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 Month Interim Periods March
31, 2018 and 2017
1.
NATURE OF OPERATIONS
Effective August 17, 2017, Grom Social
Enterprises, Inc. (the “Company,” “Grom,” “we,” “us,” or “our”), 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 (“Share Exchange”) that
was entered into on 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.” At the closing of the Share
Exchange, 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 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.
As a result of the acquisition of Grom
Holdings, Inc. 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, operates our social media network designed for children.
|
|
·
|
TD Holdings Limited (“TD Holdings”), which was acquired in July 2016, is incorporated in Hong Kong. Its operations are conducted through its subsidiary companies, Top Draw Animation Hong Kong Limited (“TDAHK”) and Top Draw Animation, Inc (“Top Draw” or “TDA”). The group’s principal activities, based in Manila, Philippines, are the production of animated films.
|
|
·
|
Grom Educational Services, Inc. (“GES”), formed in February 2017, is a Florida corporation
through which we operate our NetSpective Webfilter (“NetSpective”) services that we provide to schools and libraries.
|
|
·
|
Grom Nutritional Services, Inc. (“GNS”) is a Florida corporation formed in April 2017 through which we intend to market and distribute four flavors of a nutritional supplement to children.
|
|
·
|
Illumination America Lighting, Inc. (“IAL”), which operates our LED lighting business that was formerly Illumination, was our principal business prior to the Grom Holdings acquisition.
|
Retroactive Application of the Share Exchange Ratio
All references to share totals or values
in this Form 10-Q, unless otherwise stated, have been adjusted, retroactively, to reflect the Share Exchange ratio of 4.17 as
of August 17, 2017.
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, 2017 and 2016, as presented in the Company’s
Form 10-K filed on April 17, 2018 with the SEC.
Basis of Presentation
The Company has deemed the transfer of
net assets to be a reverse acquisition in accordance with FASB ASC 805-40,
"Reverse Acquisitions"
. The legal
acquirer is Illumination America and the legal acquiree is Grom Holdings, Inc. 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 consolidated financial statements of
the Company have been prepared in accordance with GAAP and are expressed in United States dollars. For the three-month period ended
March 31, 2018, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Grom
Social, TD Holdings, GES, Illumination, GNS and IAL. TD Holdings was acquired on July 1, 2016; and GES was formed in January 2017
to house the NetSpective assets and business which was acquired on January 1, 2017.
GNS, which was formed in April 2017, had
not recorded any material activity through the date of this report.
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
On
January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers
(“ASC 606”), using the modified retrospective method applied to those contracts which were not completed as of January
1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts
are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.
As of and for the
three months ended March 31, 2018, the consolidated financial statements were not materially impacted as a result of the application
of Topic 606 compared to Topic 605.
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 March 31, 2018 and December 31, 2017.
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.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Earnout liability
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
429,000
|
|
The following table summarizes the change
in the Company’s financial assets and liabilities measured at fair value as of March 31, 2018 and December 31, 2017.
Fair value, January 1, 2017
|
|
$
|
1,931,707
|
|
Fair value of contingent consideration issued during the period
|
|
|
362,500
|
|
Change in fair value
|
|
|
(1,865,207
|
)
|
Fair value, December 31, 2017
|
|
|
429,000
|
|
Fair value of contingent consideration issued during the period
|
|
|
–
|
|
Change in fair value
|
|
|
–
|
|
Fair Value, March 31, 2018
|
|
$
|
429,000
|
|
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.
The Company may record a write-down against
cost for inventory if necessary, based on a review of the movement and current condition of raw materials. The Company does not
believe that any obsolescence exists on 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 March 31, 2018 and December 31, 2017.
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
|
Construction in process is not depreciated
until the construction is completed and the asset is placed into service.
Goodwill and Intangible Assets
Goodwill represents the future economic
benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising
from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized
on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets
consist of customer relationships and non-compete agreements. Their useful lives range from 1.5 to 10 years. The Company’s
indefinite-lived intangible assets consist of trade names.
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, 2017 and 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 March 31, 2018 and at December 31, 2017, 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 FASB 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
FASB 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 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 March 31, 2018, and December 31, 2017, 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
Under the Jumpstart Our Business Startups
Act, or the JOBS Act, we meet the definition of an “emerging growth company.” We have irrevocably elected to opt out
of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the
JOBS Act. As a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such
standards is required for non- emerging growth companies.
