,793
$ 76,046
$ -
$ -
$ -
2028 and thereafter $ -
14. DERIVATIVE LIABILITY
On January 20, 2022, the Company closed a Second Tranche transaction with L1 Capital, as described within Note 12 (“Convertible Notes”). The terms of the transaction included a provision that in the event the stock price is below $16.20 (the “Conversion Price”) at the time for so long as stock price continues below the Conversion Price, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the stock prices elevate back to the normal Conversion Price. On May 9, 2022, stock price fell below $16.20 and the default provision was triggered.
As a result of the May 9, 2022 triggering event, the Company recorded a derivative liability for $1,052,350 which represents the fair value transferred to the note holder from the down round feature being triggered. The fair value of derivative liability was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:
Schedule of assumptions
May 9, 2022
Stock price $ 17.10
Strike price 16.20
Risk-free rate 2.12%
Annualized volatility 150%
Forecast horizon in years 1.20
Alternative Conversion Discount 20.0%
Maximum Shares to be Delivered 108,025
During the year ended December 31, 2022, L1 Capital converted $1,750,000 of the Second Tranche convertible note for 108,025 shares and a cash settlement of $1,146,901, resulting in a $143,598 loss on settlement of derivative.
Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood or in the volatility assumptions would result in a higher (lower) fair value measurement.
15. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, non on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, include the Company’s own credit risk.
The Company applied FASB Accounting Standards Codification (“ASC”) 820 - Fair Value Measurement, which provides guidance for using fair value to measure assets and liabilities by defining fair value and establishing the framework for measuring fair value. ASC 820 applies to financial and nonfinancial instruments that are measured and reported on a fair value basis. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair value hierarchy requires the use of observable market data when available and consists of the following levels:
· Level 1 - Unadjusted inputs based on quoted markets for identical assets or liabilities.
· Level 2 - Observable inputs, either direct or indirect, not including Level 1 measurements, corroborated by market data or based upon quoted prices in non-active markets
· Level 3 - Unobservable inputs that reflect management’s best assumptions of what market participants would use in valuing the asset or liability.
Contingent Consideration
The fair value of the Company’s contingent consideration payable was based on the Company’s evaluation as to the probability and amount of any earn-out that could have ultimately been payable. The Company utilizes a third-party valuation firm to assist in the calculation of the contingent consideration at the acquisition date. The Company evaluates the forecast of the acquired entity and the probability of earn-out provisions being achieved when it evaluates the contingent consideration recorded at initial acquisition date and at each subsequent reporting period. The fair value of contingent consideration is measured at each reporting period and adjusted as necessary. The Company evaluates the terms in contingent consideration arrangements provided to former owners of acquired companies who become employees of the Company to determine if such amounts are part of the purchase price of the acquired entity or compensation. Because the fair value measurements relating to the contingent consideration liabilities are subject to management judgment, measurement uncertainty is inherent in the valuation of the contingent consideration liabilities as of the reporting date.
Derivative Liability
The fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer to Note 14 (“Derivative Liability”), for a further discussion of the measurement of fair value of the derivatives and their underlying assumptions.
The fair value of the Company’s financial instruments carried at fair value at December 31, 2022 and 2021 are as follows:
Schedule of financial instruments
December 31, 2022
Total Level 1 Level 2 Level 3
Liabilities:
Contingent Purchase Consideration $ - $ - $ - $ -
Total Liabilities $ - $ - $ - $ -
December 31, 2021
Total Level 1 Level 2 Level 3
Liabilities:
Contingent Purchase Consideration $ 5,586,493 $ - $ - $ 5,586,493
Total Liabilities $ 5,586,493 $ - $ - $ 5,586,493
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities during the years ended December 31, 2022 and 2021:
Schedule of changes in the fair value financial liabilities
Level 3 Financial Liabilities for the Year Ended December 31, 2022
Balance January 1, 2022 Realized (Gains) Losses Additions Settlements Unrealized (Gains) Losses Balance December 31, 2022
Liabilities:
Derivative Liabilities $ - $ 143,598 $ 1,052,350 $ (1,146,901 ) $ (49,047 ) $ -
Contingent Purchase Consideration 5,586,493 - - - (5,586,493 ) -
Total Liabilities $ 5,586,493 $ 143,598 $ 1,052,350 $ (1,146,901 ) $ (5,635,540 ) $ -
Level 3 Financial Liabilities for the Year Ended December 31, 2021
Balance January 1, 2021 Realized (Gains) Losses Additions Settlements Unrealized (Gains) Losses Balance December 31, 2021
Liabilities:
Contingent Purchase Consideration $ - $ - $ 5,586,493 $ - $ - $ 5,586,493
Total Liabilities $ - $ - $ 5,586,493 $ - $ - $ 5,586,493
16. INCOME TAXES
The following table sets forth the components of income tax expense (benefit) for the years ended December 31, 2022 and 2021:
Schedule of income tax expense (benefit)
December 31,
December 31,
Current:
Federal
$ -
$ -
State and local
-
-
Foreign
-
-
Total current
-
-
Deferred:
Federal
-
-
State and local
-
-
Foreign
446,178
21,042
Total deferred
446,178
21,042
Total
$ 446,178
$ 21,042
The following table sets forth a reconciliation of income tax expense (benefit) at the federal statutory rate to recorded income tax expense (benefit) for the years ended December 31, 2022 and 2021:
December 31,
December 31,
Computed tax at the expected statutory rate 21.00% 21.00%
State and local income taxes, net of federal benefit 0.67% -
Permanent differences -14.58% -
Foreign deferred tax adjustment -1.36% -
Noncontrolling interest -0.56% -
Foreign tax differential 0.10% -
Change in valuation allowance -5.27% -21.20%
Total 0.00% -0.20%
The following tables set forth the components of income taxes payable at December 31, 2022 and 2021:
Schedule of income tax payable
December 31,
December 31,
Federal $ - $ -
State and local - -
Foreign - -
Total $ - $ -
The following tables set forth the components of deferred income taxes at December 31, 2022 and 2021:
Schedule of deferred income taxes
December 31,
December 31,
Non-current deferred tax assets:
Retirement benefits
$ 73,756
$ 57,714
Write down of investment(s)
49,636
43,325
Deferred revenue net
84,126
58,477
Other
14,947
15,409
Net operating loss carryforwards
11,351,901
6,937,604
Less: valuation allowance
(11,574,366 )
(6,646,897 )
Total non-current deferred tax asset
-
465,632
Total deferred tax asset
$ -
$ 465,632
Certain prior year deferred income tax balances have been reclassified to conform with the current year presentation. The changes do not have any financial impact on the Company’s consolidated financial statements.
As of December 31, 2022, the Company had federal, state and foreign net operating loss carryforwards of approximately $49.9 million, $6.7 million, and $2.0 million, respectively. Approximately $20.7 million of these NOL's begin to expire in 2032 and $29.6 million currently do not expire. The $6.7 million of state NOL's do not expire and the foreign NOL's begin to expire in 2023. The federal and state NOL's may be subject to limitation under IRS Sec. 382, the analysis of which is not yet complete. The Company has established a full valuation allowance against the US federal, state and foreign NOL carryforwards as well as its other US and foreign deferred tax assets based on an assessment that it is more likely than not that the deferred tax assets will not be realized in future years.
The Company remains subject to examination in federal, state and foreign jurisdictions in which the Company conducts its operations and files tax returns. These tax years range from 2016 through 2022. The Company believes that the results of current or any prospective audits will not have a material effect on its financial position or results of operations.
The Company has made its assessment of the level of tax authority for each tax position, including the potential application of interest and penalties, based on the technical merits and determined that no unrecognized tax benefits associated with the tax positions exist.
17. STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue 25,000,000 shares of preferred stock, par value of $0.001 per share.
Series A Preferred Stock
On February 22, 2019, the Company designated 2,000,000 shares of its preferred stock as 10% Series A convertible preferred stock, par value $0.001 per share (“Series A Stock”).
At December 31, 2022 and December 31, 2021, the Company had no shares of Series A Stock issued and outstanding.
Series B Preferred Stock
On August 4, 2020, the Company filed with the Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series B Stock designating 10,000,000 shares as Series B Preferred Stock (the “Series B Stock”).
On February 17, 2021, the Company entered into debt exchange agreements with holders of three of the Company’s convertible promissory notes in the aggregate amount of $1,700,905 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders exchanged the outstanding notes, and all amounts owed by the Company thereunder, for an aggregate of 2,564,175 shares of the Company’s Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid in full and the notes were cancelled.
