The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
Notes to Consolidated Unaudited Financial
Statements
For the Three and Nine Month Interim Period
Ended September 30, 2017 and 2016
Effective August 17, 2017, Grom Social Enterprises,
Inc. (“Grom” or the “Company), a Florida corporation f/k/a Illumination America, Inc. (“Illumination”),
consummated the acquisition of Grom Holdings, Inc. (“Grom Holdings”). Pursuant to the terms of the share exchange
agreement dated May 15, 2017, the Company amended its articles of incorporation to increase its authorized capital to 200,000,000
shares of common stock, as well as to change its name to “Grom Social Enterprises, Inc.” Further, the Company issued
an aggregate of 110,853,883 shares of its common stock to the Grom Holdings’ shareholders, pro rata to their respective ownership
percentage. Each share of Grom Holdings was exchanged for 4.17 shares of Illumination’s common stock. As a result, the stockholders
of Grom Holdings are now stockholders of the Company and own approximately 92% of the Company’s issued and outstanding shares
of common stock.
The acquisition was deemed a reverse acquisition
in accordance with FASB ASC 805-40,
"Reverse Acquisitions"
. The legal acquirer is Illumination and the legal acquiree
is Grom Holdings. However, the transaction was accounted for as a recapitalization effected by a share exchange, wherein Grom Holdings
is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have
been brought forward at their book value and no goodwill has been recognized.
The Company now operates its business through
five wholly-owned subsidiaries, including:
|
·
|
Grom Social, Inc. (“Grom Social”), incorporated in the State of Florida in March 2012, which operates a social media network designed for children;
|
|
·
|
TD Holdings Limited (“TD Holdings”), incorporated in Hong Kong, and its subsidiary companies, Top Draw Animation Hong Kong Limited and Top Draw Animation, Inc. The group’s principal activities, based in Manila, Philippines, are the production of animated films;
|
|
·
|
Grom Educational Services Inc. (“GES”), incorporated in the State of Florida in February 2017, which operates its NetSpective WebFiltering services that are provided to schools and libraries;
|
|
·
|
Grom Nutritional Services (“GNS”), incorporated in the State of Florida in April 2017, which was established to market and distribute a product line of nutritional supplement beverages formulated for children; and
|
|
·
|
Illumination America Lighting (“IAL”), which operates the lighting distribution business that was formerly Illumination America, Inc.’s principal business prior to the Grom Holdings acquisition.
|
Retroactive Application of the Share
Exchange Ratio
All references to common share totals or values
in the accompanying consolidated financial statements, unless otherwise stated, have been retroactively adjusted to reflect a share
exchange ratio of 4.17 pursuant to the terms of the share exchange agreement dated May 15, 2017 described above.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Going Concern
The accompanying consolidated financial statements
have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction
of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. On
a consolidated basis, the Company has incurred significant operating losses since inception.
Because the Company does not expect that existing
operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about the Company’s
ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative
sources of financing. Historically, the Company has raised capital through private placements, convertible debentures and officer
loans as an interim measure to finance working capital needs, and may continue to raise additional capital through sale of common
stock or other securities, and obtaining some short-term loans. The Company will be required to continue to so until its consolidated
operations become profitable. Also, the Company has, in the past, paid for consulting services with its common stock to maximize
working capital, and intends to continue this practice where feasible.
Management’s Representation of
Interim Financial Statements
The accompanying unaudited consolidated financial
statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed
by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not
misleading. These consolidated financial statements include all of the adjustments, which in the opinion of management are necessary
to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature.
Interim results are not necessarily indicative of results for a full year. These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements at December 31, 2016 and 2015, as presented in Exhibit 99.1 on
the Company’s Form 8-K/A filed on November 2, 2017 with the SEC.
Basis of Presentation
The consolidated financial statements of the
Company have been prepared in accordance with GAAP and are expressed in United States dollars. For the nine-month period ended
September 30, 2017, the consolidated financial statements include the accounts of the Company; and its wholly-owned subsidiaries
Grom Social, TD Holdings, GES, GNS and IAL. All intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant estimates relate to revenue recognition, valuation of accounts receivable
and inventories, purchase price allocation of acquired businesses, impairment of long lived assets and goodwill, valuation of financial
instruments, income taxes, and contingencies. The Company bases its estimates on historical experience, known or expected trends
and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these
financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets
and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Revenue Recognition
Revenue from the production of animated films
is recognized based upon substantial completion and delivery of the Company’s produced animated films on a per episodic basis.
Substantial means that the animated films are 100% complete and is usually termed as a “first take”. In certain animation
contracts, a certain percentage of the total contract price are withheld by the Company’s client for possible retakes and
rejects over the finished products and are not recognized as revenue. A certain percentage of the episode price is required in
advance as a down payment upon every inception of the animation of an episode and is initially recorded by the Company as deferred
revenue.
Revenue is measured by reference to the fair
value of consideration received or receivable by the Company for services provided, excluding value-added tax (VAT), if any, and
trade discounts. Cost and expenses are recognized in the consolidated statements of comprehensive income upon utilization of the
service or at the date they are incurred.
Revenue from subscription sales are recognized
on a pro-rata basis over the subscription period. Typically, a subscriber purchases computer hardware and a service license for
a period of use between one year to five years for software and support. The subscriber is billed in full at the time of the sale.
The Company immediately recognizes any revenue attributable to the computer hardware as it is non-refundable. The advanced billing
for software and service is initially recorded as deferred revenue and subsequently recognized as revenue evenly throughout the
subscription period.
Fair Value Measurements
The Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 820, “
Fair Value Measurements and Disclosures
” (“ASC
820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
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 September 30, 2017 and December 31, 2016.
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 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.
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.
The following table summarizes the Company’s
financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Earnout liability
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,294,207
|
|
The following table summarizes the change in
the Company’s financial assets and liabilities measured at fair value as of September 30, 2017 and December 31, 2016
Fair value, January 1, 2016
|
|
$
|
–
|
|
Fair value of contingent consideration issued during the period
|
|
|
3,987,602
|
|
Change in fair value
|
|
|
(2,055,895
|
)
|
Fair value, December 31, 2016
|
|
|
1,931,707
|
|
Fair value of contingent consideration issued during the period
|
|
|
362,500
|
|
Change in fair value
|
|
|
–
|
|
Fair value, September 30, 2017
|
|
$
|
2,294,207
|
|
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 considers all highly liquid investments
with a maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash
on deposit with banks and money market funds, the fair value of which approximates cost. The Company maintains its cash balances
with a high-credit-quality financial institution. At times, such cash may be in excess of the Federal Deposit Insurance Corporation
insured limit of $250,000. The Company has not experienced any losses in such accounts, and management believes the Company is
not exposed to any significant credit risk on its cash and 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.
Inventory
Materials are recorded at cost, determined
using the first-in, first-out method. Work-in-process inventories are valued at the actual cost incurred for a specific project.
The cost of work-in-process includes materials, direct labor, other direct costs and related production overheads.
Inventories are measured at the lower of cost
or net realizable value. Historically, costs are generally lower in the case of the Company’s inventories since all animation
projects are contract based with guaranteed payments from its customers. Materials-in-transit, if any, are stated at invoice cost
plus any importation or other incidental charges.