FASB ASU 2016-02, Leases
(Topic 842)
- ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease
liability) and a right-of-use asset representing its right
FASB ASU No. 2014-15,
“Disclosure of
Uncertainties about an Entities Ability to Continue as a Going Concern,
to use the underlying asset for the lease term.
For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of
underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to
recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.
Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early
application is permitted for all public business entities and all nonpublic business entities upon issuance. The adoption of
this standard is not expected to have a material impact on our financial position and results of operations.
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.
3.
|
ACCOUNTS RECEIVABLE, NET
|
The following table sets forth the components
of the Company’s accounts receivable at March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
638,305
|
|
|
$
|
445,388
|
|
Allowance for doubtful accounts
|
|
|
–
|
|
|
|
–
|
|
Total accounts receivable, net
|
|
$
|
638,305
|
|
|
$
|
445,388
|
|
As of March 31, 2018, and December 31,
2017, 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 three-month period ended March 31, 2018 and the year ended December 31, 2017.
During the three-month ended March 31,
2018, the Company had 5 customers that accounted for 86.5% revenues and 4 of those same customers that accounted for 67.2% of accounts
receivable.
During the year ended December 31, 2017,
the Company had four customers that accounted for approximately 71.6% of consolidated revenues and three customers that accounted
for 77.3% of consolidated 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 March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Collaborative development agreement
|
|
$
|
167,590
|
|
|
$
|
191,531
|
|
Vendor advances
|
|
|
72,624
|
|
|
|
43,219
|
|
Prepaid service agreements
|
|
|
485,773
|
|
|
|
578,732
|
|
Prepaid rent
|
|
|
41,640
|
|
|
|
55,211
|
|
Employee advance and other payroll related items
|
|
|
14,193
|
|
|
|
15,734
|
|
Other prepaid expenses and current assets
|
|
|
150,999
|
|
|
|
150,952
|
|
Total
|
|
$
|
932,819
|
|
|
$
|
1,035,379
|
|
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 March 31, 2018 and December 31, 2017:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
Capital assets subject to depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers, software and office equipment
|
|
$
|
1,795,946
|
|
|
$
|
(1,339,414
|
)
|
|
$
|
456,532
|
|
|
$
|
1,792,499
|
|
|
$
|
(1,319,388
|
)
|
|
$
|
473,111
|
|
Machinery and equipment
|
|
|
152,964
|
|
|
|
(85,408
|
)
|
|
|
67,556
|
|
|
|
95,356
|
|
|
|
(88,342
|
)
|
|
|
7,014
|
|
Vehicles
|
|
|
156,000
|
|
|
|
(112,974
|
)
|
|
|
43,027
|
|
|
|
159,431
|
|
|
|
(110,098
|
)
|
|
|
49,333
|
|
Furniture and fixtures
|
|
|
311,980
|
|
|
|
(268,023
|
)
|
|
|
43,957
|
|
|
|
305,855
|
|
|
|
(273,768
|
)
|
|
|
32,086
|
|
Leasehold improvements
|
|
|
736,771
|
|
|
|
(575,480
|
)
|
|
|
161,291
|
|
|
|
654,309
|
|
|
|
(585,808
|
)
|
|
|
68,502
|
|
Capital assets not subject to depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
166,850
|
|
|
|
–
|
|
|
|
166,850
|
|
|
|
219,847
|
|
|
|
–
|
|
|
|
219,847
|
|
Total fixed assets
|
|
$
|
3,320,511
|
|
|
$
|
(2,381,299
|
)
|
|
$
|
939,213
|
|
|
$
|
3,227,297
|
|
|
$
|
(2,377,404
|
)
|
|
$
|
849,893
|
|
For the three-month period ended March
31, 2018 and the year ended December 31, 2017, the Company recorded depreciation expense of $81,601 and $277,047, 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. 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 to the selling shareholders of TDA (“TDA Sellers”) for all of the equity of TD Holdings. The 7,367,001
shares of the Company’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 TDA 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.
For the years ended December 31, 2017 and 2016 respectively no earn-out thresholds were achieved. -see Note 12, Debt, “Amendment
of TDA Sellers Note”.
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, 2017, the Company recorded $202,667 in interest expense related to the note
discount.