On February 17, 2021, the Company entered into subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 300,000 shares of Series B Stock for aggregate gross proceeds of $300,000.
On March 31, 2021, the Company entered into subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 650,000 shares of Series B Stock for aggregate gross proceeds of $650,000.
On March 31, 2021, the Company issued 75,000 shares of Series B Stock with a fair market value of $75,000 to its attorneys for legal services rendered.
On May 20, 2021, the Company entered into exchange agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed to exchange all of the issued and outstanding shares of Series B Stock for shares of the Company’s newly designated Series C Stock, on a one for one basis. As a result of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059 shares of Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
At December 31, 2022 and 2021, the Company had no shares of Series B Stock issued and outstanding, respectively.
Series C Preferred Stock
On May 20, 2021, the Company filed with the Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series C Stock designating 10,000,000 shares as Series C Preferred Stock (the “Series C Stock”). The Series C Stock ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.
The holder may, at any time after the 6-month anniversary of the issuance of the shares of Series C Preferred Stock, convert such shares into common stock at a conversion rate of $57.60 per share. In addition, the Company may, at any time after the issuance of the shares, convert any or all of the outstanding shares of Series C Preferred Stock at a conversion rate of $57.60 per share.
Each share of Series C Stock entitles the holder to 1.5625 votes for each share of Series C Stock. The consent of the holders of at least two-thirds of the shares of Series C Stock is required for the amendment to any of the terms of the Series C Stock, to create any additional class of stock unless the stock ranks junior to the Series C Stock, to make any distribution or dividend on any securities ranking junior to the Series C Stock, to merge or sell all or substantially all of the assets of the Company or acquire another business or effectuate any liquidation of the Company.
Cumulative dividends accrue on each share of Series C Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in arrears quarterly commencing 90 days from issuance. The dividend shall be payable in shares of common stock (a “PIK Dividend”) and are be due and payable on the date on which such PIK Dividend was declared.
Upon a liquidation, dissolution or winding up of the Company, the holders of the Series C Stock are entitled to $1.00 per share plus all accrued and unpaid dividends. No distribution may be made to holders of shares of capital stock ranking junior to the Series C Stock upon a liquidation until Series C stockholders receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series C Stock, may elect to deem a merger, reorganization or consolidation of the Company into or with another corporation, not affiliated with said majority, or other similar transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of in exchange for property, rights or securities distributed to holders thereof by the acquiring person, firm or other entity, or the sale of all or substantially all of the assets of the Company.
On May 20, 2021, the Company entered into exchange agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed to exchange all of the issued and outstanding shares of Series B Stock for shares of Series C Stock, on a one for one basis. As a result of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059 shares of the Company’s Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.
On June 11, 2021, the Company entered into subscription agreements with an accredited investor, pursuant to which the Company sold the investor an aggregate of 100,000 shares of Series C Stock for aggregate gross proceeds of $100,000.
On September 10, 2021, the Company entered into a debt exchange agreement with a holder of a 10% convertible note pursuant to which 85,250 shares of the Company’s Series C Stock was issued for $85,250 of outstanding principal and accrued and unpaid interest.
On January 24, 2022, the Company issued 686 shares of common stock to a stockholder upon the conversion of 39,500 shares of Series C preferred stock.
On July 29, 2022, the Company issued 1,371 shares of common stock to a stockholder upon the conversion of 79,000 shares of Series C preferred stock.
As of December 31, 2022 and 2021, the Company had 9,281,759 shares and 9,400,259 shares of Series C Stock issued and outstanding, respectively.
For the years ended December 31, 2022 and 2021, the Company declared cumulative dividends totaling $735,586 and $459,068, respectively, for amounts accrued on its Series C Stock.
Common Stock
The Company is authorized to issue 500,000,000 shares of common stock, par value of $0.001 per share and had 2,515,290 and 433,518 shares of common stock issued and outstanding as of December 31, 2022 and 2021, respectively.
Reverse Stock Splits
On April 7, 2021, the board of directors of the Company approved, and on April 8, 2021, the Company’s shareholders approved, an increase to the range of the ratio for a reverse stock split to a ratio of no less than 1-for-2 and no more than 1-for-50. On May 6, 2021, the board fixed the ratio for a reverse stock split at 1-for-32 and, on May 7, 2021, the Company filed a certificate of amendment to its articles of incorporation with the Secretary of State of the State of Florida to effect the reverse stock split which became effective as of May 13, 2021. The Company’s common stock began being quoted on the OTCQB on a post-reverse split basis beginning on May 19, 2021.
On October 4, 2022, the Board and shareholders approved the granting of authority to the Board to amend the Company’s articles of incorporation to effect a reverse stock split of the issued and outstanding shares of its common stock, by a ratio of no less than 1-for-2 and no more than 1-for-30, with the exact ratio to be determined by the Board in its sole discretion, and with such reverse stock split to be effective at such time and date, if at all, as determined by the Board in its sole discretion. On December 9, 2022, the Board effected a 1-for-30 reverse stock split in connection with our continued listing of the Company’s common stock on Nasdaq.
The reverse stock split did not have any impact on the number of authorized shares of common stock, which remains at 500,000,000 shares. All share and per share information in this prospectus reflects the reverse stock split of our outstanding common stock at a ratio of 1-for-30.
Registered Offerings
On June 21, 2021, the Company sold an aggregate of 80,321 units (“Units”), at a price to the public of $124.50 per Unit (the “Offering”), each Unit consisting of one share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price of $136.95 per share (the “Warrants”), pursuant to a underwriting agreement, dated as of June 16, 2021 (the “Underwriting Agreement”), between the Company and EF Hutton, division of Benchmark Investments, LLC, as representative (“EF Hutton”) of the several underwriters named in the Underwriting Agreement. In addition, pursuant to the Underwriting Agreement, the Company granted EF Hutton a 45-day option (the “Over-Allotment Option”) to purchase up to 12,048 additional Units, to cover over-allotments in connection with the Offering, which EF Hutton exercised with respect to Warrants exercisable for up to an additional 12,048 shares of common stock. The Company received gross proceeds of approximately $10,000,000 in the Offering, before deducting underwriting discounts and commissions and other offering expenses.
On July 15, 2021, EF Hutton exercised in full the Over-Allotment Option with respect to all 12,048 additional shares of the Company’s common stock for total gross proceeds to the Company of approximately $1,500,000, before deducting underwriting discounts and commissions and other offering expenses.
On December 8, 2022, the Company sold an aggregate of 1,415,682 units (the “Units”) and 314,422 pre-funded units (the “Pre-Funded Units”), with (a) each Unit consisting of: (i) one share of common stock, par value $0.001 per share (the “Common Stock”); and (ii) two warrants (the “Warrants”), each Warrant to purchase one share of Common Stock at $2.89 per share (100% of the offering price per Unit); and (b) each Pre-Funded Unit consisting of: (i) one pre-funded warrant (the “Pre-Funded Warrant”) exercisable for one share of Common Stock at $0.001; and (ii) two Warrants. The Warrants will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. The Pre-Funded Warrants will be exercisable immediately and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. The Warrants and Pre-Funded Warrant will be issued pursuant to a warrant agent agreement (the “Warrant Agent Agreement”) entered into by and between the Company and Equiniti Trust Company, as warrant agent. Pursuant to the Underwriting Agreement, the Company granted the Underwriter a 45-day option to purchase up to an additional 259,515 Units and/or Pre-Funded Units to cover over-allotments. On December 12, 2022 the Underwriter exercised in part, the over-allotment to purchase 495,602 Warrants.
The Company received gross proceeds of approximately $5,000,000 in the Offering, before deducting underwriting discounts and commissions and other offering expenses.
Private Offerings
During the year ended December 31, 2022, the Company we sold 51,498 shares of common stock for gross proceeds of $275,000 to accredited investors in a private offering.
Common Stock Issued as Compensation to Employees, Officers and/or Directors
During the year ended December 31, 2021, the Company issued 5,265 shares of common stock with a fair market value of $410,652 to an officer as compensation.
Common Stock Issued in Exchange for Consulting, Professional and Other Services
During the year ended December 31, 2022, the Company issued 5,950 shares of common stock with a fair market value of $116,736 to contractors for services rendered.
During the year ended December 31, 2021, the Company issued 9,656 shares of common stock with a fair market value of $1,199,135 to contractors for services rendered.
