SEC Info - Grom Social Enterprises, Inc.

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		Alternative Formats (Word, et al.) Controls and Procedures Defaults upon Senior Securities Exhibits Financial Information Financial Statements Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Mine Safety Disclosures Other Information Part I -- FINANCIAL INFORMATION Part II -- OTHER INFORMATION Quantitative and Qualitative Disclosures about Market Risk Risk Factors Table of Contents Unregistered Sales of Equity Securities and Use of Proceeds
1	1st Page – Filing Submission
"	Table of Contents
"	Part I -- FINANCIAL INFORMATION
"	Financial Statements
"	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Quantitative and Qualitative Disclosures about Market Risk
"	Controls and Procedures
"	Part II -- OTHER INFORMATION
"	Legal Proceedings
"	Risk Factors
"	Unregistered Sales of Equity Securities and Use of Proceeds
"	Defaults upon Senior Securities
"	Mine Safety Disclosures
"	Exhibits

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i ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

i ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. i ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ i No ☒

As of August 15, 2022, i 21,347,117 shares of the registrant’s common stock were outstanding.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current assumptions, expectations, and beliefs concerning future developments and their potential effect on our business. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” or the negative of these terms or other comparable terminology, although the absence of these words does not necessarily mean that a statement is not forward-looking. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements.

Factors that may cause or contribute actual results to differ from these forward-looking statements include, but are not limited to:

These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties and other factors. Considering these risks, uncertainties, and assumptions, the events described in the forward-looking statements may not occur or may occur to a different extent or at a different time than we have described.

All forward-looking statements speak only as of the date of this Report. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, or other information contained herein, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance.

The accompanying notes are an integral part of the condensed consolidated financial statements.

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (Continued)

The accompanying notes are an integral part of the condensed consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 our Form S-1/A which we filed with the Securities and Exchange Commission on June 13, 2022, 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 Quarterly Report.

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 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 operate our business through the following subsidiaries:

We own 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity. We are headquartered in Boca Raton, Florida with offices in Los Angeles, California; Salt Lake City, Utah; Norcross, Georgia; and Manila, Philippines.

Grom Social is a growing social media platform and original content provider of entertainment for children under 13 years of age, which provides safe and secure digital environments for kids that can be monitored by their parents or guardians. We initially launched our mobile app in 2019. We continue to invest in research, development, and technology to enhance the user experience. We remain committed to increasing user growth and expanding our reach in an effort to monetize the app.

Top Draw Animation is an award-winning, full-service production and pre-production animation studio that 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’s 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, background layout scene assembly, posing, animation and after-effects.

As part of its COVID-19 protocols, Top Draw continues to operate at approximately 50% seat capacity at its studio. However, it supplements its reduced studio capacity through its work-from-home program. For the three and six months ended June 30, 2022, our animation services revenues trailed the levels that we recognized during the corresponding periods of 2021. This is largely attributable to changes in our production schedule resulting from customer delays in providing us with necessary materials and content, changes to project start dates, or cancellation of an anticipated project. As a byproduct, we realized higher production costs by deploying the resources necessary to service our customers’ needs efficiently and effectively prior to these changes to our schedule.

During the six months ended June 30, 2022, we announced approximately $3.9 million in new contracts for Top Draw. These projects are all expected to commence during the year and have service periods up to twelve months in length. Based upon our current production schedule, we believe that our efficiency and productivity will increase through December 31, 2022.

Grom Educational Services provides scalable network monitoring and security solutions that are compliant with Children Internet Protection Act (CIPA) guidelines. Our goal is to enhance safety, good digital citizenship, education, and social responsibility by giving schools and parents the ability to monitor and filter their students’ and children’s access to technology while simultaneously educating them.

Our products include web filtering appliances and software, reporting and event management solutions, and our Digital Citizenship License (DCL) Program. The proprietary DCL program is a series of videos design to teach minors about appropriate online behavior.

On January 28, 2022, the Company announced the early release of enhancements to its DCL Program as part of strengthening the security features of its web filtering solutions.

Curiosity Ink Media is a global media company that develops, acquires, builds, grows and maximizes the short, mid, and long-term commercial potential of kids & family entertainment properties and associated business opportunities. Driven by a best-in-class leadership team, Curiosity’s multi-faceted intellectual property library is designed to amass ongoing value through strategic stewardship, partnerships, and highly targeted market entry.