On January 3, 2018, we entered into an
amendment to the acquisition agreement with the TDA Sellers -see Note 12 Debt, “Senior Secured Promissory Notes”.
As part of the terms of the agreement, we issued an additional 800,000 restricted shares valued at $480,000 of our common stock
to the TDA Sellers, which was recorded as an additional note discount. For the three-month period ended March 31, 2018 the Company
recorded $122,998 in interest expense related to the note discount. The remaining discount balance at March 31, 2018 was $441,815.
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 an 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, a division of TeleMate.net Software (the “TeleMate”). 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 (the “Telemate Sellers”) into the Company’s common stock at a conversion rate
of $0.78 per share. Furthermore, if not previously converted by the Telemate Sellers, the note may be converted by the Company
into shares of the Company’s common stock at a rate of $0.48 per share commencing on November 1, 2019.
The Telemate Sellers had 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
|
|
Financial liabilities assumed
|
|
|
521,735
|
|
Contingent purchase consideration
|
|
|
362,500
|
|
Fair value of total consideration
|
|
$
|
1,916,735
|
|
Recognized amount of identifiable assets acquired, and liabilities assumed:
|
|
|
|
Financial assets:
|
|
|
|
Intangible asset
|
|
|
|
Brand name
|
|
$
|
69,348
|
|
Software
|
|
|
1,134,435
|
|
Customer relationships
|
|
|
74,004
|
|
Financial liabilities:
|
|
|
|
|
Deferred revenues
|
|
|
(521,735
|
)
|
Write-down of purchase consideration
|
|
|
463,978
|
|
Goodwill
|
|
|
696,705
|
|
|
|
$
|
1,916,735
|
|
Additionally, since the valuation report
reflected that the earnout threshold would not be reached, and the earnout was achieved, the Company recorded an additional expense
of $362,500 related to the acquisition of Netspective.
In determining the fair value of the convertible
promissory note issued, the Company considered, among other factors, the market yields on debt securities for similar time horizons
and level of perceived risk of the investment. Based on the conversion factors and interest rate contained in the note, the Company
believes the note represents fair value.
We used a lattice model to estimate the
fair value of the contingent consideration. We forecast future up and down movements based on the 9.7% historical volatility of
“Net Cash Flow” which includes the years 2014-2016. The weighted average probability of each scenario was calculated
and since it did not reach the earnout threshold, we did not record any contingent consideration provision.
The fair value of the internally developed
software was estimated using a replacement cost approach similar to the Constructive Cost Model (“COCOMO”) II.
The model is an algorithmic software cost estimation tool that estimates the cost, effort, and schedule of a hypothetical software
project. We estimated costs based on total lines of code in the program and labor cost rates for the required personnel, in addition
to a profit component. Although this is a replacement cost model, we believe it represents fair value from a market participant
perspective. The key assumptions used include average labor rates, total estimated labor hours, and an income tax rate of 40%.
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 for customer relationships and tradename and a replacement cost method
for the software programs. 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 replacement cost model uses estimated current costs at the Measurement Date, plus
a profit component.
The “relief-from-royalty” method
was used to value the trade names acquired from TeleMate. 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 15% 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 1.0%, discount rate of 17.1%, 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 10%, an income tax rate of 40%,
and a discount rate of 17.1%.
7.
|
GOODWILL AND INTANGIBLE ASSETS
|
The following table sets forth the changes
in the carrying amount of the Company’s goodwill at March 31, 2018 and December 31, 2017:
Fair value, January 1, 2017
|
|
$
|
8,104,056
|
|
Acquisition of NetSpective Webfiltering
|
|
|
696,705
|
|
Balance, December 31, 2017
|
|
|
8,800,761
|
|
Change in goodwill value
|
|
|
–
|
|
Fair Value, March 31, 2018
|
|
$
|
8,800,761
|
|
The Company recorded amortization expense
for intangible assets subject to amortization of $118,500 for the three months ended March 31, 2018, and $1,092,592 for the year
ended December 31, 2017.