Common Stock Issued in Connection with the Conversion of Convertible Note Principal and Accrued Interest
During the year ended December 31, 2022, the Company issued 299,938 shares of common stock upon the conversion of $5,875,000 in convertible note principal and accrued interest.
During the year ended December 31, 2021, the Company issued 53,161 shares of common stock upon the conversion of $2,048,797 in convertible note principal and accrued interest.
Common Stock Issued in Connection with the Issuance of Convertible Promissory Notes
During the year ended December 31, 2021, the Company issued 592 shares of common stock valued at $39,750 in connection with the issuance of convertible notes.
Common Stock Issued in the Acquisition of a Business
During the year ended December 31, 2021, the Company issued 59,063 shares of common stock valued at $5,000,000 in connection with the acquisition of a business.
Stock Purchase Warrants
Stock purchase warrants are accounted for as equity in accordance with ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
The following table reflects all outstanding and exercisable warrants at December 31, 2022 and 2021.
Schedule of warrants
Number of Warrants Outstanding Weighted Avg. Exercise Price Weighted Avg. Contractual Life (Yrs.)
Balance January 1, 2021 7,654 $ 220.20 1.66
Warrants issued 142,458 $ 125.40
Warrants exercised (8,316 ) $ -
Warrants forfeited (224 ) $ -
December 31, 2021 141,572 $ 132.00 1.75
Warrants issued 4,280,355 $ 3.20
Warrants exercised (279,069 ) $ -
Warrants forfeited (5,678 ) $ -
Balance December 31, 2022 4,137,180 $ 7.29 4.89
All stock warrants are exercisable for a period ranging from three to five years from the date of issuance. See Note 13 - Debt for more information.
During the year ended December 31, 2022, the Company issued 279,069 shares of common stock upon the exercise of 279,069 Pre-Funded Warrants for gross proceeds of $279.
As of December 31, 2022, the outstanding stock purchase warrants had an aggregate intrinsic value of $0.
Stock Options
The following table represents all outstanding and exercisable stock options at December 31, 2022.
Schedule of options
Year Issued
Options
Issued
Options
Forfeited
Options
Outstanding
Vested
Options
Strike
Price
Weighted
Average
Remaining
Life (Yrs.)
8,058
(869 )
7,189
7,189
$ 230.40
0.72
-
748.80
0.33
6,950
-
6,950
2,317
$ 89.40
3.58
Total
15,070
(869 )
14,201
9,568
$ 163.68
1.23
On July 29, 2021, the Company granted stock options to purchase an aggregate of 6,950 shares to new employees at an exercise price of $89.40. The options vest annually in equal installments over a three-year period and expire in five 5 years from the date of grant. Using the Black Sholes model with a volatility of 326.5%, with no dividends paid since inception and a risk-free interest rate of 0.37%; resulted in stock-based compensation expense of $585,728 which will be amortized over a 36-month period, or $16,270 per month.
During the years ended December 31, 2022 and 2021, the Company recorded $315,332 and $82,910, respectively, in stock-based compensation expense related to stock options. Stock-based compensation expense is reported in selling, general and administrative on the Company’s Consolidated Statement of Operations and Comprehensive Loss.
As of December 31, 2022, the outstanding stock options had an aggregate intrinsic value of $0.
18. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we and our subsidiaries are subject to various pending and potential legal actions, arbitration proceedings, claims, investigations, examinations, regulatory proceedings, information gathering requests, subpoenas, inquiries and matters relating to compliance with laws and regulations (collectively, legal proceedings).
Based on our current knowledge, and taking into consideration our legal expenses, we do not believe we are a party to, nor are any of our subsidiaries the subject of, any legal proceeding that would have a material adverse effect on our consolidated financial condition or liquidity.
See also Note 7 (“Leases”).
See also Note 16 (“Income Taxes”).
19. SUBSEQUENT EVENTS
In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to December 31, 2022 to the date these consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements, except as follows:
PIPE Offering and Related Waiver
On January 25, 2023, the Company consummated a private investment in public equity financing (the “PIPE Offering”) pursuant to the terms of the Securities Purchase Agreement, dated January 25, 2023, as amended (the “2023 SPA”), by and between it and the purchaser named therein (the “2023 SPA Selling Stockholder”) and issued (i) 100,000 shares of common stock; (ii) 1,327,434 warrants (the “Purchase Warrants”) to purchase an aggregate of 2,323,010 shares of common stock; and (iii) 1,227,434 prefunded warrants (the “Pre-Funded Warrants,” and together with the Purchase Warrants, the “Warrants”) to purchase an aggregate of 1,227,434 shares of common stock. The purchase price of each share of common stock and associated Purchase Warrant was $2.26. The purchase of each Pre-Funded Warrant and associated Purchase Warrant was $2.25. The aggregate gross proceeds of the PIPE Offering was approximately $3 million, before deducting fees to the placement agent and other expenses payable by the Company. EF Hutton, division of Benchmark Investments, LLC, acted as the exclusive placement agent in connection with the PIPE Offering.
In connection with the PIPE Offering, the Company entered into a waiver agreement (the “Waiver”) with L1 Capital Global Opportunities Master Fund (“L1”) waiving certain provisions of the Securities Purchase Agreement, dated as of September 14, 2021 (the “2021 SPA”), by and between it and L1. Pursuant to the terms of the Waiver, L1 waived certain provisions of the 2021 SPA and in consideration thereof, the Company (i) issued 150,000 purchase warrants substantially similar to the Purchase Warrants issued in connection with the 2023 SPA; and (ii) paid a cash fee of $50,000 to L1.
The Purchase Warrants are immediately exercisable for $2.26 per share of common stock, subject to certain adjustments, including with respect to stock dividends, splits, subsequent rights offerings, pro rata distributions and a Fundamental Transaction (as defined in the purchase warrant agreement (the “Purchase Warrant Agreement”)), until the fifth anniversary of the original issuance date (the “Expiration Date”). The Prefunded Warrants are immediately exercisable for $0.01 per share of common stock, subject to certain adjustments, including with respect to stock dividends, splits, subsequent rights offerings, pro rata distributions and a Fundamental Transaction (as defined in the Prefunded Warrant), until all of the Prefunded Warrants are exercised in full. The exercise of the Warrants is subject to beneficial ownership limitations.
Pursuant to the 2023 SPA, the Company is obligated to hold a special stockholders’ meeting no later than 60 days following the date of the 2023 SPA to solicit the approval of the issuance of the shares of common stock, Warrants and the shares of common stock underlying the Warrants in compliance with the rules of the Nasdaq Stock Market (without regard to any limitations on exercise set forth in the Purchase Warrant Agreement or the prefunded warrant agreement (the “Prefunded Warrant Agreement”). On March 27, 2023, the Company held a virtual special meeting of stockholders, and at the meeting, the issuance of the securities in compliance with the rules of the Nasdaq Stock Market has been approved.
In connection with the PIPE Offering, the Company entered into a Registration Rights Agreement with the Purchasers, dated January 25, 2023 (the “Registration Rights Agreement”). The Registration Rights Agreement provides that we shall file a registration statement covering the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) with the SEC no later than the 7th calendar day following the date of the Registration Rights Agreement, and have the registration statement declared effective by the SEC as promptly as possible after the filing thereof, but in any event no later than the 30th calendar day following the date of the Registration Rights Agreement, or in the event of a “full review” by the SEC, the 45th day following the date of the Registration Rights Agreement. On February 2, 2023, the Company filed the registration statement, and on February 9, 2023, the registration statement was declared effective by the SEC.
Notice of Delisting of Failure to Satisfy a Continued Listing Rule or Standard
On April 10, 2023, the Company received a deficiency letter (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying it that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days, it was not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). The Notice had no immediate effect on the continued listing status of the Company’s common stock on Nasdaq, and, therefore, its listing remains fully effective. The Company was provided initial compliance period of 180 calendar days from the date of the Notice, or until October 9, 2023, to regain compliance with Nasdaq Listing Rule 5550(a)(2).

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On February 17, 2022, we dismissed BF Borgers CPA PC as the Company's independent registered public accounting firm, effective as of such date.
The audit reports of BF Borgers CPA PC on the consolidated financial statements of the Company for each of the two most recent fiscal years ended December 31, 2020 and December 31, 2019 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The audit reports for the years ended December 31, 2020 and December 31, 2019 contained an explanatory paragraph disclosing the uncertainty regarding the Company’s ability to continue as a going concern.