Depending upon the nature, Curiosity’s original properties can require a substantial amount of time to develop and produce. The Company continuously evaluates the viability of its entertainment properties, and works with its strategic partners and advisors to determine the appropriate form of media and channels of distribution for each property to ensure their greatest potential for success.

We are preparing to relaunch our Santa.com website in the fourth quarter of 2022. The enhanced digital holiday entertainment hub will include a bold new look, including a marketplace where consumers can fulfill all of their holiday needs, and an improved user experience featuring a virtual North Pole with curated gifting ideas, decor and entertainment tips, alongside other immersive content for kids and adults. Furthermore, we continue to develop Santa.com into an original animated musical holiday special for future release.

Curiosity has released two graphic novels, Thunderous and The Legion of Forgettable Supervillains, in 2022. It continues to develop concepts and seek partnerships for additional and subsequent series publications. On May 17, 2022, Curiosity and Dynamite Entertainment announced a project with the United States Postal Service to introduce a new children’s book series based on a modern-day adaptation of Mr. Zip, the iconic 1960’s cartoon figure initially used by the U.S. Post Office Department to help introduce and promote ZIP Code use.

In addition, Curiosity has started to broaden its business opportunities and relationships by offering licensing agent services. On May 23, 2022, Curiosity announced that it will partner with Cepia LLC to serve as a licensing agent for the Cats vs Pickles franchise.

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.

We have 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 Manila-based animation studio, which accounts for approximately 85% 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 have 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. We have 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.

The Purchase Agreement, as amended on October 20, 2021, with L1 Capital contemplated a closing of a second tranche of the offering (the “Second Tranche”) of up to an additional $6,000,000 principal amount of Notes identical to the First Tranche Note, and warrants exercisable for five years to purchase up to 1,041,194 shares at an exercise price of $4.20 per share.

On January 20, 2022 (the “Second Tranche Closing”), we closed on the Second Tranche of the offering with L1 Capital, resulting in the issuance of (i) a $1,750,000 10% original issue discount senior secured convertible note, due July 20, 2023, (the “Second Tranche Note”); and (ii) a five year warrant to purchase 303,682 shares of our common stock at an exercise price of $4.20 per share (the “Second Tranche Warrants”), in exchange for consideration of $1,575,000 (i.e. the face amount less the 10% original issue discount of $175,000).

In connection with the Second Tranche Closing, we paid to EF Hutton a fee of $126,000.

The Second Tranche Note is convertible into our common stock at a rate of $4.20 per share (the “Conversion Price”) into 416,667 shares of common stock (the “Second Tranche Conversion Shares”) and, is repayable in 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 our discretion and if the below listed “Equity Conditions” are met, by issuance of shares of our common stock at a price of 95% of the lowest daily VWAP during the ten-trading day period prior to the respective monthly redemption dates (with a floor of $1.92) multiplied by 102% of the amount due on such date. In the event that the ten-trading day VWAP drops below $1.92 we will have the right to pay in stock at such ten-trading day VWAP with any shortfall paid in cash. The Conversion Price may be adjusted in the event of dilutive issuances but in no event to less than $0.54 (the “Monthly Conversion Price”).

Our 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 our 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 our common stock as reported on Bloomberg L.P., which percentage is subject to increase by the investor at its sole discretion.

Other provisions of the Second Tranche Note, which is similar in terms to the First Tranche Note, include that the Second Tranche Note Conversion Price is subject to full anti-dilution price protections in the event of financings that are below the Conversion Price with a floor of $0.54.

In the event of an Event of Default as defined in the notes, if the stock price is below the Conversion Price at the time of default and only for so long as a default is continuing, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the default is cured the default conversion rate elevates back to the normal Conversion Price.

As part of the Second Tranche Closing, we issued Second Tranche Warrants exercisable for five years from the date of issuance, at $4.20 per share which carry the same anti-dilution protection as the Second Tranche Notes, subject to the same adjustment floor. The Second Tranche Warrants are exercisable via cashless exercise only for so long as no registration statement covering resale of the shares is in effect.

The Second Tranche Note continues to be subject to (i) the repayment and performance guarantees by our subsidiaries pursuant to a subsidiary guaranty and, (ii) the security agreement pursuant to which the LI Capital was granted a security interest in all of our assets and certain of our subsidiaries, each as entered into in connection with the First Tranche closing on September 14, 2021.

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 he is to receive separation payments over a nine (9) month period equal to his base salary, as well as certain limited health benefits.