The following table sets forth the components
of the Company’s intangible assets at December 31, 2018 and December 31, 2017:
|
|
|
March
31, 2018
|
|
|
|
December
31, 2017
|
|
|
|
|
Amortization
Period (Years)
|
|
|
|
Gross
Carrying Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Book Value
|
|
|
|
Gross
Carrying Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Book Value
|
|
Intangible assets subject
to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
10.00
|
|
|
$
|
1,600,286
|
|
|
$
|
(276,350
|
)
|
|
$
|
1,323,936
|
|
|
$
|
1,600,286
|
|
|
$
|
(236,343
|
)
|
|
$
|
1,363,943
|
|
Mobile software applications
|
|
|
2.00
|
|
|
|
282,500
|
|
|
|
(262,500
|
)
|
|
|
20,000
|
|
|
|
282,500
|
|
|
|
(240,729
|
)
|
|
|
41,771
|
|
NetSpective webfiltering software
|
|
|
2.00
|
|
|
|
1,134,435
|
|
|
|
(283,609
|
)
|
|
|
850,826
|
|
|
|
1,134,435
|
|
|
|
(226,887
|
)
|
|
|
907,548
|
|
Noncompete agreements
|
|
|
1.50
|
|
|
|
846,638
|
|
|
|
(846,638
|
)
|
|
|
–
|
|
|
|
846,638
|
|
|
|
(846,638
|
)
|
|
|
–
|
|
Subtotal
|
|
|
|
|
|
|
3,863,859
|
|
|
|
(1,669,097
|
)
|
|
|
2,194,762
|
|
|
|
3,863,859
|
|
|
|
(1,550,597)
|
|
|
|
2,313,262
|
|
Intangible assets not subject
to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
–
|
|
|
|
4,455,595
|
|
|
|
–
|
|
|
|
4,455,595
|
|
|
|
4,455,595
|
|
|
|
–
|
|
|
|
4,455,595
|
|
Total intangible assets
|
|
|
|
|
|
$
|
8,319,454
|
|
|
$
|
(1,669,097
|
)
|
|
$
|
6,650,357
|
|
|
$
|
8,319,454
|
|
|
$
|
(1,550,597
|
)
|
|
$
|
6,768,857
|
|
The following table provides information
regarding estimated amortization expense for intangible assets subject to amortization for each of the following years ending December
31:
|
2018
|
|
|
$
|
428,686
|
|
|
2019
|
|
|
|
386,916
|
|
|
2020
|
|
|
|
386,916
|
|
|
2021
|
|
|
|
386,915
|
|
|
2022
|
|
|
|
160,029
|
|
|
Thereafter
|
|
|
|
563,800
|
|
|
|
|
|
$
|
2,313,262
|
|
Other assets are comprised solely of guarantee
deposits at TDA which are refundable upon termination of contract or delivery of subject matter of the contract. These are initially
recorded at cost which is the fair value at the time of 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 March 31, 2018 and December 31, 2017.
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Earnout consideration payable in connection with Netspective acquisition
|
|
$
|
362,500
|
|
|
$
|
362,500
|
|
Executive and employee compensation
|
|
|
826,088
|
|
|
|
838,689
|
|
Interest on convertible debentures and promissory notes
|
|
|
431,827
|
|
|
|
356,599
|
|
Other accrued expenses and liabilities
|
|
|
21,310
|
|
|
|
34,938
|
|
Total accrued liabilities
|
|
$
|
1,641,725
|
|
|
$
|
1,592,726
|
|
Accrued expenses for both 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
|
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. During the three-month period ended March 31, 2018, Wayne Dearing, the managing director of TDH and his
wife Stella Dearing made loans to the Company amounting to $394,052 as of March 31, 2018. These loans were made to assist TDH’s
liquidity and helping to fund the capital expenditures to build out new office space at its facilities in Manila. These short-term
demand loans are non-interest. The Company expects to repay by the end of the second quarter ended.
On December 29, 2017, Messrs. Marks
and Leiner agreed to convert an aggregate of $500,000 of their combined loan balances into shares of our Common Stock, at a conversion
price of $0.50 per share, which was above the closing price of the Company’s common stock of $.30 on December 29, 2017.
Mr. Marks converted $333,333 of his loan into 666,666 shares; and Mr. Leiner converted $166,667 into 333,334 shares. As a result
of the transaction, Mr. Marks and Mr. Leiner’s loan balances were reduced to $1,291,018 and $842,468, respectively.
Mr. Marks and Mr. Leiner now beneficially own 15,204,731 and 9,313,136 shares of our Common Stock, respectively.
As of March 31, 2018, and December 31,
2017, after accounting for the taking the aggregate amount of loans made from the Company’s executive officers through their
family trusts were $1,211,826 and $1,215,442 respectively, for Mr. Marks; and $858,083 and $861,198, respectively, for Mr. Leiner.