During the Company's two most recent fiscal years ended December 31, 2020 and December 31, 2019 and during the subsequent interim period from January 1, 2021 through February 17, 2022, (i) there were no disagreements with BF Borgers CPA PC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures that, if not resolved to BF Borgers CPA PC's satisfaction, would have caused BF Borgers CPA PC to make reference to the subject matter of the disagreement in connection with its reports and (ii) there were no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
On February 17, 2022, we engaged Rosenberg Rich Baker Berman P.A. as the Company's independent registered public accounting firm for the year ending December 31, 2021.
During the two most recent fiscal years ended December 31, 2020 and December 31, 2019 and during the subsequent interim period from January 1, 2021 through February 17, 2022, neither the Company nor anyone on its behalf consulted Rosenberg Rich Baker Berman P.A. regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report nor oral advice was provided to the Company that Rosenberg Rich Baker Berman P.A. concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a “disagreement” or a “reportable event”, each as defined in Regulation S-K Item 304(a)(1)(iv) and 304(a)(1)(v), respectively.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2022, the end of the period covered by this Annual Report.
These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial, as appropriate officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2022.
The Company’s assessment identified certain material weaknesses which are set forth below:
Functional Controls and Segregation of Duties
Because of the Company’s limited resources, there are limited controls over information processing. Additionally, there is inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation, we will need to hire additional staff to provide greater segregation of duties.
Accordingly, as the result of identifying the above material weakness we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements may not be prevented or detected on a timely basis by the Company’s internal controls.
Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management continues to take actions to remedy these weaknesses, including the process of hiring additional staff to create the necessary segregation of duties to improve controls over information processing. Additionally, management has initiated the process of building a risk management framework with plans to embed the principles of this framework across all aspects of the business.
Despite the existence of the material weakness, we have concluded that the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. Additionally, the material weakness did not result in any restatements of our consolidated financial statements or disclosures for any prior period.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and include those policies and procedures that:
· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, our management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in May 2013.
Based on its assessment, management has concluded that as of December 31, 2022, our disclosure controls and procedures and internal control over financial reporting were not effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.
Remediation Plan
Management has implemented remediation steps to address the material weakness and to improve our internal control over financial reporting. Specifically, we (i) expanded and improved our review process for complex transactions and related accounting standards, including the identification of third-party professionals with whom to consult regarding the application of complex accounting matters, (ii) hired qualified personnel to improve the oversight of our accounting operations, and (iii) established new processes and policies. While we believe that these remediation actions will improve the effectiveness of our internal control over financial reporting, the material weakness identified will not be considered remediated until the controls operate for a sufficient period of time, and we cannot assure you that the measures we have taken to date, or any measures we may take in the future will be sufficient to remediate the material weakness we have identified or avoid potential future material weaknesses.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our fourth fiscal quarter, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9b. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth information regarding our current directors and executive officers:
Name
Age
Position
Darren M. Marks
Chief Executive Officer, President and Director
Jason A. Williams
Chief Financial Officer, Treasurer and Secretary
Norman Rosenthal
Director
Robert Stevens
Director
Dr. Thomas J. Rutherford
Director
Our directors hold office until the next annual meeting of shareholders of the Company and until their successors have been elected and qualified. Our officers are elected by the Board and serve at the discretion of the Board.
Biographies
Darren M. Marks, Chief Executive Officer and President
Darren Marks has served as our Chief Executive Officer and director since June 2012 and as our President since the Share Exchange on August 17, 2017. From July 6, 2015 until the Share Exchange, Mr. Marks was chairman, chief executive officer, president and a director of Grom Holdings, Inc. From January 2011 to February 2016, Mr. Marks was the President of DNA Brands, Inc., a beverage distributor and formerly a public company quoted on the OTCBB (“DNA Brands”). Mr. Marks has more than 20 years of executive management experience. In 1991, Mr. Marks co-founded and served as Vice-President of Sims Communications, Inc. a telecommunications company that formerly traded on the Nasdaq (“Sims”), where he was responsible for the creation, design, and funding of a national telecommunications program for clients such as Alamo Rental Car and the American Automobile Association. Mr. Marks attended the University of Florida/Santa Fe Community College from 1986 to 1988.
Mr. Marks’ management and public company experience and his role as Chief Executive Officer and President of the Company, led to the conclusion that he should serve as a director.
Jason A. Williams, Chief Financial Officer, Treasurer and Secretary
Jason Williams has served as our Chief Financial Officer, Secretary and Treasurer since July 26, 2021. Mr. Williams has more than 20 years of leadership experience in accounting, finance, and operations. Before joining the Company, Mr. Williams served as President of WM Consulting, LLC, offering executive-level, strategic and financial consulting services since 2016. Prior to this, Mr. Williams served as Chief Financial Officer for two publicly traded companies and in varying financial leadership roles with several other entities. Mr. Williams earned his Bachelor of Science in Accounting from Florida Atlantic University in 1995 and is a Certified Public Accountant (inactive).
Dr. Thomas J. Rutherford, Director
Dr. Thomas J. Rutherford has served as a director of the Company since August 2017 and as a director of Grom Holdings Inc. since July 2015. Dr. Rutherford is an oncologist and a national expert in cancer, with more than 30 years of highly specialized surgical and clinical expertise in gynecologic cancer care. Dr. Rutherford has been the Director of Oncology for South Florida University in Tampa, Florida since January 2017. Prior thereto, from January 2015 through December 2016, Dr. Rutherford was the Director of Oncology for Connecticut Oncology, a Division of Women’s Health of Connecticut and Director of Cancer Services for Western Connecticut Health Network leading more than 100 physician subspecialists including surgeons, medical oncologists and radiation oncologists. Dr. Rutherford served as Chair of Gynecological Oncology at Yale University Medical School until January 2015. Dr. Rutherford has served on the Strategic Advisory Board at Mira Dx, Inc., a Delaware corporation. Dr. Rutherford practiced at Yale Oncology and served as Professor of Oncology and Director of Oncology Fellowship at Yale University School of Medicine from July 1993 through December 2014. Dr. Rutherford received a Bachelor of Science degree in 1976 from Roanoke College, a Master of Science degree from John Carroll University in 1979 and a Ph.D. from the Medical College of Ohio in 1989.
Mr. Rutherford’s operational experience led to the conclusion that he should serve as a director.
Robert Stevens, Director
Robert Stevens has served as a director since June 2018. Mr. Stevens founded Somerset Capital Ltd., a private capital firm that employs industry-specific skillsets to make strategic investments in distressed and turnaround situations as well as merger and direct investments in private and pre-public companies and has served as its president and managing director since 2001. Mr. Stevens also serves as a court-appointed receiver. Mr. Stevens also served as Managing Director of Technology Partners, a private equity and M&A firm, from 2010 to 2013.
Mr. Stevens financial experience led to the conclusion that he should serve as a director.
Norman Rosenthal, Director
Norman Rosenthal has served as a director since June 2018. Mr. Rosenthal founded Tempest Systems Inc., a technology consultancy firm which offers business development, relationship management and competitive intelligence services. and has served as its chief executive officer since 1986. Mr. Rosenthal has also served in senior management/advisory positions at Micro Focus International plc and Computer Associates International, Inc.
Mr. Rosenthal’s financial experience led to the conclusion that he should serve as a director.
Significant Employees
Russell Hicks, President and Chief Content Officer, Curiosity Ink Media and President, Top Draw Animation
Russell Hicks has served as our President and Chief Content Officer of Curiosity Ink Media and President of Top Draw Animation since September 26, 2021. Before joining the Company, Mr. Hicks founded and served as Chief Creative Officer for Curiosity Ink Media since April 2018. Prior to this, Mr. Hicks served as President of Content Development and Production for Nickelodeon, and as Chief Creative Officer of Viacom. Mr. Hicks attended California State University, Fullerton where he studied Art & Illustration.
Jared Wolfson, Chief Executive Officer, Curiosity Ink Media and Executive Vice President, Top Draw Animation
Jared Wolfson has served as our Chief Executive Officer of Curiosity Ink Media and Executive Vice President of Top Draw Animation since September 26, 2021. Before joining the Company, Mr. Wolfson served as Senior Vice President of Media & Entertainment for Jakks Pacific from January 2018 through September 2021. Prior to this, Mr. Wolfson served as Senior Vice President of Entertainment Licensing and Business Development for Skyrocket Toys, and as President of Franchise Development, Content Distribution and Marketing of ZAG Entertainment. Mr. Wolfson earned his Bachelor of Arts in Economics from the University of California and his Master of Business Administration in Entertainment & Marketing from the University of Southern California.