A provision for inventory obsolescence or slow-moving
inventory is set-up, if necessary, based on a review of the movement and current condition of raw materials. The Company does not
believe that any obsolescence is exists on finished work in process. In the event of a dispute with a client regarding quality
or specifications, the Company may incur additional costs because of retakes and editing in an effort to achieve customer satisfaction.
The Company believes that no write-down for obsolete
inventory is necessary as of September 30, 2017 and December 31, 2016.
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:
Computers, software and office equipment
|
1 – 5 years
|
Machinery and equipment
|
3 – 5 years
|
Vehicles
|
5 years
|
Furniture and fixtures
|
5 – 10 years
|
Leasehold improvements
|
Lesser of lease term or estimated useful life
|
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. Goodwill impairment testing is
a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying
amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches. The fair
values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting
unit. Under the income approach, 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, then the
second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill
by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting
unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s
assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If
the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal
to the excess.
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 impairment test prior to scheduled annual impairment tests.
The Company performed its annual fair value
assessment at December 31, 2016 on its subsidiaries with material goodwill and intangible asset amounts on their respective balance
sheets and determined that no impairment exists.
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 September 30, 2017 and at December 31, 2016, 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”
. 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. FASB 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.
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
has adopted 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 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
ASC 220,
“Comprehensive Income”,
establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As
of September 30, 2017, and December 31, 2016, the Company determined that it had items that represented components of comprehensive
income and, therefore, has included a statement of comprehensive income in the financial statements.
Advertising expenses
Advertising costs are expensed as incurred
and included in selling and marketing expenses.
Shipping and handling costs
Shipping and handling costs related to the
acquisition of goods from vendors are included in cost of sales.
Basic and Diluted Net Income (Loss) Per
Share
The Company computes net income (loss) per
share in accordance with ASC 260,
“Earnings per Share”
. ASC 260 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 common shares outstanding during the period using the treasury stock method
and convertible preferred stock using the if-converted method. 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 May 2014, the FASB issued ASU 2014-09, “
Revenue
from Contracts with Customers (Topic 606)”.
Under the update, revenue will be recognized based on a five-step model.
The core principle of the model is that revenue will be recognized when the transfer of promised goods or services to customers
is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. In 2015, the FASB deferred the effective date of the standard to annual and interim periods beginning after December
15, 2017. Early adoption will be permitted for annual and interim periods beginning after December 15, 2016. The Company is currently
evaluating the impact that adopting this ASU will have on its financial position, results of operations and cash flows.
The following table sets forth the components
of the Company’s accounts receivable at September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
942,983
|
|
|
$
|
697,115
|
|
Allowance for doubtful accounts
|
|
|
(146,970
|
)
|
|
|
(146,970
|
)
|
Total accounts receivable, net
|
|
$
|
796,013
|
|
|
$
|
550,145
|
|
Effective July 1, 2016, the Company received
$1,719,001 in gross accounts receivable in connection with its acquisition of TD Holdings. See Note 6 – Business Combinations.
An allowance for bad debts totaling $146,904 was reserved against those trade receivables. As of September 30, 2017 and December
31, 2016, the Company evaluated its outstanding trade receivables and determined that its allowance for bad debts was sufficiently
reserved. No bad debt expense was recorded during the nine months ended September 30, 2017 and the year December 31, 2016.
During the nine-month period ended September
30, 2017, the Company had four customers that accounted for 77.7% of consolidated revenues and another five customers that accounted
for 74.3% of consolidated accounts receivable. Four of these customers were the same concentration customers for the period ended
December 31, 2016.
During the year ended December 31, 2016, the
Company had four customers that accounted for 69.8% revenues and the same four customers that accounted for 89.2% 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 September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Prepaid rent
|
|
$
|
19,281
|
|
|
$
|
32,500
|
|
Prepaid service agreements
|
|
|
181,149
|
|
|
|
83,690
|
|
Other prepaid expenses and current assets
|
|
|
109,837
|
|
|
|
26,018
|
|
Total
|
|
$
|
310,267
|
|
|
$
|
142,208
|
|
Prepaid expenses and other assets represent
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 September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
Capital assets subject to depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers, software and office equipment
|
|
$
|
1,608,141
|
|
|
$
|
(1,244,604
|
)
|
|
|
363,537
|
|
|
$
|
1,789,070
|
|
|
$
|
(1,430,016
|
)
|
|
$
|
359,054
|
|
Machinery and equipment
|
|
|
91,050
|
|
|
|
(82,581
|
)
|
|
|
8,469
|
|
|
|
561,431
|
|
|
|
(536,045
|
)
|
|
|
25,386
|
|
Vehicles
|
|
|
157,555
|
|
|
|
(101,586
|
)
|
|
|
55,969
|
|
|
|
143,395
|
|
|
|
(83,130
|
)
|
|
|
60,265
|
|
Furniture and fixtures
|
|
|
290,154
|
|
|
|
(266,062
|
)
|
|
|
24,092
|
|
|
|
297,346
|
|
|
|
(263,290
|
)
|
|
|
34,056
|
|
Leasehold improvements
|
|
|
631,693
|
|
|
|
(569,368
|
)
|
|
|
62,325
|
|
|
|
648,443
|
|
|
|
(567,666
|
)
|
|
|
80,777
|
|
Total fixed assets
|
|
$
|
2,778,593
|
|
|
$
|
(2,264,201
|
)
|
|
$
|
514,392
|
|
|
$
|
3,439,685
|
|
|
$
|
(2,880,147
|
)
|
|
$
|
559,538
|
|
For the nine-month period ended September 30,
2017 and the year ended December 31, 2016, the Company recorded depreciation expense of $200,566 and $131,132, respectively.
Acquisition of TD Holdings Limited
On February 6, 2016, Grom Holdings entered
into a letter of intent to acquire all of the stock of TD Holdings Limited. Grom Holdings issued 417,000 shares of its common stock
valued at $0.58 per share, or $240,000, in return for a period of exclusivity through May 31, 2016.
On June 20, 2016, Grom Holdings executed a
share sale agreement with TD Holdings. Under the terms of the agreement, Grom Holdings paid $12.0 million in consideration including
$3.5 million in cash, the issuance of $4.0 million of its common stock and the issuance of $4.5 million in 5% senior, secured promissory
notes in exchange for all of the equity of TD Holdings. The 7,367,001 shares of Grom Holdings’s common stock issued were
subject to a twelve-month restrictive period from the date of the transaction closing. The transaction closed effective July 1,
2016.
The Sellers were also entitled to receive $329,644
in post-closing cash payments for the excess working capital, as defined by the agreement, on TD Holdings’ closing balance
sheet. These amounts were subject to certain adjustments, and payable on demand after the transaction closing date. As of December
31, 2016, the excess working capital obligation was fully satisfied.
Additionally, the former stockholders will
have the opportunity for contingent, earn-out payments of up to $5.0 million if certain revenue and EBITDA thresholds are achieved
over the three-year post-closing period. The earn-out payments, if made, shall be payable 25% in cash and 75% in common stock.