In accordance with the Separation Agreement, we will pay to Mr. Leiner the sum of $236,250 in biweekly installments over the nine (9) month period beginning on our first regular pay period after April 22, 2022 and ending on January 13, 2023. The Separation Agreement also contains non-disparagement covenants and a mutual release of claims by the parties thereto.

On the same day, Mr. Leiner resigned from our Board of Directors, effectively immediately. Mr. Leiner did not resign as a result of any disagreement with us on any matter relating to our operations, policies or practices.

On May 24, 2022, we received a deficiency letter (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, based upon the closing bid price of the Company’s common stock, par value $0.001 per share (“Common Stock”), for the last 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”).

The Notice has no immediate effect on the continued listing status of the Company's common stock on The Nasdaq Capital Market, and, therefore, the Company's listing remains fully effective.

The Company is provided a compliance period of 180 calendar days from the date of the Notice, or until November 21, 2022, to regain compliance with Nasdaq Listing Rule 5550(a)(2). If at any time before November 21, 2022, the closing bid price of the Company’s common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, subject to Nasdaq’s discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(G), Nasdaq will provide written notification that the Company has achieved compliance with the Minimum Bid Requirement, and the matter would be resolved.

If the Company does not regain compliance with the Minimum Bid Requirement during the initial 180 calendar day period, the Company may be eligible for an additional 180 calendar day compliance period. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Requirement, and would need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary.

The Company will continue to monitor the closing bid price of its Common Stock and seek to regain compliance with all applicable Nasdaq requirements within the allotted compliance periods. If the Company does not regain compliance within the allotted compliance periods, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company's common stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel.

The Company intends to actively monitor the closing bid price of the common stock and will evaluate available options to regain compliance with the Minimum Bid Requirement. However, there can be no assurance that the Company will regain compliance with the Minimum Bid Requirement during the 180-day compliance period, secure a second period of 180 days to regain compliance or maintain compliance with the other Nasdaq listing requirements.

If the common stock ceases to be listed for trading on the Nasdaq Capital Market, the Company would expect that the common stock would be traded on one of the three tiered marketplaces of the OTC Markets Group.

Comparison of Results of Operations for the Three Months Ended June 30, 2022 and 2021

Revenue for the three months ended June 30, 2022 was $1,139,582, compared to revenue of $1,388,551 during the three months ended June 30, 2021, representing a decrease of $248,969 or 17.9%.

Animation revenue for the three months ended June 30, 2022 was $1,025,966, compared to animation revenue of $1,276,555 during the three months ended June 30, 2021, representing a decrease of $250,589 or 19.6%. 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 three months ended June 30, 2022 was $113,472, compared to web filtering revenue of $111,507 during the three months ended June 30, 2021, representing an increase of $1,965 or 1.8%. The increase is primarily due to the timing of multi-year contract renewals.

Subscription and advertising revenue from our Grom Social mobile app has been nominal. Subscription and advertising revenue for the three months ended June 30, 2022 was $144 compared to subscription and advertising revenue of $489 during the three months ended June 30, 2021, representing a decrease of $345 or 70.6%, primarily attributable to a decrease in marketing and promotion activities.

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 three months ended June 30, 2022 and 2021 were $192,123, or 16.9%, and $392,708, or 28.3%, respectively. The decrease in gross profit is primarily attributable to lower contract margins in our animation business due to the absorption of fixed overhead expenses against reduced revenue levels and certain projects exceeding budgeted costs.

Operating expenses for the three months ended June 30, 2022 were $2,142,800, compared to operating expenses of $1,859,733 during the three months ended June 30, 2021, representing an increase of $283,067 or 15.2%. The increase is primarily attributable to an increase in selling, general and administrative costs incurred during the three months ended June 30, 2022 due to an increase in research and development, employee headcount, compensation and benefits from the acquisition of Curiosity, and stock-based compensation from the grant of stock and stock option awards.

Selling, general and administrative (“SG&A”) 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 $1,778,696 for the three months ended June 30, 2022, compared to $1,400,485 for the three months ended June 30, 2021, representing an increase of $378,211 or 27.0%.

Professional fees are comprised of accounting and compliance services, legal services, investor relations and other advisory fees. Professional fees were $299,941 for the three months ended June 30, 2022, compared to $325,922 for the three months ended June 30, 2021, representing a decrease of $25,981 or 8.0%.