On January 4, 2018, Mr. Marks and Mr. Leiner
voluntarily agreed to defer a large portion of their demand loans until July 1, 2019. Mr. Marks agreed to defer $915,442 of his
loan balance, and Mr. Leiner agreed to defer $561,198, leaving each individual with a current principal balance due of $300,000.
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 years ended December 31, 2017
and 2016, the Company’s two officers and Zach Marks each voluntarily agreed to defer portion of their salaries. As of March
31, 2018, and December 31, 2017 the group was collectively owed $620,338 and $617,213 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 March 31, 2018 and December 31, 2017 amounted to $229,580 and $237,495 respectively.
Convertible Debentures
The following tables set forth the components
of the Company’s, convertible debentures as of March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Redeemable unsecured convertible note -TeleMate
|
|
$
|
1,000,000
|
|
|
|
1,000,000
|
|
Principal value of secured convertible notes
|
|
|
1,372,486
|
|
|
|
676,223
|
|
Loan discounts
|
|
|
(293,294
|
)
|
|
|
(137,950
|
)
|
Less: Current portion
|
|
|
(24,653
|
)
|
|
|
(75,000
|
)
|
Total convertible notes, net
|
|
$
|
2,054,539
|
|
|
$
|
1,463,273
|
|
Redeemable unsecured convertible
note -TeleMate
On January 1, 2017, the Company issued
a three-year 0.68% redeemable convertible note for $1,000,000 to TeleMate in connection with the acquisition of the NetSpective
webfiltering assets from them. All note principal and accrued interest is payable January 1, 2020. The note is convertible at
the election of the noteholders into the Company’s’ common stock at a conversion rate of $0.78 per share. Furthermore,
if not previously converted by the noteholders, the note may be converted by the Company into shares of the Company’s common
stock at a rate of $0.48 per share commencing on November 1, 2019.
Under the terms of the asset purchase agreement
in which TeleMate had the obligation to collect certain monies on behalf of the Company, TeleMate failed to remit $146,882 it had
collected on the Company’s behalf from NetSpective customers. As a result of TeleMate’s non-payment, and to avoid litigation,
on January 12, 2018 we entered into a First Modification to the Purchase and Sale Agreement (the “Modification”).
Under the terms of the Modification, the
TeleMate Sellers agreed to the following terms:
|
·
|
To pay the Company $10,000 per month against their outstanding balance of $146,822. To date they have paid the Company $30,000 and are current on their monthly payment obligations.
|
|
|
|
|
·
|
They cannot exercise the conversion feature of their $1.0 million promissory note, nor will any of the $362,500 Earnout shares (464,744) until all payments are made in full.
|
|
·
|
The December 31, 2019 maturity date of the $1,000,000 convertible note is extended indefinitely, until all payments are made in full.
|
|
·
|
All interest payments ($6,800 annually) due from the Company to the TeleMate Sellers were suspended indefinitely until all payments are made in full.
|
Finally, assuming all payments are made
and the TeleMate Sellers decide to exercise the conversion feature of their promissory note, they are now bound by a leakout agreement
which will limit for a one-year period the amount of shares they can register for sale on a monthly basis.
Secured Convertible Notes- 2018
During the three-month period ended March
31, 2018, the Company privately placed a series of secured, convertible, original issue discount (OID) notes with accredited investors
for gross proceeds of $671,263. The Notes were issued with an OID discounts of 10.0%, or $67,126. The debentures carried an interest
rate of 10% per annum, payable semiannually in cash, for a two-year term with fixed conversion at a price per share if converted
within the first year of issuance or fixed conversion price at $0.78 converted during the two-year following issuance.
In connection with the issuance of these
convertible debentures, the Company issued to its noteholders an aggregate of 186,566 shares of common stock as an inducement
to lend. These shares were valued at $109,839 or approximately $0.59 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 related amortization
expense was $29,799 for the three months ended March 31, 2018.
Secured Convertible Notes-2017
During the year ended December 31, 2017,
the Company privately placed a series of secured, convertible, original issue discount (OID) notes with accredited investors for
gross proceeds of $601,223. The Notes were issued with an OID discounts of 10.0%, or $60,122. The debentures carried an interest
rate of 10% per annum, payable semiannually in cash, for a two-year term with fixed conversion at a price per share if converted
within the first year of issuance or fixed conversion price at $0.78 converted during the two-year following issuance.