At December 31, 2016, no earn-out thresholds were achieved.
Fair Value of Consideration Transferred
and Recording of Assets Acquired
The following table summarizes the acquisition
date fair value of the consideration paid, identifiable assets acquired, and liabilities assumed including an amount for goodwill:
Consideration Paid:
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,500,000
|
|
Common stock, 7,367,001 shares of Grom common stock (includes the 417,000 Letter of Intent shares)
|
|
|
4,240,000
|
|
Senior, secured promissory notes, net of discount of $309,049
|
|
|
4,190,951
|
|
Working capital adjustment payable to sellers
|
|
|
329,644
|
|
Contingent purchase consideration
|
|
|
3,987,602
|
|
Fair value of total consideration
|
|
$
|
16,248,197
|
|
|
|
|
|
|
Recognized amount of identifiable assets acquired, and liabilities assumed:
|
|
|
|
|
Financial assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,024,424
|
|
Accounts receivables
|
|
|
693,406
|
|
Inventory
|
|
|
350,769
|
|
Prepaid and other assets
|
|
|
148,079
|
|
Property and equipment
|
|
|
405,191
|
|
Deferred tax assets
|
|
|
180,735
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
1,526,282
|
|
Non-compete agreements
|
|
|
846,638
|
|
Trade name
|
|
|
4,386,247
|
|
Financial liabilities:
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(465,247
|
)
|
Advance payments and deferred revenues
|
|
|
(697,752
|
)
|
Other noncurrent liabilities
|
|
|
(254,631
|
)
|
Total identifiable net assets
|
|
|
8,144,141
|
|
Goodwill
|
|
|
8,104,056
|
|
|
|
$
|
16,248,197
|
|
In estimating the fair value of the common
stock issued, the Company considered, among other factors, the recent volume and pricing of capital raise activities. The Company
valued the common stock shares at $0.58 per share, which represents a 26% discount to the most recent issue price prior to the
measurement date. The Company believes the discount represents a market participant perspective due to the large block and
minimum six month holding period.
In determining the fair value of the promissory
notes issued, the Company considered, among other factors, the market yields on debt securities depending on the time horizon and
level of perceived risk of the specific investment. The Company arrived at an estimated market rate of 9.4% and calculated the
present value of the $4.0 million promissory note and its related interest to be $3,690,951. As a result, the Company recorded
a discount against the promissory notes of $309,049. The discount is being amortized using the effective interest method over the
life of the notes. For the year ended December 31, 2016, the Company recorded $72,010 in interest expense related to the note discount.
The remaining discount balance at December 31, 2016 was $237,039. For the nine-month period ended September 30, 2017, the Company
recorded $108,803 in interest expense related to the note discount. The remaining discount balance at September 30, 2017, was $128,236.
The fair value of the contingent consideration
was estimated using a lattice model. The forecast future up and down movements were estimated based on historical EBITDA volatility
of 22.2% which includes the years 2013-2015 and the trailing twelve months ended June 30, 2016. The weighted average probability
of each scenario was calculated and discounted to present value at the weighted average cost of capital to arrive at $3,987,602.
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 acquisition is attributable to the value of the potential expanded market opportunity with new customers. The goodwill is not
expected to be deductible for tax purposes.
In determining the purchase price allocation,
the Company considered, among other factors, how a market participant would likely use the acquired assets. The estimated fair
value of intangible assets was based on the income approach. The income approach requires a projection of the cash flow that the
asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return,
or discount rate, which accounts for the time value of money and the degree of risk inherent in the asset. The expected future
cash flow that is projected should include all of the economic benefits attributable to the asset, including the tax savings associated
with the amortization of the intangible asset value over the tax life of the asset. The income approach may take the form of a
“relief-from-royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess
earnings methodology, depending on the specific asset under consideration.
The “relief-from-royalty” method
was used to value the trade names acquired from TD Holdings. The “relief-from-royalty” method estimates the cost savings
that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned
through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline
intangible assets. Typically, revenue is projected over the expected remaining useful life of the intangible asset. The key assumptions
in the prospective cash flows include a 11% compound annual sales growth rate over the five years period subsequent to the acquisition.
The royalty rate is then applied to estimate the royalty savings. The key assumptions used in valuing the existing trade names
acquired were as follows: royalty rate of 7.0%, discount rate of 13.8%, and a tax rate of 40.0%. The trade names are expected to
be used indefinitely and the value includes a terminal value, based on a long-term sustainable growth rate of 2.0%, of the after-tax
royalty savings determined using a form of the Gordon Growth model.
The fair value of customer relationships was
valued using an income method. Net Operating Profit After Tax (“NOPAT”) per customer is a function of the gross profit
margin of the Company, applicable contributory assets (i.e., working capital, fixed capital, work force, brand, IPR&D) charges,
and the discount rate reflecting the riskiness of the asset under valuation. NOPAT per customer was used to estimate the value
of the customer relationships. The key assumptions used include a revenue attrition rate of 35%, an income tax rate of 40%, and
a discount rate of
13.8%.
The “with and without” method was
used to value the non-compete agreement which will be amortized over three years. The key assumptions used include an income tax
rate of 40%, and a discount rate of 13.8%.
Acquisition of NetSpective Webfiltering
On January 1, 2017, Grom Holdings acquired
the assets of Netspective Webfilter, a division of TeleMate.net Software (the “Sellers”). Under the terms of the agreement,
Grom Holdings paid $1.0 million in consideration in the form of a $1.0 million redeemable, convertible promissory note. The note
bears interest at 0.68% per annum. All note principal and accrued interest is payable January 1, 2020. The note is convertible
at the election of the Sellers into Grom’s common stock at a conversion rate of $0.78 per share. Furthermore, if not previously
converted by the Sellers, the note may be converted by the Company into shares of Grom’s common stock at a rate of $0.48
per share commencing on November 1, 2019.
The Sellers will have the opportunity for contingent,
earn-out payments of up to $362,500 if certain net cash flow thresholds are achieved during the one-year post-closing period. The
earn-out payments, if made, shall be payable entirely in common stock.
Consideration Paid:
|
|
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
Common stock, 41,700 shares paid with letter of intent
|
|
|
32,500
|
|
Senior, secured promissory notes
|
|
|
1,000,000
|
|
Contingent purchase consideration
|
|
|
362,500
|
|
Fair value of total consideration
|
|
$
|
1,395,000
|
|
Recognized amount of identifiable assets acquired, and liabilities assumed:
|
|
|
|
Financial liabilities:
|
|
|
|
Deferred revenues
|
|
|
(521,735
|
)
|
Goodwill
|
|
|
1,916,735
|
|
|
|
$
|
1,395,000
|
|
The Company expects to perform a valuation study
on this acquisition by December 31, 2017 to determine the level of intangible assets.