Board Committees
On June 1, 2018, concurrently with the appointment of two independent directors, Mr. Stevens and Mr. Rosenthal, we formed an Audit Committee, a Compensation Committee, and a Nominating and Governance Committee.
Mr. Stevens was appointed to the Nominating and Governance Committee, Audit Committee and Compensation Committee. Mr. Stevens was appointed chair of the Audit Committee and “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.
Mr. Rosenthal was appointed to the Nominating and Governance Committee, Audit Committee and Compensation Committee. Mr. Rosenthal was appointed the chair of the Nominating and Governance Committee.
Dr. Rutherford was appointed to the Nominating and Governance Committee, Audit Committee and Compensation Committee. Dr. Rutherford was appointed the chair of the Compensation Committee.
Audit Committee
The Audit Committee is composed of three independent directors: Robert Stevens (Chair), Thomas Rutherford and Norman Rosenthal. Mr. Stevens is also an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. Each member of the Audit Committee is an independent director as defined by the rules of the SEC and Nasdaq. The Audit Committee has the sole authority and responsibility to select, evaluate and engage independent auditors for the Company.
The Audit Committee’s primary responsibilities are to:
• review our accounting policies and issues which may arise in the course of the audit of our financial statements; and
• select and retain our independent registered public accounting firm.
The Audit Committee meets at least on a quarterly basis to discuss with management the annual audited financial statements and quarterly financial statements and meets from time to time to discuss general corporate matters.
Compensation Committee
The Compensation Committee is composed of three independent directors: Thomas Rutherford (Chair), Robert Stevens and Norman Rosenthal.
The general responsibilities of our Compensation Committee include:
• approving the compensation of our President and Chief Executive Officer and all other executive officers; and
• approving all equity grants.
The Compensation Committee meets in executive session to determine the compensation of the Chief Executive Officer of the Company. In determining the amount, form, and terms of such compensation, the Committee considers the annual performance evaluation of the Chief Executive Officer conducted by the Board in light of company goals and objectives relevant to Chief Executive Officer compensation, competitive market data pertaining to Chief Executive Officer compensation at comparable companies, and such other factors as it deems relevant, and is guided by, and seeks to promote, the best interests of the Company and its shareholders.
In addition, subject to existing agreements, the Compensation Committee determines the salaries, bonuses, and other matters relating to compensation of the executive officers of the Company using similar parameters. It sets performance targets for determining periodic bonuses payable to executive officers. It also reviews and makes recommendations to the Board regarding executive and employee compensation and benefit plans and programs generally, including employee bonus and retirement plans and programs (except to the extent specifically delegated to a Board appointed committee with authority to administer a particular plan). In addition, the Compensation Committee approves the compensation of non-employee directors and reports it to the full Board.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee consists of Norman Rosenthal (Chair), Thomas Rutherford and Robert Stevens. All members must satisfy the independence requirements of the Exchange Act, the rules adopted by the SEC thereunder and the corporate governance and other listing standards of the Nasdaq as in effect from time to time.
The duties and responsibilities of the Nominating and Corporate Governance Committee include the following:
• develop and recommend to the Board a set of corporate governance guidelines and from time to time, review and reassess the adequacy of such guidelines;
• identify, review and recommend to the Board individuals qualified to become members of the Board; and
• recommend to the Board nominating policies and procedures.
The Nominating and Corporate Governance Committee identifies individuals qualified to become members of the Board, consistent with criteria approved by the Board,; recommends to the Board the director nominees for the next annual meeting of stockholders or special meeting of shareholders at which directors are to be elected; recommends to the Board candidates to fill any vacancies on the Board; develops, recommends to the Board, and reviews the corporate governance guidelines applicable to the Company; and oversees the evaluation of the Board and management.
In recommending director nominees for the next annual meeting of shareholders, the Nominating and Governance Committee ensures the Company complies with its contractual obligations, if any, governing the nomination of directors. It considers and recruits candidates to fill positions on the Board, including as a result of the removal, resignation or retirement of any director, an increase in the size of the Board or otherwise. The Committee conducts, subject to applicable law, any and all inquiries into the background and qualifications of any candidate for the Board and such candidate’s compliance with the independence and other qualification requirements established by the Committee. The Committee also recommends candidates to fill positions on committees of the Board.
In selecting and recommending candidates for election to the Board or appointment to any committee of the Board, the Nominating and Governance Committee does not believe that it is appropriate to select nominees through mechanical application of specified criteria. Rather, the Nominating and Governance Committee shall consider such factors at it deems appropriate, including, without limitation, the following: personal and professional integrity, ethics and values; experience in corporate management, such as serving as an officer or former officer of a publicly-held company; experience in the Company’s industry; experience as a board member of another publicly-held company; diversity of expertise and experience in substantive matters pertaining to the Company’s business relative to other directors of the Company; practical and mature business judgment; and composition of the Board (including its size and structure).
The Nominating and Governance Committee develops and recommends to the Board a policy regarding the consideration of director candidates recommended by the Company’s shareholders and procedures for submission by stockholders of director nominee recommendations.
In appropriate circumstances, Nominating and Corporate Committee, in its discretion, will consider and may recommend the removal of a director, in accordance with the applicable provisions of the Company’s articles of incorporation, as amended, and amended bylaws. If the Company is subject to a binding obligation that requires director removal structure inconsistent with the foregoing, then the removal of a director shall be governed by such instrument.
The Nominating and Governance Committee oversees the evaluation of the Board and management. It also develops and recommends to the Board a set of corporate governance guidelines applicable to the Company, which the Nominating and Governance Committee shall periodically review and revise as appropriate. In discharging its oversight role, the Nominating and Governance Committee is empowered to investigate any matter brought to its attention.
Family Relationships
There are no family relationships among any of our officers or directors.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive, financial and accounting officers (or persons performing similar functions) and have filed a copy of such Code as Exhibit 14.1 to this Annual Report.
Insider Trading Policies and Procedures
We have adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of our securities by directors, officers and employees, or us, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to us.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles. Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined. In addition, having one person serve as both Chairman and Chief Executive Officer eliminates the potential for confusion and provides clear leadership for the Company, with a single person setting the tone and managing our operations.
Involvement in Certain Legal Proceedings
To our knowledge, our directors and executive officers have not been involved in any of the following events during the past ten years:
1. any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;
4. being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
5. being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
6. being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors and persons beneficially owning more than ten percent of our equity securities (“Reporting Persons”), to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely upon a review of the copies of these reports and representations from the Reporting Persons that no other reports were required, we believe that, during our fiscal year ended December 31, 2021, the Reporting Persons timely filed all such reports.
Changes in Nominating Process
There are no material changes to the procedures by which security holders may recommend nominees to our Board.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our Chief Executive Officer and the other executive officers with compensation exceeding $100,000 during 2022 (each a "Named Executive Officer").
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary
($)
Bonus
($)
Stock Awards
($)
Option Awards ($) Non-equity Incentive Plan Compensation ($) Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)
All Other
Compensation ($)
Total
($)
Darren Marks $ 300,000 $ - $ - $ - $ - $ - $ - $ 300,000
Chief Executive Officer and President $ 300,000 $ 7,500 $ 410,652 $ - $ - $ - $ - $ 718,152
Melvin Leiner (1) $ 314,375 $ - $ - $ - $ - $ - $ - $ 314,375
Chief Operating Officer and Executive Vice President $ 300,000 $ 7,500 $ - $ - $ - $ - $ - $ 307,500
Jason Williams (2) $ 228,000 $ - $ - $ - $ - $ - $ - $ 228,000
Chief Financial Officer, Treasurer and Secretary $ 103,000 $ 7,500 $ - $ - $ - $ - $ - $ 110,500
(1) As of April 22, 2022, Mr. Leiner resigned as Chief Operating Officer and Executive Vice President.
(2) As of July 26, 2021, Mr. Williams was appointed as Chief Financial Officer, Treasurer and Secretary.