In connection with the issuance of these
convertible debentures, the Company issued to its noteholders an aggregate of 150,305 shares of common stock as an inducement to
lend. These shares were valued at $78,321 with share prices ranging between $0.38 and $0.54 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 related amortization expense was $4,543 for the year ended December 31, 2017.
Additionally, at the end of 2017, there
were two convertible notes outstanding amounting to $75,000 that had been issued in 2016 with a fixed conversion price of $1.19.
Secured Convertible Notes-2016 activity
During the year ended December 31, 2016,
the Company privately placed a series of secured, 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.
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 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 March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Principal value of promissory notes
|
|
$
|
4,040,000
|
|
|
$
|
4,040,000
|
|
Loan discounts
|
|
|
(443,340
|
)
|
|
|
(86,339
|
)
|
Less current portion
|
|
|
(38,475
|
)
|
|
|
–
|
|
Total promissory notes, net
|
|
$
|
3,558,185
|
|
|
$
|
3,953,661
|
|
Amendment of TDA Sellers Note
On January 3, 2018, we entered into an
amendment to the acquisition agreement with the TDA Sellers (the “Amendment”):
|
·
|
The TDA Sellers agreed to extend the maturity date of the $4.0 million secured promissory note one year until July 1, 2019 (see 2016 description below);
|
|
·
|
The interest rate on the Note during the one-year extension period from July 2, 2018 to July 1, 2019 was changed to 10%. The interest rate on the Note remained at 5%, payable annually in arrears, until June 30, 2018;
|
|
·
|
During the one-year extension period, the interest will be paid quarterly in arrears, instead of annually in arrears. The first such quarterly interest payment of $100,000 is due on September 30, 2018; and
|
|
·
|
Under the terms of the terms acquisition agreement, the TDA Sellers had an opportunity to earn up to $5.0
million in contingent Earnout Payments (as describe above). The original Earn out measurement period ended on December 31, 2018.
As part of the consideration for the TDA Sellers agreeing to enter the Amendment, we agreed to extend the Earnout Period, one year,
to December 31, 2019.
|
Also, as additional consideration, we issued
an additional 800,000 restricted shares valued at $480,000 of our common stock to the TDA Sellers. The amortization of this $480,000
in additional discount amount to $80,000 in interest during the three-month period ended March 31, 2018.
As a result of the amendment, the Company
has classified the promissory note as a long-term obligation on our balance sheet for the period ended December 31, 2017.
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. See amendment to the TDH Seller’s Note (above).
Maturities of the Company’s borrowings
for each of the next five years are as follows:
2018
|
|
$
|
65,000
|
|
2019
|
|
$
|
5,701,223
|
|
2020
|
|
$
|
646,263
|
|
2021
|
|
$
|
–
|
|
2022
|
|
$
|
–
|
|
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 March
31, 2018 or December 31, 2017.
Common stock
The Company is authorized to issue 200,000,000
shares of common stock at a par value of $0.001 and had 126,115,017 and 124,273,548 shares of common stock issued and outstanding
as of March 31, 2018 and December 31, 2017, respectively.
Common Stock Issued in Private Placements
During the three-month period ended March
31, 2018 and the year ended December 31, 2017, the Company did not issue any shares of stock in private placements.
Common Stock Issued in Connection
with the Exercise of Warrants
During the three months ended March
31, 2018, the Company issued 256,455 shares of common stock for proceeds of $61,244 under a series of stock warrant exercises with
a share price of approximately $0.24 per share.
During the year ended December 31,
2017, the Company issued 6,530,220 shares of common stock for proceeds of $1,566,000 under a series of stock warrant exercises
with a share price of approximately $0.24 per share.
Common Stock Issued in Exchange for
Consulting, Professional and Other Services
During the three months ended March 31,
2018, the Company issued 115,321 shares of common stock with a fair market value of $76,193 to employees, officers and directors
in lieu of cash payment. Additionally, the Company issued 197,500 shares of common stock with a fair value of $138,375 to consultants
and other professionals in lieu of cash payments.