Depreciation and amortization included in operating expenses was $64,163 for the three months ended June 30, 2022, compared to $133,326 for the three months ended June 30, 2021, representing a decrease of $69,163 or 51.9%. The decrease is attributable to certain fixed assets that are fully depreciated having reached the end of their estimated useful lives and certain intangible assets that were impaired during the fourth quarter of 2021. These fixed and intangible assets were subject to depreciation and amortization during the three months ended June 30, 2021.

Net other expense for the three months ended June 30, 2022 was $1,248,703, compared to a net other expense of $1,037,480 for the three months ended June 30, 2021, representing an increase of $211,223 or 20.4%. The increase in other expense is primarily attributable to recognition of interest expense of $1,052,350 related to the derivative liability recognized during the three months ended June 30, 2022, offset by a decrease interest expense related to payment of principal balance and decrease in convertible notes outstanding balance due to conversions recorded during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Interest expense is comprised of interest accrued and paid on our convertible notes and recorded from the amortization of note discounts. Interest expense was $1,314,508 for the three months ended June 30, 2022, compared to $1,094,916 during the three months ended June 30, 2021, representing an increase of $219,592 or 20.1%.

We realized a net loss attributable to common stockholders of $3,295,571, or $0.17 per share, for the three months ended June 30, 2022, compared to a net loss attributable to common stockholders of $2,504,505, or $0.42 per share, during the three months ended June 30, 2021, representing an increase in net loss attributable to common stockholders of $791,066 or 31.6%.

Comparison of Results of Operations for the Six Months Ended June 30, 2022 and 2021

Revenue for the six months ended June 30, 2022 was $2,370,707, compared to revenue of $3,263,835 during the six months ended June 30, 2021, representing a decrease of $893,128 or 27.4%.

Animation revenue for the six months ended June 30, 2022 was $2,074,579, compared to animation revenue of $2,990,213 during the six months ended June 30, 2021, representing a decrease of $915,634 or 30.6%. 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 six months ended June 30, 2022 was $295,716, compared to web filtering revenue of $272,748 during the six months ended June 30, 2021, representing an increase of $22,968 or 8.4%. The increase is primarily due to the timing of multi-year contract renewals.

Subscription and advertising revenue from our Grom Social mobile app has been nominal. Subscription and advertising revenue for the six months ended June 30, 2022 was $412 compared to subscription and advertising revenue of $874 during the six months ended June 30, 2021, representing a decrease of $462 or 52.9%, primarily attributable to a decrease in marketing and promotion activities.

Gross profit for the six months ended June 30, 2022 and 2021 were $506,299, or 21.4%, and $1,249,871, or 38.3%, respectively. The decrease in gross profit is primarily attributable to lower contract margins in our animation business due to the absorption of fixed overhead expenses against reduced revenue levels and certain projects exceeding budgeted costs.

Operating expenses for the six months ended June 30, 2022 were $4,306,135, compared to operating expenses of $3,427,745 during the six months ended June 30, 2021, representing an increase of $878,390 or 25.6%. The increase is primarily attributable to an increase in selling, general and administrative costs and fees for professional services rendered during the six months ended June 30, 2022 due to an increase in research and development, employee headcount, compensation and benefits from the acquisition of Curiosity, and stock-based compensation from the grant of stock and stock option awards.

Selling, general and administrative (“SG&A”) 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 $3,473,515 for the six months ended June 30, 2022, compared to $2,662,750 for the six months ended June 30, 2021, representing an increase of $810,765 or 30.5%.

Professional fees are comprised of accounting and compliance services, legal services, investor relations and other advisory fees. Professional fees were $704,007 for the six months ended June 30, 2022, compared to $513,031 for the six months ended June 30, 2021, representing an increase of $190,976 or 37.2%.

Depreciation and amortization included in operating expenses was $128,613 for the six months ended June 30, 2022, compared to $251,964 for the six months ended June 30, 2021, representing a decrease of $123,351 or 49.0%. The decrease is attributable to certain fixed assets that are fully depreciated having reached the end of their estimated useful lives and certain intangible assets that were impaired during the fourth quarter of 2021. These fixed and intangible assets were subject to depreciation and amortization during the six months ended June 30, 2021.

Net other expense for the six months ended June 30, 2022 was $2,855,989, compared to a net other expense of $2,642,206 for the six months ended June 30, 2021, representing an increase of $213,783 or 8.1%. The increase in net other expense is primarily attributable recognition of interest expense of $1,052,350 related to the derivative liability recognized during the six months ended June 30, 2022, offset by an 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 during 2021.