Employment Agreements
On June 1, 2016, the Company entered into an employment agreement with Darren Marks pursuant to which Mr. Marks serves as the Company’s Chief Executive Officer. The employment agreement is for an initial term of three years, which term shall be automatically extended for successive and additional two-year periods unless either party shall provide written notice of termination at least 90 days prior to the end of the then-current term. Under the agreement, Mr. Marks is entitled to an annual base salary of $245,000 (subject to a minimum 5% annual increase each year commencing on January 1, 2017) and an annual incentive bonus of up to an 80% of his base salary. The employment agreement may be terminated by the Company for “cause” (as such term is defined in the agreement), in which case Mr. Marks shall be entitled to his base salary up to the date of termination, without “cause” by the Company or for “good reason”( as such term is defined in the agreement), by Mr. Marks upon 90 days’ prior written notice, in which case Mr. Marks shall be entitled to base salary and health benefits for 18 months from the expiration of the agreement and shall have 10 years to exercise any outstanding stock options. The agreement provides that Mr. Marks has the obligation to mitigate any such severance with any income he may subsequently receive. The agreement also provides that Mr. Marks shall not compete with the Company and shall keep all Company information confidential for one year after the term of the agreement.
On June 1, 2016, the Company entered into an employment agreement with Melvin Leiner pursuant to which Mr. Leiner serves as the Company’s Executive Vice President and Chief Financial Officer. The employment agreement is for an initial term of three years, which term shall be automatically extended for successive and additional two-year periods unless either party shall provide written notice of termination at least 90 days prior to the then current term Under the agreement Mr. Leiner is entitled to an annual base salary of $237,500 (subject to a minimum 5% annual increase each year commencing on January 1, 2017) and an annual incentive bonus of up to 80% of his base salary. The employment agreement may be terminated by the Company for “cause” (as such term is defined in the agreement), in which case Mr. Leiner shall be entitled to his base salary up to the date of termination, without “cause” by the Company or for “good reason”( as such term is defined in the agreement), by Mr. Leiner upon 90 days’ prior written notice, in which case Mr. Leiner shall be entitled to base salary and health benefits for 18 months from the expiration of the agreement and shall have 10 years to exercise any outstanding stock options. The agreement provides that Mr. Leiner has the obligation to mitigate any such severance with any income he may subsequently receive. The agreement also provides that Mr. Leiner shall not compete with the Company and shall keep all Company information confidential for one year after the term of the agreement.
On April 22, 2022, the Company entered into an Executive Separation Agreement with Melvin Leiner (the “Separation Agreement”), pursuant to which Mr. Leiner retired from his positions as its Executive Vice President and Chief Operating Officer. Pursuant to the Separation Agreement, Mr. Leiner’s employment with the Company ended on April 22, 2022, and Mr. Leiner is to receive separation payments over a 9-month period equal to his base salary, as well as certain limited health benefits.
On the same day, Mr. Leiner resigned from the Company’s board of directors, effective immediately. Mr. Leiner did not resign as a result of any disagreement with the Company on any matter relating to its operations, policies or practices.
Director Compensation
2022 Director Compensation Table
Name
Fees
Earned
or Paid
in Cash Stock
Awards Option
Awards Non-Equity
Incentive Plan
Compensation Change in Pension Value and Nonqualified
Deferred
Compensation Earnings All Other
Compensation Total
Thomas Rutherford $ 6,000 $ - - - - - $ 6,000
Robert Stevens $ 6,000 $ - - - - - $ 6,000
Norman Rosenthal $ 6,000 $ - - - - - $ 6,000
All directors are reimbursed for out-of-pocket expenses related to their Board duties. Our employee director, Mr. Marks, does not receive any compensation for serving as a director. Our three independent directors receive $1,500 per quarter for their services.
Employee Benefit Plans
The Company currently has no employee benefit plans.
2020 Equity Incentive Plan
On September 14, 2020, the Board and on September 16, 2020, the shareholders approved the Company’s 2020 Equity Incentive Plan (the “Plan”). The Plan provides for the grant of nonqualified stock options, incentive stock options, restricted stock awards, restricted RSUs, performance units and performance shares (which may be designed to comply with Section 162(m) of the Internal Revenue Code and stock appreciation rights to officers, directors, key employees, consultants and directors who provide services to the Company. The Company has reserved 62,500 shares for issuance under the Plan. As of April 14, 2023, an aggregate 5,265 shares of common stock and 6,950 options to purchase shares of common stock have been issued under the Plan.
Outstanding Equity Awards
The Company’s Named Executive Officers had no outstanding equity awards on December 31, 2022.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists, as of April 7, 2023, the number of shares of common stock beneficially owned by (i) each person, entity or group (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) known to the Company to be the beneficial owner of more than 5% of the outstanding common stock; (ii) each of our directors (iii) each of our Named Executive Officers and (iv) all executive officers and directors as a group. Information relating to beneficial ownership of common stock by our principal stockholders and management is based upon information furnished by each person using "beneficial ownership" concepts under the rules of the SEC. Under these rules, a person is deemed to be a beneficial owner of a security if that person directly or indirectly has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to dispose or direct the disposition of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the SEC rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary interest. Except as noted below, each person has sole voting and investment power with respect to the shares beneficially owned and each stockholder's address is c/o Grom Social Enterprises, Inc., 2060 NW Boca Raton Blvd., Suite #6, Boca Raton, Florida, 33431.
The percentages below are calculated based on 7,288,177 shares of common stock and 9,281,809 shares of Series C Stock issued and outstanding as of April 7, 2023.
Name of Beneficial Owner
Common
Stock
Percentage
of
Common
Stock
Series C
Preferred
Stock
Percentage
of
Series C
Stock
Combined
Voting
Power
Executive Officers and Directors:
Darren Marks
23,721 (1)
*
-
-
66.9% (9)
Melvin Leiner
(2)
*
-
-
*
Jason Williams
*
-
-
*
Robert Stevens
(3)
*
-
-
*
Norman Rosenthal
(4)
*
-
-
*
Thomas J. Rutherford
2,567
*
-
-
*
All officers and directors as a group (6 persons)
27,774 (5)
*
-
-
67.0% (10)
5% or Greater Holders:
Denis J. Kerasotes
31 Fairview Lane
Springfield, Illinois 62711
** (6)
**
3,816,105 (11)
41.1%
-
Condor Equities, LLC (6)
2535 Webb Girth Road
Gainesville, Georgia 30507
* (8)(13)
*
3,131,300 (11)
33.7%
-
Section 3 Developments (7)
2415 Alta Monte Drive
Cedar Park, Texas 78613
*
*
520,000 (11)
5.6%
-
Eileen F. Kerasotes Family Trust (8)
4747 County Road 501
Bayfield, CO 81122
*
*
472,420 (11)
5.0%
-
__________
*Less than 1%
**Less than 5%
(1) Represents 23,721 shares of common stock held by Family Tys, LLC (“Family Tys”), of which Mr. Marks is the managing member and over which Mr. Marks has voting and dispositive power. Does not include an aggregate of (i) 9,281,809 shares of Series C Stock (with 1.5625 votes per share, or 14,502,828 votes in the aggregate) and (ii) 58,907 shares, for which Mr. Marks has a voting proxy until May 20, 2023.
(2) Represents 596 shares of common stock held by 4 Life LLC (“4 Life”), of which Mr. Leiner is the managing member and over which Mr. Leiner has voting and dispositive power. On April 22, 2022, Melvin Leiner resigned from his positions as the Company’s Chief Operating Officer, Executive Vice President and Director.
(3) Represents shares held by Thistle Investments, LLC, of which Mr. Stevens is managing member and over which Mr. Stevens has sole voting and dispositive power.
(4) Represents shares held by Tempest Systems, Inc., of which Mr. Rosenthal is chief executive officer and over which Mr. Rosenthal has sole voting and dispositive power.
(5) Does not include an aggregate of (i) 9,281,809 shares of Series C Stock (with 1.5625 votes per share, or 14,502,828 votes in the aggregate), and (ii) 58,907 shares of common stock, for which Mr. Marks has a voting proxy until May 20, 2023.
(6) Dale Nabb, manager of Condor Equities, LLC (“Condor”), has sole voting and dispositive power of the shares held by Condor.
(7) Michael Tapajna, chief executive officer of Section 3 Developments, Inc. (“Section 3”), has sole voting and dispositive power of the shares held by Section 3.
(8) John G. Kerasotes, as trustee of the Eileen F. Kerasotes Trust, has sole voting and dispositive power over the shares held by such Trust.
(9) Based upon (i) 23,721 shares of common stock held by Family Tys of which Mr. Marks is the managing member and over which Mr. Marks has voting and dispositive power and (ii) the voting rights to an aggregate of (A) 58,907 shares of common stock held by certain holders of our Series C Stock, and (B) 9,281,809 shares of Series C Stock, having the right to 1.5625 votes for each share of Series B Stock for which Mr. Marks has a voting proxy until May 20, 2023.