7.
|
GOODWILL AND INTANGIBLE ASSETS
|
The following table sets forth the changes
in the carrying amount of the Company’s goodwill at September 30, 2017 and December 31, 2016:
Balance, January 1, 2016
|
|
$
|
–
|
|
Acquisition of TD Holdings Limited
|
|
|
8,104,056
|
|
Balance, December 31, 2016
|
|
$
|
8,104,056
|
|
Acquisition of Netspective Webfiltering
|
|
|
1,916,735
|
|
Balance, September 30, 2017
|
|
$
|
10,020,790
|
|
The following table sets forth the components
of the Company’s intangible assets at September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
Amortization Period
(Years)
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Book Value
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Book Value
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
10.0
|
|
$
|
1,526,282
|
|
|
|
(190,785
|
)
|
|
|
1,335,497
|
|
|
$
|
1,526,282
|
|
|
$
|
(76,314
|
)
|
|
$
|
1,449,968
|
|
Mobile software applications
|
|
2.0
|
|
|
282,500
|
|
|
|
(205,417
|
)
|
|
|
77,083
|
|
|
|
282,500
|
|
|
|
(99,479
|
)
|
|
|
183,021
|
|
Noncompete agreements
|
|
1.5
|
|
|
846,638
|
|
|
|
(705,532
|
)
|
|
|
141,106
|
|
|
|
846,638
|
|
|
|
(282,213
|
)
|
|
|
564,425
|
|
Subtotal
|
|
|
|
|
2,655,420
|
|
|
|
(1,101,734
|
)
|
|
|
1,553,686
|
|
|
|
2,655,420
|
|
|
|
(458,006
|
)
|
|
|
2,197,414
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
4,386,247
|
|
|
|
–
|
|
|
|
4,386,247
|
|
|
|
4,386,247
|
|
|
|
–
|
|
|
|
4,386,247
|
|
Total intangible assets
|
|
|
|
$
|
7,041,667
|
|
|
$
|
(1,101,734
|
)
|
|
$
|
5,939,933
|
|
|
$
|
7,041,667
|
|
|
$
|
(458,006
|
)
|
|
$
|
6,583,661
|
|
The Company recorded amortization expense for
intangible assets subject to amortization of $643,728 for the nine-month period ended September 30, 2017 and $458,006 during the
year ended December 31, 2016.
Other assets are comprised solely of guarantee
deposits 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 transaction and are subsequently measured at amortized cost.
9.
|
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 expected amount required to settle the obligation or liability.
The following table sets forth the components
of the Company’s accrued liabilities at September 30, 2017 and December 31, 2016.
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Executive and employee compensation
|
|
|
843,265
|
|
|
|
815,480
|
|
Interest on convertible debentures and promissory notes
|
|
|
298,837
|
|
|
|
126,882
|
|
Other accrued expenses and liabilities
|
|
|
332,052
|
|
|
|
207,310
|
|
Total accrued liabilities
|
|
$
|
1,474,154
|
|
|
$
|
1,149,672
|
|
Accrued expenses include approximately $138,000
for an estimated compromise settlement relating to tax deductions against supplier invoices in the Philippines at TDA. The Company,
in accordance with ASC 740-10, has determined that the recording of this amount is required because it is more likely than not
that the tax will be assessed.
10.
|
RELATED PARTY PAYABLES AND DONATED CAPITAL
|
In January 2016, Dr. Thomas J. Rutherford,
a member of the Company’s board of directors, purchased an unsecured, convertible note from Grom Holdings in the principal
amount of $200,000. The note bears interest at a rate of 9% per year and is payable semi-annually. In connection with the issuance
of the convertible note, Grom issued to Dr. Rutherford 69,501 shares of common stock as an inducement to lend. In November 2016,
Dr. Rutherford voluntarily converted his note, including inducement costs and accrued interest totaling $23,000, into 309,973 shares
of common stock.
Messrs. Darren Marks and Melvin Leiner, both
officers of the Company, have made numerous loans to Grom to help fund operations. These loans are non-interest bearing and callable
on demand. Neither Mr. Marks nor Mr. Leiner have any intention of calling these loans at present. The loan balances are classified
as short-term obligations under Related Party Payables on the Company’s balance sheet.
As of September 30, 2017, and December 31,
2016, the aggregate amount of loans made from the Company’s executive officers through their family trusts were $1,624,351
and 1,301,251, respectively, for Mr. Marks; and $1,009,135 and 972,459, respectively, for Mr. Leiner
Mr. Marks’ son Zach and his wife Sarah
are employees of Grom. Their annual salaries are $90,000 and $35,000, respectively. His sons Luke and Jack, and daughter Caroline
are also employed by Grom as independent contractors. Their annual fees are $18,000, $7,200 and $15,000, respectively.
During the nine months ended September 30,
2017 and the year ended December 31, 2016, the Company’s two officers and Zach Marks each voluntarily agreed to defer portion
of their salaries. As of September 30, 2017, and December 31, 2016 the group was collectively owed $646,088 and $623,953, respectively,
in accrued salaries. See Note 9 – Accounts Payable and Accrued Liabilities.
11.
|
OTHER NONCURRENT LIABILITIES
|
Other noncurrent liabilities are comprised
solely of retirement benefit costs. The Philippine Republic Act (RA) No. 7641, mandates all private employers to provide retirement
benefits to employees who upon reaching the age of sixty years or more, but not beyond sixty-five years, have served at least five
years in the said establishment. The amount of retirement benefit was defined as “at least one-half month salary for every
year of service, a fraction of at least six months being considered as one whole year”.
The balance of the accrued retirement benefit
cost, as of September 30, 2017 and December 31, 2016, amounted to $233,167 and $239,719, respectively. No retirement expense was
recognized for the year ended December 31, 2016, as the acquired prior period liability still approximates the Company’s
retirement obligation.
Unsecured, Convertible Debentures
The following tables set forth the components
of the Company’s unsecured, convertible debentures as of September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Principal value of convertible notes
|
|
$
|
1,100,000
|
|
|
$
|
225,000
|
|
Loan discounts
|
|
|
(12,208
|
)
|
|
|
(36,683
|
)
|
Total convertible notes, net
|
|
$
|
1,087,792
|
|
|
$
|
188,317
|
|
On January 1, 2017, the Company issued a three-year
0.68% redeemable convertible note of $1,000,000 in connection with the acquisition of the Netspective Webfiltering assets. All
note principal and accrued interest is payable January 1, 2020. The note is convertible at the election of the noteholders into
Grom’s common stock at a conversion rate of $3.25 per share. Furthermore, if not previously converted by the noteholders,
the note may be converted by the Company into shares of Grom’s common stock at a rate of $2.00 per share commencing on November
1, 2019.
During the nine- month period ended September
30, 2017, the Company did not make any private placements of convertible debt. The Company, upon receiving formal notice from a
noteholder, converted $17,500 in accrued interest into 24,434 shares of common stock. For the nine-month period ended September
30, 2017, the Company recorded $24,475 from the amortization of loan discount described below.
During the year ended December 31, 2016, the
Company privately placed a series of unsecured, convertible debentures with accredited investors for gross proceeds of $2,705,600.
The debentures carried an interest rate of 9% per annum, payable semiannually in cash, for a two-year term with fixed conversion
prices ranging from $0.72 to $0.96 per share if converted within the first year of issuance or fixed conversion prices ranging
from $1.20 to $1.44 if converted during the year following issuance.