Interest expense is comprised of interest incurred on our convertible notes and from the amortization of note discounts. Interest expense was $2,945,530 for the six months ended June 30, 2022, compared to $1,743,762 during the six months ended June 30, 2021, representing an increase of $1,201,768 or 68.9%. The increase is primarily attributable to recognition of interest expense of $1,052,350 related to the derivative liability and increase in amortization expense associated with debt discount recorded during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

We realized a net loss attributable to common stockholders of $6,849,022, or $0.42 per share, for the six months ended June 30, 2022, compared to a net loss attributable to common stockholders of $4,820,080, or $0.79 per share, during the six months ended June 30, 2021, representing an increase in net loss attributable to common stockholders of $2,028,942 or 42.1%.

Net cash used in operating activities for the six months ended June 30, 2022 was $3,383,231, compared to net cash used in operating activities of $2,662,823 during the six months ended June 30, 2021, representing an increase in cash used of $760,408, primarily due to the increase in our net loss, recognition of a derivative liability, change in our operating assets and liabilities, stock-based compensation and amortization of debt discounts.

Net cash used in investing activities for the six months ended June 30, 2022 was $33,308, compared to net cash used in investing activities of $2,790 during the six months ended June 30, 2021 representing an increase in cash used of $30,518. This change is attributable to an increase in the amount of fixed assets purchased and/or leasehold improvements made by our animation studio in Manilla, Philippines during the six months ended June 30, 2022.

Net cash provided by financing activities for the six months ended June 30, 2022 was $1,040,992, compared to net cash provided by financing activities of $10,644,544 for the six months ended June 30, 2021, representing a decrease in cash provided of $9,308,013. The primary reason for the decrease is attributable to our public equity offering completed in June 2021.

Our primary sources of cash from financing activities during the six months ended June 30, 2022 were attributable to $1,444,000 in proceeds from second tranche of convertible notes issued to L1 Capital, as compared to $8,953,616 in proceeds from the sale of our common stock, $950,000 and $100,000 in proceeds from the sale of our Series B Stock and Series C Stock, respectively, and $908,500 in proceeds from the sale of 8% to 12% senior secured convertible notes during the six months ended June 30, 2021. These sources of cash were offset, in part, by the repayment of convertible notes and loans payable of $107,469 and cash settlement of a derivative liability of $295,539 in accordance with a note conversion during the six months ended June 30, 2022, as compared to repayments of convertible notes and loans for $267,572 during the six months ended June 30, 2021.

We believe we have adequate working capital to meet our operational needs for at least the next 12 months.

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed consolidated financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position.

During the three and six months ended June 30, 2022, there were no significant changes to the critical accounting estimates disclosed under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K.

We are a smaller reporting company and are not required to provide this information.

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 June 30, 2022, the end of the period covered by this Quarterly 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 June 30, 2022.

The Company’s assessment identified certain material weaknesses which are set forth below:

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.

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.

Other than the remediation efforts described above, there were no changes in our internal controls over financial reporting during our first two fiscal quarters, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

There are no pending legal proceedings to which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company's and its subsidiaries’ property is not the subject of any pending legal proceedings.

Except as set forth below, there were no sales of equity securities sold during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.

On June 17, 2022, the Company issued 176,844 shares of common stock to the holders of its Series C Stock for PIK dividends.

The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe is exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof.

*** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

i Florida		i 46-5542401
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

i 2060 NW Boca Raton Blvd. #6, i Boca Raton, i Florida		i 33431
(Address of principal executive offices)		(Zip Code)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
i Common Stock, par value $0.001	i GROM	The i Nasdaq Capital Market
i Warrants to purchase shares of Common Stock, par value $0.001 per share	i GROMW	The i Nasdaq Capital Market


	June 30,			December 31,
	2022			2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	i 4,174,763		$	i 6,530,161
Accounts receivable, net		i 672,971			i 968,579
Inventory, net		i 155,188			i 91,361
Prepaid expenses and other current assets		i 604,922			i 457,578
Total current assets		i 5,607,844			i 8,047,679
Operating lease right of use assets		i 483,766			i 593,405
Property and equipment, net		i 409,945			i 577,988
Goodwill		i 21,907,599			i 22,376,025
Intangible assets, net		i 5,449,241			i 5,073,074
Deferred tax assets, net -- noncurrent		i 435,938			i 465,632
Other assets		i 1,011,831			i 721,160
Total assets	$	i 35,306,164		$	i 37,854,963