(10) Includes 9,281,809 shares of Series C Stock (with 1.5625 votes per share, or 14,502,828 votes in the aggregate).
(11) Darren Marks, the Company’s Chief Executive Officer, President, and a director, has the voting rights to such shares of Series C Stock and common stock until May 20, 2023, pursuant to voting proxies from such shareholders.
Series C Stock
Darren Marks, the Company’s Chief Executive Officer, President, and a director, has all of the voting rights of the Series C Stock until May 20, 2023, pursuant to a proxy from the Series C shareholders.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Darren Marks’s Family
The Company has engaged the family of Darren Marks, its Chief Executive Officer, to assist in the development of the Grom Social website and mobile application. These individuals have created over 1,400 hours of original short form content. Sarah Marks, the wife of Darren Marks, our President and Chief Executive Officer, Zach Marks, Luke Marks, Jack Marks, Dawson Marks, Caroline Marks and Victoria Marks, each Darren Marks’s children, are, or have been, by the Company employed or independently contracted.
During the years ended December 31, 2022 and 2021, the Marks family was paid a total of $36,026 and $29,050, respectively.
Compensation for services provided by the Marks family is expected to continue for the foreseeable future. Each member of the Marks family is actively involved in the creation of content for the website and mobile app, including numerous videos focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special events.
Liabilities Due to Executive Officers and/or Directors
On July 13, 2018, our director Dr. Thomas Rutherford loaned the Company $50,000. The loan bears interest at a rate of 10% per annum and was due on August 11, 2018. No notice of default or demand for payment has been received by the Company. During the years ended December 31, 2022 and 2021, the Company recorded interest expense of $5,000 and $5,000, respectively.
At December 31, 2022 and 2021, the aggregate related party payables were $72,356 and $67,356, respectively, of which 22,356 and 17,356 were reported under accrued liabilities on our consolidated balance sheets.
Common Stock and Stock Options Issued to Officers and/or Directors
On August 2, 2021, Mr. Marks was issued 5,265 shares of the Company’s restricted common stock valued at $78.00 per share or $410,652 as compensation.
Voting Proxies
On May 20, 2021, the Company entered into exchange agreements (each, an “Exchange Agreement”) with the holders of the Company’s Series B 8% Convertible Preferred Stock (“Series B Stock”), pursuant to which the holders agreed to exchange all of their shares of the Series B Stock for shares of the Company’s 8% Series C Convertible Preferred Stock (the “Series C Stock”), on a one for one basis (the “Exchange”). As a result of the Exchange, all 9,215,059 issued and outstanding shares of the Company’s Series B Stock were exchanged for 9,215,059 shares of the Company’s newly-designated Series C Stock and all of the exchanged Series B Stock was cancelled.
In connection with their entry into the Exchange Agreements, the holders delivered proxies to Darren Marks, an officer and director of the Company, granting him the power to vote all the holder’s shares of Series C Stock, and all other securities they hold of the Company, for a period of two years. As a result, Mr. Marks has 66.9% of the Company’s combined voting power.
Director Independence
As of December 31, 2022, our Board is currently composed of five members, three of whom, Dr. Thomas Rutherford, Robert Stevens, and Norman Rosenthal qualify as independent in accordance with the published listing requirements of the NASDAQ Capital Market. The NASDAQ Capital Market independence definition includes a series of objective tests, such as that the directors are not, and have not been for at least three years, one of our employees and that neither the directors nor any of their family members, have engaged in various types of business dealings with us.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
On February 17, 2022, we dismissed BF Borgers CPA PC as the Company's independent registered public accounting firm, effective as of such date and engaged Rosenberg Rich Baker Berman P.A. as the Company's independent registered public accounting firm for the year ending December 31, 2021.
The following table reflects the aggregate fees billed for professional services rendered by Rosenberg Rich Baker Berman P.A. and BF Borgers CPA PC in years ended December 31, 2022 and 2021:
Rosenberg Rich Baker Berman P.A. BF Borgers CPA PC
Services 2021
Audit Fees $ 190,000 $ - $ - $ 75,600
Audit-Related Fees 122,500 - 234,900 164,000
Tax Fees - - - -
All Other Fees - - - -
Total Fees $ 202,500 $ - $ 234,900 $ 239,600
Audit Fees. Consists of fees for professional services rendered for the audit of our annual financial statements included in our Annual Reports on Forms 10-K for our fiscal years ended December 31, 2022 and 2021 and reviews of our interim financial statements included in our Quarterly Reports on Form 10-Q.
Audit-Related Fees. Consists of fees for assurance and related services that are reasonably related to the audit. This category includes fees related to assistance consulting on financial accounting/reporting standards.
Tax Fees. Consists of amounts billed for professional services rendered for tax return preparation, tax planning, and tax advice.
All Other Fees. Consists of amounts billed for services other than those noted above.
Audit Committee’s Pre-Approval Practice
The Audit Committee of the Board has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit and audit-related services provided by our independent registered public accounting firm in 2022 and 2021, consistent with the Audit Committee’s responsibility for engaging our independent registered public accounting firm. The Audit Committee also considered whether the non-audit services rendered by our independent registered public accounting firm are compatible with an auditor maintaining independence. The Audit Committee has determined that the rendering of such services is compatible with our independent registered public accounting firm maintaining its independence. The percentage of hours expended on our independent registered public accounting firm ’s engagement to audit our financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was 0%.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES.
The following exhibits are included with this Annual Report:
Exhibit
Number
Description
3.1 Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on January 13, 2016)
3.2 Bylaws (Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on January 13, 2016)
3.3 Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.3 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 22, 2017)
3.4 Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 18, 2019)
3.5 Certificate of Amendment to the Articles of Incorporation of the Company, filed May 7, 2021, effective as of May 13, 2021 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 17, 2021)
3.6 Certificate of Designation of Preferences, Rights and Limitations of Series C 8% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 24, 2021)
3.7 Certificate of Amendment to the Articles of Incorporation of the Company, filed on December 6, 2022 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 8, 2022)
4.1 Specimen Stock Certificate (Incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on January 13, 2016)
4.2 Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 19, 2019)
4.3 Certificate of Designation of Series A Convertible Preferred Stock, dated February 22, 2019 (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2019)
4.4 Articles of Amendment to Articles of Incorporation, dated May 31, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 18, 2019)
4.5 Description of Securities (incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 10-K filed with the SEC on April 13, 2021)
4.6 Certificate of Designation of Series B 8% Convertible Preferred Stock (incorporated by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020)
4.7 12% Convertible Note, dated February 9, 2021, issued to Auctus Fund, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 19, 2021)
4.8 Common Stock Purchase Warrant, dated February 9, 2021, issued to Auctus Fund, LLC (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2021)
4.9 12% Convertible Promissory Note, dated April 16, 2021, issued to Labrys Fund, LP (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2021)
4.10 Common Stock Purchase Warrant, dated April 16, 2021, issued to Labrys Fund, LP (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2021)
4.11 8% Convertible Promissory Note, dated August 19, 2021, issued by Grom Social Enterprises, Inc. to Curiosity Ink Media LLC (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 24, 2021)
4.12 Form of $4,400,000 Principal Amount, 10% Original Issue discount Senior Secured Convertible Note issued to L1 Capital, due March 14, 2023 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2021)
4.13 Form of Common Stock Purchase Warrant issued to L1 Capital, exercisable at $4.20 for 813,278 shares of the Company’s Common Stock (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2021)
4.14 Amended and Restated $4,400,000 Principal Amount, 10% Original Issue Discount Senior Secured Convertible Note issued to L1 Capital on October 20, 2021 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 20, 2021)
4.15 Form of Common Stock Purchase Warrant (Incorporated by reference to Exhibit 4.15 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on December 6, 2022)
4.16 Form of Pre-Funded Common Stock Purchase Warrant (Incorporated by reference to Exhibit 4.16 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on December 6, 2022)
4.17 Form of Warrant Agreement (Incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K, filed with the Securities and Exchange Commission on January 31, 2023)
4.18 Form of Prefunded Warrant Agreement (Incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K, filed with the Securities and Exchange Commission on January 31, 2023)
10.1 Form of Sales Rep Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on January 13, 2016)
10.2 Consulting Agreement and Addendum (Incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on January 13, 2016)
10.3 Sublease Agreement with Grom Social, Inc. (Incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on March 3, 2016)
10.4 Purchase and Sale Agreement with Forcefield (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 6, 2016)
10.5 Copy of Letter of Intent with Grom Holdings, Inc. (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2017)
10.6 Share Exchange Agreement with Grom Holdings, Inc. (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 17, 2017)
10.7* Employment Agreement, dated June 1, 2016, between the Company and Darren Marks (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 22, 2017)
10.8* Employment Agreement with Melvin Leiner (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 22, 2017)
10.9 Acquisition Agreement of TD Holdings (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 22, 2017)
10.10 Memorandum of Understanding with Fyoosion LLC (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 6, 2017)
10.11 Asset Purchase Agreement with Fyoosion LLC (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 3, 2018)
10.12 Amending Agreement to the Share Sale Agreement for the Entire Issued Share Capital of TD Holdings Limited and the Secured Promissory Note (Incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 5, 2018)
10.17 $1.0 Million Convertible Promissory Note with TeleMate.net (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2019).