In connection with the issuance of these convertible
debentures, the Company issued to its noteholders an aggregate of 884,244 shares of common stock as an inducement to lend. These
shares were valued at $667,332, with share prices ranging between $0.72 and $0.96 per share. The Company recorded the value of
these shares as a loan discount to be amortized as interest expense over the term of the related convertible debentures. The remaining
debt discount associated with these beneficial conversion features was $32,620 as of December 31, 2016. The related amortization
expense was $215,427 for the year ended December 31, 2016.
All of the convertible debentures were analyzed
at the time of their issuance for a beneficial conversion feature. In some instances, the Company concluded that a beneficial conversion
feature existed. The beneficial conversion features were measured using the commitment-date stock price and were determined to
aggregate $67,917. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related
convertible debentures. The remaining debt discount associated with these beneficial conversion features was $4,063 as of December
31, 2016. The related amortization expense was $22,891 for the year ended December 31, 2016.
During the year ended December 31, 2016, the
Company converted, upon receiving formal notices from its noteholders, $2,480,600 in note principal, plus inducement costs and
accrued interest totaling $233,029, into 3,771,928 shares of common stock. As a result of the conversions, the Company wrote off
the corresponding unamortized loan discounts totaling $460,248 as a charge to interest expense.
At December 31, 2016, the number of shares
of common stock underlying these convertible debentures totaled 312,750 shares.
The Company has analyzed the convertible debentures
for derivative accounting consideration and determined that derivative accounting does not apply.
Senior, Secured Promissory Notes
The following tables set forth the components
of the Company’s senior, secured promissory notes at September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Principal value of promissory notes
|
|
$
|
4,040,000
|
|
|
$
|
4,000,000
|
|
Loan discounts
|
|
|
(128,236
|
)
|
|
|
(237,039
|
)
|
Total promissory notes, net
|
|
$
|
3,911,764
|
|
|
$
|
3,762,961
|
|
On May 11, 2017, the Company issued a promissory
note to an accredited investor. The note totaled $40,000 in principal, with an original issuance discount (“OID”) of
20.0%, or $8,000. The note bears interest at a rate of 10.0% per annum, and is payable in full upon maturity on May 11, 2018.
At October 1, 2016, Grom owed $250,000 in principal
on the second note to the former shareholders of TD Holdings. The Company negotiated an extension of terms through December 31,
2016 in exchange for 41,700 shares of Grom common stock. These shares were valued at $32,500, or $0.78 per share, and recorded
as interest expense in the Company’s consolidated financial statements. This promissory note obligation was fully satisfied
as of December 31, 2016.
On July 1, 2016, the Company issued a secured
promissory note to the shareholders of TD Holdings in connection with the closing of the TD Holdings acquisition. The note totaled
$500,000, bears interest at 5.0% per annum and is due on the earlier of (i) October 1, 2016 or (ii) the date on which the Company
successfully completes a qualified initial public offering as defined in the agreement. The note is also collateralized by all
of the assets of TD Holdings.
On June 20, 2016, the Company issued a secured
promissory note to the shareholders of TD Holdings in connection with the share sale agreement. The note totaled $4.0 million,
bears interest at 5.0% per annum and is 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 note is collateralized by all of the assets of TD
Holdings.
Maturities of the Company’s borrowings
for each of the next five years are as follows:
2017
|
|
$
|
–
|
|
2018
|
|
$
|
4,265,000
|
|
2019
|
|
$
|
1,000,000
|
|
2020
|
|
$
|
–
|
|
2021
|
|
$
|
–
|
|
Preferred Stock
The Company is authorized to issue 25,000,000
shares of preferred stock at a par value of $0.001. No shares of preferred stock were issued and outstanding as of either September
30, 2017 or December 31, 2016.
Common Stock
The Company is authorized to issue 200,000,000
shares of common stock at a par value of $0.001 and had 120,621,893 and 101,452,789 shares of common stock issued and outstanding
as of September 30, 2017 and December 31, 2016, respectively.
Common Stock Issued and Warrants Exercised
in Private Placements
During the nine-month period ended September
30, 2017, the Company issued 6,300,870 shares of common stock for proceeds of $1,511,000 under a series of stock warrant exercises
with a share price of $0.24 per share.
During the year ended December 31, 2016,
the Company issued 5,216,670 shares of common stock for proceeds of $1,251,000 under a series of stock warrant exercises with a
share price of $0.24 per share.
During the year ended December 31, 2016, the
Company issued 436,987 shares of common stock for proceeds of $340,076 under a series of private placement equity offerings with
share prices ranging between $0.72 and $0.78 per share.
Common Stock Issued in Exchange for Consulting,
Professional and Other Services
During the nine-month period ended September
30, 2017, the Company issued 851,931 shares of common stock with a fair market value of $663,975 to employees, officers and
directors in lieu of cash payment. Additionally, the Company issued 1,597,965 shares of common stock with a fair value of $956,705
to consultants and other professionals in lieu of cash payments.
During the year ended December 31, 2016, the
Company issued 543,030 shares of common stock with a fair market value of $343,225 to consultants and other professionals
in lieu of cash payments.
Each share issuance made in exchange for services
was valued based upon the private placement offering price of the Company’s common stock in place on its respective date
of award.
Common Stock Issued In lieu of Cash for
Loans Payable and Other Accrued Obligations
During the nine months ended September 30,
2017, the Company issued 45,870 shares of common stock with a fair market value of $33,000 to satisfy loans payable and other
accrued obligations.
During the year ended December 31, 2016, the
Company issued 521,250 shares of common stock with a fair market value of $150,000 to satisfy loans payable and other accrued
obligations.
Common Stock Issued in Connection with
the Amendment of Terms of a Promissory Note
At October 1, 2016, Grom Holdings owed $250,000
in past due principal on a promissory note to the former shareholders of TD Holdings. Grom Holdings negotiated an extension of
terms through December 31, 2016 in exchange for 41,700 shares of Grom’s common stock. These shares were valued at $32,500,
or $0.78 per share, and recorded as interest expense in the Company’s consolidated financial statements. See Note 12 –
Debt.
Common Stock Issued in Connection with
the Issuance of Convertible Debentures
During the year ended December 31, 2016, the
Company issued 884,244 shares of common stock with a fair market value of $667,332 to investors as an inducement to lend in
connection with the issuance of its unsecured, convertible notes. The fair value of the shares was recorded as interest expense
in the Company’s consolidated financial statements. See Note 12 – Debt.
Common Stock Issued in the Acquisition
of a Business
On July 1, 2016, the Company issued 7,617,201
shares of its common stock valued at approximately $0.58 per share, or $4,435,000, in connection with its acquisition of TD Holdings.
See Note 6 – Business Combinations.
Common Stock Issued in the Acquisition
of Intangible Assets
On August 26, 2016, the Company issued 208,500
shares of its common stock valued at $0.78 per share, or $162,500, in connection with its acquisition of the MamaBear mobile software
application from GeoWaggle LLC.
Conversion of Convertible Debentures
and Accrued Interest into Common Stock
During the year ended December 31, 2016, the
Company converted, upon receiving formal instructions from its noteholders, $2,480,600 in note principal, plus inducement costs
and accrued interest of $233,029, into 3,771,928 shares of common stock. See Note 12 – Debt.