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	i 314,541		$	i 467,711
Accrued liabilities		i 514,730			i 400,329
Dividend payable		i 187,216			i 459,068
Advanced payments and deferred revenues		i 580,841			i 404,428
Convertible notes, net -- current		i 1,462,046			i 2,604,346
Loans payable -- current		i 1,989			i 36,834
Related party payables		i 50,000			i 50,000
Derivative liabilities		i 739,311			i –
Lease liabilities -- current		i 263,657			i 333,020
Total current liabilities		i 4,114,331			i 4,755,736
Convertible notes, net of loan discounts		i 144,416			i 716,252
Lease liabilities		i 212,370			i 284,848
Contingent purchase consideration		i 5,586,493			i 5,586,493
Other noncurrent liabilities		i 386,942			i 390,833
Total liabilities		i 10,444,552			i 11,734,162

Commitments and contingencies (Note 17)		–			–

Stockholders' Equity:
Series A preferred stock, $ i i 0.001 / par value. i i 2,000,000 / shares authorized; zero i i i i 0 / / / shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		i –			i –
Series B preferred stock, $ i i 0.001 / par value. i i 10,000,000 / shares authorized; zero i i i i 0 / / / shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		i –			i –
Series C preferred stock, $ i i 0.001 / par value. i i 10,000,000 / shares authorized; i i 9,360,759 / and i i 9,400,259 / shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		i 9,361			i 9,400
Common stock, $ i i 0.001 / par value. i i 500,000,000 / shares authorized; i i 19,780,053 / and i i 12,698,192 / shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		i 19,780			i 12,698
Additional paid-in capital		i 95,661,982			i 89,851,309
Accumulated deficit		( i 73,253,212	)		( i 66,404,190	)
Accumulated other comprehensive loss		( i 87,776	)		( i 30,755	)
Total Grom Social Enterprises, Inc. stockholders' equity		i 22,350,135			i 23,438,462
Noncontrolling interests		i 2,511,477			i 2,682,339
Total stockholders' equity		i 24,861,612			i 26,120,801
Total liabilities and equity	$	i 35,306,164		$	i 37,854,963


	Six Months Ended June 30			Six Months Ended June 30
	2022			2021
Cash flows from operating activities of continuing operations:
Net loss	$	( i 6,655,825	)	$	( i 4,820,080	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		i 265,804			i 424,498
Amortization of debt discount		i 1,852,816			i 1,239,740
Common stock issued in exchange for fees and services		i 95,482			i 331,361
Convertible notes issued for financing costs		i –			i 61,633
Derivative expense		i 1,052,350			i –
Stock based compensation		i 137,383			i –
Amortization of rights-of-use assets		i 190,117			i 148,839
Loss on disposal of property and equipment		i 2,296			i –
Loss on extinguishment of debt		i –			i 947,179
Loss on settlement of derivative transaction		i 39,624			i –
Unrealized gain on change in fair value of derivative liabilities		( i 57,124	)		i –
Changes in operating assets and liabilities:
Accounts receivable		i 287,341			( i 117,389	)
Inventory		( i 83,237	)		i 21,409
Prepaid expenses and other current assets		( i 174,109	)		i 61,418
Other assets		( i 291,170	)		i 11,204
Accounts payable		( i 180,381	)		( i 628,233	)
Accrued liabilities		i 127,903			i 225,822
Advanced payments and deferred revenues		i 208,716			( i 329,875	)
Income taxes payable and other noncurrent liabilities		( i 3,974	)		i 3,061
Operating lease liability		( i 197,243	)		( i 152,163	)
Related party payables		i –			( i 51,247	)
Net cash used in operating activities		( i 3,383,231	)		( i 2,622,823	)

Cash flows from investing activities:
Purchase of fixed assets		( i 47,377	)		( i 2,790	)
Proceeds from sale of property and equipment		i 14,069			i –
Net cash used in financing activities		( i 33,308	)		( i 2,790	)

Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs		i –			i 1,050,000
Proceeds from issuance of common stock, net of issuance costs		i –			i 8,953,616
Proceeds from issuance of convertible notes		i 1,444,000			i 908,500
Repayments of convertible notes		( i 72,623	)		( i 225,946	)
Repayments of loans payable		( i 34,846	)		( i 41,626	)
Payment of settlement of derivative liability upon note conversion		( i 295,539	)		i –
Net cash provided by financing activities		i 1,040,992			i 10,644,544