10.18 Investment Banking Agreement with Newbridge Securities Corporation (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2019).
10.19 Form of Pledge and Security Agreement (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2019).
10.20 Subscription Agreement for Series A Stock (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2019).
10.21 Purchase and Sale Agreement with TeleMate.Net (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2019).
10.22 Grom Educational Services Peachtree Pointe Lease (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2019).
10.23 Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 19, 2019)
10.24 Form of Debt Exchange Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 15, 2019
10.25 Form of 12% Senior Secured Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2020)
10.26 Form of 12% Senior Secured Convertible Promissory Note(incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2020)
10.27 Form of Subscription Agreement for 12% Senior Secured Convertible Promissory Note (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2020)
10.28 Intercreditor Deed (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2020)
10.29 Security Agent Agreement, dated March 16, 2020 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2020)
10.30 Third Amendment to the TDH Share Sell Agreement, dated March 16, 2020 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2020)
10.31 Security Agreement, dated March 16, 2020 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2020)
10.32 Form of Subscription Agreement (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2020)
10.33 Form of Debt Exchange Agreement (incorporated by reference to Exhibit 10.33 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020)
10.34 Form of Exchange Agreement for Series A 10% Convertible Preferred Stock (incorporated by reference to Exhibit 10.34 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020)
10.35 Form of Subscription Agreement for Series B Convertible Stock (incorporated by reference to Exhibit 10.35 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020)
10.36 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.36 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2020)
10.37 Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.37 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2020)
10.38 Form of NonQualified Stock Option Agreement (incorporated by reference to Exhibit 10.38 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2020)
10.39 Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.39 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2020)
10.40 Form of Grant of Stock Appreciation Rights (incorporated by reference to Exhibit 10.40 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2020)
10.41 Securities Purchase Agreement, dated November 30, 2020, between the Company and EMA Financial, LLC (incorporated by reference to Exhibit 10.43 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2021)
10.42 8% Convertible Note, dated November 30, 2020 issued to EMA Financial, LLC (incorporated by reference to Exhibit 10.44 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2021)
10.43 Note Purchase Agreement, dated November 30, 2020, between the Company and Quick Capital, LLC (incorporated by reference to Exhibit 10.45 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2021)
10.44 $113,587 Convertible Note, dated November 30, 2020, issued to Quick Capital, LLC (incorporated by reference to Exhibit 10.46 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2021)
10.45 Common Stock Purchase Warrant, dated November 30, 2020, issued to Quick Capital, LLC (incorporated by reference to Exhibit 10.47 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2021)
10.46 Securities Purchase Agreement, dated February 9, 2021, between the Company and Auctus Fund, LLC incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2021)
10.47 Note Cancellation and General Release, dated March 17, 2021 from Newbridge Securities Corporation (incorporated by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K filed with the SEC on April 13, 2021)
10.48 12% Convertible Promissory Note, dated March 11, 2021, issued to FirstFire Fund, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 5, 2021)
10.49 Common Stock Purchase Warrant, dated March 11, 2021, issued to FirstFire Fund, LLC (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 5, 2021)
10.50 Securities Purchase Agreement, dated March 11, 2021, between the Company and FirstFire Fund, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 5, 2021)
10.51 Registration Rights Agreement, dated March 11, 2021, between the Company and FirstFire Fund, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 5, 2021)
10.52 Securities Purchase Agreement, dated April 16, 2021, between the Company and Labrys Fund, LP (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2021)
10.53 Form of Exchange Agreement for exchange of Series B Stock for Series C Stock (incorporated by reference to Exhibit10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 24, 2021)
10.54 Membership Interest Purchase Agreement, dated July 29, 2021, by and among the Company, Curiosity and the Sellers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 4, 2021)
10.55 Amended and Restated Limited Liability Company Agreement dated as of August 19, 2021 by and among CIM, Grom and Sellers (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 24, 2021)
10.56 Employment Agreement dated as of August 19, 2021 between the Company and Russell Hicks (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 24, 2021)
10.57 Non-Qualified Stock Option Agreement dated August 19, 2021 between the Company and Russell Hicks (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on August 24, 2021)
10.58 Employment Agreement dated as of August 19, 2021 between the Company and Brent Watts (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on August 24, 2021)
10.59 Non-Qualified Stock Option Agreement dated August 19, 2021 between the Company and Brent Watts (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on August 24, 2021)
10.60 Securities Purchase Agreement, Dated as of September 14, 2021 (“Closing Date”), between Grom Social Enterprises, Inc., a Florida corporation (the “Company”), and L1 Capital Global Master Fund (“L1 Capital”) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2021)
10.61 Form of Subsidiary Guaranty executed by Company subsidiaries, in favor of L1 Capital (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2021)
10.62 Form of Registration Rights Agreement, dated September 14, 2021, between the Company and L1 Capital (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2021)
10.63 Form of Security Agreement, dated as of September 14, 2021, between the Company and L1 Capital (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2021)
10.64 Form of Intercreditor Agreement, dated as of September 14, 2021, between the Company, L1 Capital and certain pre-existing creditors of the Company (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2021)
10.65 Amended and Restated Securities Purchase Agreement, dated October 20, 2021, between the Company and L1 Capital (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 20, 2021)
10.66 10% Original Issue Discount Promissory Note dated January 20, 2022, between the Company”, and L1 Global Capital Master Fund (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2022).
10.67 Common Stock Purchase Warrant to purchase 303,682 shares of the Company’s common stock issued to L1 Global Capital Master Fund, dated January 20, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2022).
10.68 Form of Registration Rights Agreement, dated January 20, 2022, between the Company and L1 Capital Capital Master Fund (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2022).
10.69 Executive Separation Agreement, dated April 22, 2022, by and among Grom Social Enterprises, Inc., and Melvin Leiner (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 28, 2022).
10.70 Form of Warrant Agent Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report filed on December 13, 2022, filed with the Securities and Exchange Commission on December 6, 2022)
10.71 Form of Lockup Agreement (Incorporated by reference to Exhibit 10.71 of the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on December 6, 2022)
10.72 Securities Purchase Agreement, dated January 25, 2023, between the Company and Hudson Bay Master Fund Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023)
10.73 Amendment No. 1 to Securities Purchase Agreement, dated January 30, 2023, between the Company and Hudson Bay Master Fund Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023)
10.74 Amendment No. 2 to Securities Purchase Agreement, dated January 30, 2023, between the Company and Hudson Bay Master Fund Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023)
10.75 Waiver Agreement, dated January 30, 2023, between the Company and L1 Capital Global Opportunities Master Fund (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023)
10.76 Registration Rights Agreement by and between Grom Social Enterprises, Inc. and the Hudson Bay Master Fund Ltd. dated January 25, 2023 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2023)
14.1 Code of Conduct (Incorporated by reference to Exhibit 14.1 of the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 17, 2018)
21.1 Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 17, 2018)
31.1** Certification of Chief Executive Officer required by Rule 13a-14(a) under the Exchange Act (filed herewith)
31.2** Certification of Chief Financial Officer required by Rule 13a-14(a) under the Exchange Act (filed herewith)
32** Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith)
101.INS** Inline XBRL Instance Document
101.SCH** Inline XBRL Schema Document
101.CAL** Inline XBRL Calculation Linkbase Document
101.LAB** Inline XBRL Label Linkbase Document
101.PRE** Inline XBRL Presentation Linkbase Document
101.DEF** Inline XBRL Definition Linkbase Document
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
* Management compensation agreement
** Filed herewith