Stock Purchase Warrants
The following table reflects all outstanding
and exercisable warrants at September 30, 2017 and December 31, 2016. All stock warrants are exercisable for a period of approximately
five years from the date of issuance.
|
|
Number of Warrants Outstanding
|
|
|
Weighted Avg.
Exercise Price
|
|
|
Avg. Remaining Contractual Life (Yrs)
|
|
Balance January 1, 2017
|
|
|
7,351,699
|
|
|
$
|
0.26
|
|
|
|
0.75
|
|
Warrants issued
|
|
|
567,166
|
|
|
$
|
1.50
|
|
|
|
2.25
|
|
Warrants exercised
|
|
|
(7,107,765
|
)
|
|
$
|
0.24
|
|
|
|
|
|
Warrants forfeited
|
|
|
(29,190
|
)
|
|
$
|
0.24
|
|
|
|
|
|
Balance September 30, 2017
|
|
|
781,910
|
|
|
$
|
1.36
|
|
|
|
2.63
|
|
14.
|
COMMITMENTS AND CONTINGENCIES
|
Grom leases its principal offices in Boca Raton,
Florida, at an annual base cost of approximately $33,168. The lease expires in October 31, 2018.
TD Holdings leases its principal offices in
Manila, Philippines at an annual base cost of approximately $151,000. The lease is for a five-year term expiring on December 31,
2019. Lease payments escalate by 5% commencing in the second year. Further, the lease contract provides a renewal option that gives
TD Holdings the right to extend the lease period on terms mutually agreed upon with the lessor.
15.
|
RESTATEMENT
OF FINANCIAL STATEMENTS
|
Our interim financial statements for the
three and nine-month periods ended September 30, 2017, as previously filed as part of our Form 10-Q filed with the SEC on November
20, 2017 have been restated. The previously filed financial statements did not reflect the proper accounting treatment of the acquisition
of Grom Holdings, Inc. by Illumination America, Inc. during the appropriate quarterly interim periods. The impact of this restatement
on the Company’s Balance Sheet, Income Statements for the three and nine-month periods ended September 30, 2017, and on the
Statements of Cash Flows for the periods ended September 30, 2017 and 2016, are reflected in the tables below:
GROM SOCIAL ENTERPRISES INC.
Consolidated Balance Sheets
|
|
As revised
|
|
|
As reported
|
|
|
As revised
|
|
|
As reported
|
|
|
|
as of September 30, 2017
|
|
|
as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
712,319
|
|
|
$
|
712,319
|
|
|
$
|
443,494
|
|
|
$
|
445,901
|
|
Accounts receivable, net
|
|
|
796,013
|
|
|
|
796,013
|
|
|
|
550,145
|
|
|
|
666,044
|
|
Inventory, net
|
|
|
407,389
|
|
|
|
407,389
|
|
|
|
390,931
|
|
|
|
390,931
|
|
Prepaid expenses and other current assets
|
|
|
310,267
|
|
|
|
310,267
|
|
|
|
142,208
|
|
|
|
144,820
|
|
Total current assets
|
|
|
2,225,988
|
|
|
|
2,225,988
|
|
|
|
1,526,778
|
|
|
|
1,647,696
|
|
Investment in subsidiary companies
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
Accounts receivable, net -- noncurrent
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
Property and equipment, net
|
|
|
514,392
|
|
|
|
514,392
|
|
|
|
559,538
|
|
|
|
559,538
|
|
Goodwill
|
|
|
10,020,790
|
|
|
|
10,020,790
|
|
|
|
8,104,056
|
|
|
|
8,104,056
|
|
Intangible assets, net
|
|
|
5,939,933
|
|
|
|
5,939,933
|
|
|
|
6,583,661
|
|
|
|
6,583,661
|
|
Deferred tax assets, net -- noncurrent
|
|
|
174,141
|
|
|
|
174,141
|
|
|
|
165,901
|
|
|
|
165,901
|
|
Other assets
|
|
|
64,585
|
|
|
|
64,585
|
|
|
|
45,704
|
|
|
|
49,023
|
|
Total assets
|
|
$
|
18,939,829
|
|
|
$
|
18,939,829
|
|
|
$
|
16,985,638
|
|
|
$
|
17,109,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
624,418
|
|
|
$
|
624,418
|
|
|
$
|
771,870
|
|
|
$
|
996,897
|
|
Accrued liabilities
|
|
|
1,474,154
|
|
|
|
1,474,154
|
|
|
|
1,149,672
|
|
|
|
1,266,527
|
|
Advanced payments and deferred revenues
|
|
|
1,275,617
|
|
|
|
1,275,617
|
|
|
|
347,162
|
|
|
|
347,162
|
|
Senior secured promissory notes, net -- current
|
|
|
3,911,764
|
|
|
|
3,911,764
|
|
|
|
–
|
|
|
|
–
|
|
Related party payables
|
|
|
2,633,486
|
|
|
|
2,633,486
|
|
|
|
2,119,263
|
|
|
|
2,273,710
|
|
Income taxes payable
|
|
|
–
|
|
|
|
–
|
|
|
|
30,137
|
|
|
|
30,137
|
|
Total current liabilities
|
|
|
9,919,439
|
|
|
|
9,919,439
|
|
|
|
4,418,104
|
|
|
|
4,914,433
|
|
Convertible debentures, net of loan discounts
|
|
|
1,087,792
|
|
|
|
1,087,792
|
|
|
|
188,317
|
|
|
|
188,317
|
|
Senior secured promissory notes, net of loan discounts
|
|
|
–
|
|
|
|
–
|
|
|
|
3,762,961
|
|
|
|
3,762,961
|
|
Contingent purchase consideration
|
|
|
2,294,207
|
|
|
|
2,294,207
|
|
|
|
1,931,707
|
|
|
|
1,931,707
|
|
Other noncurrent liabilities
|
|
|
233,167
|
|
|
|
233,167
|
|
|
|
239,719
|
|
|
|
239,719
|
|
Total liabilities
|
|
|
13,534,605
|
|
|
|
13,534,605
|
|
|
|
10,540,808
|
|
|
|
11,037,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value. 10,000,000 shares authorized; zero shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
120,622
|
|
|
|
36,888
|
|
|
|
101,454
|
|
|
|
34,594
|
|
Additional paid-in capital
|
|
|
45,907,035
|
|
|
|
49,136,475
|
|
|
|
41,195,941
|
|
|
|
43,758,354
|
|
Accumulated earnings (deficit)
|
|
|
(40,543,068
|
)
|
|
|
(43,688,774
|
)
|
|
|
(34,797,909
|
)
|
|
|
(37,665,554
|
)
|
Accumulated other comprehensive income
|
|
|
(79,365
|
)
|
|
|
(79,365
|
)
|
|
|
(54,656
|
)
|
|
|
(54,656
|
)
|
Total stockholders' equity
|
|
|
5,405,224
|
|
|
|
5,405,224
|
|
|
|
6,444,830
|
|
|
|
6,072,738
|
|
Total liabilities and equity
|
|
$
|
18,939,829
|
|
|
$
|
18,939,829
|
|
|
$
|
16,985,638
|
|
|
$
|
17,109,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding
|
|
|
120,621,893
|
|
|
|
120,621,893
|
|
|
|
101,452,789
|
|
|
|
111,717,533
|
|
GROM SOCIAL ENTERPRISES INC.
Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
|
|
As revised
|
|
|
As reported
|
|
|
As revised
|
|
|
As reported
|
|
|
As revised
|
|
|
As reported
|
|
|
As revised
|
|
|
As reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
Three
Months Ended September 30,
|
|
|
Three
Months Ended September 30,
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,194,275
|
|
|
$
|
2,371,776
|
|
|
$
|
1,878,465
|
|
|
$
|
1,973,595
|
|
|
$
|
5,679,831
|
|
|
$
|
6,021,400
|
|
|
$
|
1,878,465
|
|
|
$
|
2,485,453
|
|
Cost of goods sold
|
|
|
877,147
|
|
|
|
1,020,745
|
|
|
|
912,875
|
|
|
|
967,972
|
|
|
|
2,491,521
|
|
|
|
2,754,329
|
|
|
|
912,875
|
|
|
|
1,386,222
|
|
Gross margin
|
|
|
1,317,128
|
|
|
|
1,351,031
|
|
|
|
965,590
|
|
|
|
1,005,623
|
|
|
|
3,188,310
|
|
|
|
3,267,071
|
|
|
|
965,590
|
|
|
|
1,099,231
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
282,748
|
|
|
|
282,748
|
|
|
|
273,152
|
|
|
|
273,152
|
|
|
|
844,294
|
|
|
|
844,294
|
|
|
|
312,402
|
|
|
|
312,402
|
|
Selling and marketing
|
|
|
88,388
|
|
|
|
88,388
|
|
|
|
70,658
|
|
|
|
71,277
|
|
|
|
201,359
|
|
|
|
207,177
|
|
|
|
211,726
|
|
|
|
225,750
|
|
General and administrative
|
|
|
1,723,103
|
|
|
|
1,755,164
|
|
|
|
1,047,430
|
|
|
|
1,168,773
|
|
|
|
3,880,628
|
|
|
|
4,106,232
|
|
|
|
2,219,615
|
|
|
|
2,552,833
|
|
Professional fees
|
|
|
277,918
|
|
|
|
298,698
|
|
|
|
305,479
|
|
|
|
365,107
|
|
|
|
1,305,579
|
|
|
|
1,430,148
|
|
|
|
846,868
|
|
|
|
1,055,191
|
|
Stock based compensation
|
|
|
413,475
|
|
|
|
413,475
|
|
|
|
3,989,777
|
|
|
|
3,989,777
|
|
|
|
2,376,835
|
|
|
|
2,376,835
|
|
|
|
6,992,551
|
|
|
|
6,992,551
|
|
Total operating expenses
|
|
|
2,785,632
|
|
|
|
2,838,473
|
|
|
|
5,686,496
|
|
|
|
5,868,086
|
|
|
|
8,608,695
|
|
|
|
8,964,686
|
|
|
|
10,583,162
|
|
|
|
11,138,727
|
|
Income (loss) from operations
|
|
|
(1,468,504
|
)
|
|
|
(1,487,442
|
)
|
|
|
(4,720,906
|
)
|
|
|
(4,862,463
|
)
|
|
|
(5,420,385
|
)
|
|
|
(5,697,615
|
)
|
|
|
(9,617,572
|
)
|
|
|
(10,039,496
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(322,551
|
)
|
|
|
(322,551
|
)
|
|
|
(315,108
|
)
|
|
|
(315,259
|
)
|
|
|
(530,132
|
)
|
|
|
(530,963
|
)
|
|
|
(580,938
|
)
|
|
|
(581,104
|
)
|
Other gains (losses)
|
|
|
179,969
|
|
|
|
165,929
|
|
|
|
17,058
|
|
|
|
(4,968
|
)
|
|
|
205,358
|
|
|
|
205,358
|
|
|
|
17,201
|
|
|
|
17,201
|
|
Total other income (expense)
|
|
|
(142,582
|
)
|
|
|
(156,622
|
)
|
|
|
(298,050
|
)
|
|
|
(320,227
|
)
|
|
|
(324,774
|
)
|
|
|
(325,605
|
)
|
|
|
(563,737
|
)
|
|
|
(563,903
|
)
|
Income (loss) before income taxes
|
|
|
(1,611,086
|
)
|
|
|
(1,644,064
|
)
|
|
|
(5,018,956
|
)
|
|
|
(5,182,690
|
)
|
|
|
(5,745,159
|
)
|
|
|
(6,023,220
|
)
|
|
|
(10,181,309
|
)
|
|
|
(10,603,399
|
)
|
Provision for income taxes (benefit)
|
|
|
–
|
|
|
|
–
|
|
|
|
36,961
|
|
|
|
36,961
|
|
|
|
–
|
|
|
|
–
|
|
|
|
36,961
|
|
|
|
36,961
|
|
Net income (loss)
|
|
|
(1,611,086
|
)
|
|
|
(1,644,064
|
)
|
|
|
(5,055,917
|
)
|
|
|
(5,219,651
|
)
|
|
|
(5,745,159
|
)
|
|
|
(6,023,220
|
)
|
|
|
(10,218,270
|
)
|
|
|
(10,640,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per common
share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
111,380,009
|
|
|
|
118,340,249
|
|
|
|
96,829,137
|
|
|
|
106,947,587
|
|
|
|
106,119,177
|
|
|
|
106,947,587
|
|
|
|
91,122,598
|
|
|
|
106,947,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,611,086
|
)
|
|
$
|
(1,644,064
|
)
|
|
$
|
(5,055,917
|
)
|
|
$
|
(5,219,651
|
)
|
|
$
|
(5,745,159
|
)
|
|
$
|
(6,023,220
|
)
|
|
$
|
(10,218,270
|
)
|
|
$
|
(10,640,360
|
)
|
Foreign currency translation adjustment
|
|
|
(24,709
|
)
|
|
|
(9,639
|
)
|
|
|
(270,542
|
)
|
|
|
(270,542
|
)
|
|
|
(24,709
|
)
|
|
|
(24,709
|
)
|
|
|
(270,542
|
)
|
|
|
(270,542
|
)
|
Comprehensive income (loss)
|
|
$
|
(1,635,795
|
)
|
|
$
|
(1,653,703
|
)
|
|
$
|
(5,326,459
|
)
|
|
$
|
(5,490,193
|
)
|
|
$
|
(5,769,868
|
)
|
|
$
|
(6,047,929
|
)
|
|
$
|
(10,488,812
|
)
|
|
$
|
(10,910,902
|
)
|
GROM SOCIAL ENTERPRISES INC.