Effect of exchange rates on cash and cash equivalents		i 20,149			i 22,677
Net increase (decrease) in cash and cash equivalents		( i 2,355,398	)		i 8,041,608
Cash and cash equivalents at beginning of period		i 6,530,161			i 120,300
Cash and cash equivalents at end of period	$	i 4,174,763		$	i 8,161,908

Supplemental disclosure of cash flow information:
Cash paid for interest	$	i 21,780		$	i 74,299

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued for financing costs incurred in connection with convertible and promissory notes	$	i –		$	i 29,750
Common stock issued related to Series C preferred stock dividend		i 646,523			i –
Common stock warrants issued in connection with convertible promissory notes		i 363,329			i 694,644
Conversion of convertible notes and accrued interest into common stock		i 4,574,999			i 1,102,905
Conversion of convertible notes and accrued interest into preferred stock		i –			i 1,616,996
Discount for beneficial conversion features on convertible notes		i –			i 318,616
Operating leases rights-of-sue assets obtained in exchange for lease liabilities		i 80,478			i –
Preferred stock dividend payable on convertible preferred stock		i 187,216			i –

Grom Social Enterprises, Inc. – ‘10-Q’ for 6/30/22

On: Tuesday, 8/16/22, at 3:16pm ET · For: 6/30/22 · Accession #: 1683168-22-5837 · File #: 1-40409

Previous ‘10-Q’: ‘10-Q’ on 5/16/22 for 3/31/22 · Next: ‘10-Q’ on 11/7/22 for 9/30/22 · Latest: ‘10-Q’ on 11/20/23 for 9/30/23 · 8 References:

Quarterly Report — Form 10-Q

Filing Table of Contents

‘10-Q’ — Quarterly Report

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Dates Referenced Herein and Documents Incorporated by Reference

8 Subsequent Filings that Reference this Filing

Large accelerated filer	☐	Accelerated filer	☐
i Non-accelerated filer	☒	Smaller reporting company	i ☒
		Emerging growth company	i ☒

Part I – FINANCIAL INFORMATION		Page

Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42

Part II – OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44

Schedule of accounts receivable
	June 30, 2022			December 31, 2021

Billed accounts receivable	$	i 426,649		$	i 822,536
Unbilled accounts receivable		i 285,067			i 187,751
Allowance for doubtful accounts		( i 38,745	)		( i 41,708	)
Total accounts receivable, net	$	i 672,971		$	i 968,579
Total advanced payments and deferred revenues	$	i 580,841		$	i 404,428

Schedule Of Other Assets
	June 30, 2022		December 31, 2021

Capitalized website development costs		i 575,908		i 411,800
Prepublication costs		i 158,788		i 152,286
Produced and licensed content costs		i 207,202		i 76,701
Deposits		i 69,933		i 76,052
Other noncurrent assets		i –		i 4,321
Total other assets		i 1,011,831		i 721,160

Schedule of operating right-of-use assets
	Six Months Ended June 30, 2022
Cash paid for operating lease liabilities	$	i 230,389
Weighted-average remaining lease term		i 1.2
Weighted-average discount rate		i 10%

Schedule of amortization of lease liabilities
Remainder of 2022	$	i 203,980
2023		i 114,411
2024		i 50,235
2025		i 40,291
2026		i 42,305
Thereafter		i 44,421
Total future lease payments		i 495,643
Less: Imputed interest		( i 19,616	)
Present value of lease liabilities	$	i 476,027

Schedule Of Components Of Income Tax Expense Benefit
Consideration Paid:
Cash consideration	$	i 400,000
Common stock issued		i 5,421,962
Convertible notes		i 278,000
Contingent purchase consideration		i 5,586,493
Total consideration	$	i 11,686,455

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed
Cash and cash equivalents	$	i 26,408
Inventory		i 65,734
Produced and licensed content cost		i 187,920
Goodwill and intangible assets		i 14,271,969
Accounts payable		( i 113,462	)
Noncontrolling interest		( i 2,752,114	)
Total identifiable assets acquired, and liabilities assumed	$	i 11,686,455

Schedule of identifiable intangible assets
Licensing agreements	$	i 341,728
Books and stories content		i 126,698
Total identifiable intangible assets	$	i 468,426