Consolidated Statements of Cash Flows (Unaudited)
|
|
As revised
|
|
|
As reported
|
|
|
As revised
|
|
|
As reported
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
Nine
months Ended September 30
|
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,745,159
|
)
|
|
$
|
(6,023,220
|
)
|
|
$
|
(10,218,270
|
)
|
|
$
|
(10,640,360
|
)
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
844,294
|
|
|
|
844,294
|
|
|
|
445,874
|
|
|
|
445,874
|
|
Amortization of debt discount
|
|
|
141,278
|
|
|
|
141,278
|
|
|
|
352,508
|
|
|
|
352,508
|
|
Common stock issued for financing costs
|
|
|
17,499
|
|
|
|
17,499
|
|
|
|
–
|
|
|
|
–
|
|
Common stock issued in exchange for fees and services
|
|
|
956,705
|
|
|
|
956,705
|
|
|
|
235,250
|
|
|
|
235,250
|
|
Deferred taxes
|
|
|
(8,240
|
)
|
|
|
(8,240
|
)
|
|
|
(13,481
|
)
|
|
|
(13,481
|
)
|
Stock based compensation
|
|
|
2,376,835
|
|
|
|
2,376,835
|
|
|
|
6,992,551
|
|
|
|
6,992,551
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(245,867
|
)
|
|
|
(129,968
|
)
|
|
|
59,092
|
|
|
|
52,551
|
|
Inventory
|
|
|
(16,458
|
)
|
|
|
(16,458
|
)
|
|
|
2,019
|
|
|
|
2,019
|
|
Prepaid expenses and other current assets
|
|
|
(200,558
|
)
|
|
|
(197,946
|
)
|
|
|
(38,516
|
)
|
|
|
(34,148
|
)
|
Other assets
|
|
|
(18,882
|
)
|
|
|
(15,564
|
)
|
|
|
(3,999
|
)
|
|
|
(3,999
|
)
|
Accounts payable
|
|
|
(74,775
|
)
|
|
|
(279,478
|
)
|
|
|
140,037
|
|
|
|
359,625
|
|
Accrued liabilities
|
|
|
318,547
|
|
|
|
207,625
|
|
|
|
(287,497
|
)
|
|
|
(235,275
|
)
|
Advanced payments and deferred revenues
|
|
|
406,721
|
|
|
|
406,721
|
|
|
|
57,204
|
|
|
|
57,204
|
|
Income taxes payable and other noncurrent liabilities
|
|
|
(36,689
|
)
|
|
|
(36,689
|
)
|
|
|
2,698
|
|
|
|
2,698
|
|
Related party payables
|
|
|
315,520
|
|
|
|
359,777
|
|
|
|
1,660,551
|
|
|
|
1,754,628
|
|
Net cash provided by (used in) operating activities
|
|
|
(969,229
|
)
|
|
|
(1,396,829
|
)
|
|
|
(613,979
|
)
|
|
|
(672,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash consideration for acquisition of business
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,500,000
|
)
|
|
|
(3,500,000
|
)
|
Cash acquired in acquisition of business
|
|
|
182
|
|
|
|
|
|
|
|
1,024,424
|
|
|
|
|
|
Purchase of intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(156,500
|
)
|
Purchase of fixed assets
|
|
|
(155,420
|
)
|
|
|
(155,420
|
)
|
|
|
(249,283
|
)
|
|
|
(249,283
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(155,238
|
)
|
|
|
(155,420
|
)
|
|
|
(2,724,859
|
)
|
|
|
(3,905,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
–
|
|
|
|
–
|
|
|
|
336,827
|
|
|
|
443,960
|
|
Proceeds from donated capital
|
|
|
–
|
|
|
|
425,375
|
|
|
|
–
|
|
|
|
–
|
|
Proceeds from exercise of common stock purchase warrants, net of
issuance costs
|
|
|
1,511,000
|
|
|
|
1,511,000
|
|
|
|
1,201,000
|
|
|
|
1,201,000
|
|
Proceeds from issuance of convertible debentures
|
|
|
–
|
|
|
|
–
|
|
|
|
2,655,600
|
|
|
|
2,655,600
|
|
Proceeds from issuance of senior, secured promissory notes
|
|
|
32,000
|
|
|
|
32,000
|
|
|
|
–
|
|
|
|
–
|
|
Repayments of convertible debentures
|
|
|
(125,000
|
)
|
|
|
(125,000
|
)
|
|
|
–
|
|
|
|
–
|
|
Repayments of loans payable
|
|
|
–
|
|
|
|
–
|
|
|
|
(250,000
|
)
|
|
|
(250,000
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,418,000
|
|
|
|
1,843,375
|
|
|
|
3,943,427
|
|
|
|
4,050,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(24,708
|
)
|
|
|
(24,708
|
)
|
|
|
(270,274
|
)
|
|
|
(270,175
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
268,825
|
|
|
|
266,418
|
|
|
|
334,315
|
|
|
|
(797,753
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
443,494
|
|
|
|
445,901
|
|
|
|
3,090
|
|
|
|
1,135,187
|
|
Cash and cash equivalents at end of period
|
|
$
|
712,319
|
|
|
$
|
712,319
|
|
|
$
|
337,405
|
|
|
$
|
337,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
–
|
|
|
|
|
|
|
$
|
–
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
–
|
|
|
|
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock
|
|
$
|
–
|
|
|
|
|
|
|
$
|
–
|
|
|
|
|
|
Cancellation of promissory notes, accrued interest and other related
payables
|
|
$
|
–
|
|
|
|
|
|
|
$
|
–
|
|
|
|
|
|
Common stock issued related to acquisition of business
|
|
$
|
–
|
|
|
|
|
|
|
$
|
4,240,000
|
|
|
|
4,240,000
|
|
Common stock issued with letter of intent to acquire a business
|
|
$
|
–
|
|
|
|
|
|
|
$
|
–
|
|
|
|
|
|
Common stock issued related to acquisition of intangible assets
|
|
$
|
60,000
|
|
|
$
|
60,000
|
|
|
$
|
162,500
|
|
|
|
162,500
|
|
Common stock issued for financing costs incurred in connection with
convertible and promissory notes
|
|
$
|
–
|
|
|
|
|
|
|
$
|
667,332
|
|
|
|
667,332
|
|
Common stock issued to reduce convertible and promissory notes payable
|
|
$
|
–
|
|
|
|
|
|
|
$
|
–
|
|
|
|
|
|
Common stock issued to reduce accounts payable and other accrued
liabilities
|
|
$
|
33,000
|
|
|
$
|
33,000
|
|
|
$
|
150,000
|
|
|
|
150,000
|
|
Contingent purchase consideration
|
|
$
|
362,500
|
|
|
$
|
362,500
|
|
|
$
|
3,987,602
|
|
|
|
3,987,602
|
|
Conversion of convertible debentures and accrued interest into common
stock
|
|
$
|
–
|
|
|
|
|
|
|
$
|
669,350
|
|
|
|
669,350
|
|
Debt issued related to acquisition of a business
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
|
$
|
4,500,000
|
|
|
|
4,500,000
|
|
Discount for beneficial conversion features on convertible debentures
|
|
$
|
–
|
|
|
|
|
|
|
$
|
67,917
|
|
|
|
67,917
|
|
Discount for fair value adjustment on promissory notes
|
|
$
|
–
|
|
|
|
|
|
|
$
|
309,049
|
|
|
|
309,049
|
|