Schedule of amortization
Remainder of 2022	$	i 85,011
2023		i 170,022
2024		i 170,022
2025		i 170,022
2026		i 93,708
Thereafter		i 247,512
Total remaining intangible assets subject to amortization	$	i 936,297

Schedule of convertible debt
	June 30, 2022			December 31, 2021
8% Unsecured Convertible Note (Curiosity)	$	i 278,000		$	i 278,000
10% Senior Secured Convertible Note with Original Issuance Discount (L1 Capital Global Master Fund or “L1”)		i –			i 4,125,000
10% Senior Secured Convertible Note with Original Issuance Discount (L1 – Second Tranche)		i 1,300,000			i –
12% Senior Convertible Notes with Original Issuance Discounts (OID Notes)		i 75,000			i 75,000
12% Senior Secured Convertible Notes (TDH Secured Notes)		i 269,340			i 330,039
12% Senior Secured Convertible Notes (Additional Secured Notes)		i 51,175			i 63,099
Loan discounts		( i 367,053	)		( i 1,550,540	)
Total convertible notes, net		i 1,606,462			i 3,320,598
Less: current portion of convertible notes, net		( i 1,462,046	)		( i 2,604,346	)
Convertible notes, net	$	i 144,416		$	i 716,252

Schedule of future debt maturity payments
Remainder of 2022	$	i 1,079,676
2023		i 817,793
2024		i 76,046
2025 and thereafter		i –
Total Convertible notes principal amount payable.	$	i 1,973,515


	May 9, 2022		June 30, 2022
Stock price		i $0.57		i $0.41
Strike price		i 0.54		i 0.54
Risk-free rate		i 2.12%		i 2.77%
Annualized volatility		i 150%		i 120%
Forecast horizon in years		i 1.20		i 1.05
Alternative Conversion Discount		i 20.0%		i 20.0%
Maximum Shares to be Delivered		i 3,240,741		i 2,407,407

Exhibit No.		Description

31.1*		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2*		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32**		Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS***		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH***		Inline XBRL Taxonomy Extension Schema Document
101.CAL***		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF***		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE***		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104***		Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).

Date: August 16, 2022	By:	/s/ *Darren Marks*
		Darren Marks
		Chief Executive Officer and President (Principal Executive Officer)


Date: August 16, 2022	By:	/s/ *Jason Williams*
		Jason Williams
		Chief Financial Officer (Principal Financial and Accounting Officer)

This ‘10-Q’ Filing	Date	Other Filings

	12/31/25
	3/16/24
	7/20/23
	1/13/23
	12/31/22
	11/21/22
Filed on:	8/16/22	NT 10-Q
	8/15/22
	8/13/22
	7/25/22
	7/11/22
For Period end:	6/30/22	NT 10-Q
	6/28/22
	6/17/22
	6/13/22	S-1/A
	5/24/22	8-K
	5/23/22
	5/17/22
	5/9/22
	4/22/22	8-K
	4/15/22	10-K
	3/31/22	10-Q, NT 10-K
	3/2/22	8-K
	1/28/22
	1/24/22
	1/20/22	8-K
	1/1/22
	12/31/21	10-K, NT 10-K
	12/15/21
	10/20/21	8-K, S-1
	9/14/21	8-K
	9/10/21
	8/19/21	8-K, 8-K/A
	7/29/21	8-K
	7/19/21
	6/30/21	10-Q, NT 10-Q
	6/11/21
	5/20/21	8-K
	5/19/21
	5/13/21	8-K
	5/7/21
	5/6/21
	4/8/21	PRE 14C
	4/7/21	8-K
	3/31/21	10-Q, NT 10-K
	2/17/21	UPLOAD
	1/1/21
	12/31/20	10-K, NT 10-K
	11/30/20	8-K
	8/6/20	10-Q
	3/16/20	8-K
	3/12/20
	3/11/20
	1/30/20
	8/11/18
	7/11/18
	4/19/17
	1/17/17	8-K
	1/9/17
	3/5/12
	9/15/05
		List all Filings

Grom Social Enterprises, Inc. – ‘10-Q’ for 6/30/22

On: Tuesday, 8/16/22, at 3:16pm ET · For: 6/30/22 · Accession #: 1683168-22-5837 · File #: 1-40409

Quarterly Report — Form 10-QFiling Table of Contents

‘10-Q’ — Quarterly ReportDocument Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

8 Subsequent Filings that Reference this Filing

Quarterly Report — Form 10-Q

Filing Table of Contents

‘10-Q’ — Quarterly Report

Document Table of Contents