During the year ended December 31, 2017,
the Company issued 1,156,931 shares of common stock with a fair market value of $835,225 to employees, officers and directors
in lieu of cash payment. Additionally, the Company issued 3,264,965 shares of common stock with a fair value of $1,892,735 to consultants
and other professionals in lieu of cash payments.
Each share issuance made in exchange for
services was valued based upon the trading price of the Company’s common stock on the OTC markets.
Common Stock Issued In lieu of Cash
for Loans Payable and Other Accrued Obligations
During the three months ended March 31,
2018, the Company issued 285,627 shares of common stock with a fair market value of $171,376 to satisfy loans payable and
other accrued obligations.
During the year ended December 31, 2017,
the Company issued 1,045,870 shares of common stock with a fair market value of $533,000 to satisfy loans payable and other
accrued obligations.
Common Stock Issued in Connection
with the Issuance of Convertible Debentures
During the three months ended March 31,
2018 the Company issued 186,566 shares of common stock with a fair market value of $78,321 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.
During the year ended December 31, 2017
the Company issued 150,305 shares of common stock with a fair market value of $78,322 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
During the year ended December 31, 2017,
the Company issued 300,000 shares valued at $147,000 with the ac question of a business,
Common Stock Issued in the Acquisition
of Intangible Assets
During the year ended December 31, 2017
the company issued 83,400 shares in connection with the acquisition of certain intangible assets valued at $60,000
Common Stock issued in Connection
with the Amendment of the Terms of a Promissory note
During the three months ended March 31,
2018, we issued 800,000 shares valued at $480,000 in connection with the amendment we negotiated to the $4.0 million dollar TDA
Sellers Note -see Note 11
Stock Purchase Warrants
The stock purchase warrants have been accounted
for 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.
The following table reflects all outstanding
and exercisable warrants at March 31, 2018 and December 31, 2017. All stock warrants are exercisable for a period between
three and five years from the date of issuance.
|
|
Number of Warrants Outstanding
|
|
|
Weighted Avg. Exercise Price
|
|
|
Weighted Avg. Contractual Life (Yrs)
|
|
Balance January 1, 2017
|
|
|
7,608,154
|
|
|
$
|
0.26
|
|
|
|
0.75
|
|
Warrants issued
|
|
|
567,166
|
|
|
$
|
1.50
|
|
|
|
2.25
|
|
Less : Warrants exercised
|
|
|
(7,107,765
|
)
|
|
$
|
0.24
|
|
|
|
|
|
Warrants forfeited
|
|
|
(29,190
|
)
|
|
$
|
0.24
|
|
|
|
|
|
Balance December 31, 2017
|
|
|
1,038,365
|
|
|
$
|
1.36
|
|
|
|
2.38
|
|
Warrants issued
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Less : Warrants exercised
|
|
|
(256,455)
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2018
|
|
|
781,910
|
|
|
$
|
1.36
|
|
|
|
2.13
|
|
Stock Options
The following table represents all outstanding
and exercisable stock options as of March 31, 2018.
|
|
|
Options
issued
|
|
|
Options
forfeited
|
|
|
Options
outstanding
|
|
|
Vested
options
|
|
|
Strike Price
|
|
|
Weighted Average Remaining Life In Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,735,350
|
|
|
|
–
|
|
|
|
7,735,350
|
|
|
|
7,735,350
|
|
|
$
|
0.24
|
|
|
5.0
|
|
|
|
|
9,695,250
|
|
|
|
417,000
|
|
|
|
9,278,250
|
|
|
|
9,278,250
|
|
|
$
|
0.36
|
|
|
1.2
|
|
|
|
|
938,250
|
|
|
|
938,250
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
13,135,500
|
|
|
|
3,544,500
|
|
|
|
9,591,000
|
|
|
|
9,591,000
|
|
|
$
|
0.72
|
|
|
2.0
|
|
|
|
|
5,421,000
|
|
|
|
1,042,500
|
|
|
|
4,378,500
|
|
|
|
4,300,313
|
|
|
$
|
0.78
|
|
|
2.9
|
Total
|
|
|
|
36,925,350
|
|
|
|
(5,942,250
|
)
|
|
|
30,983,100
|
|
|
|
30,904,913
|
|
|
|
|
|
|
2.6
|
For the three months ended March 31, 2018
and the year ended December 31, 2017, the Company recorded $-0- and $1,823,408 in stock-based compensation expense, respectively
related to these stock options.
14.
|
COMMITMENTS AND CONTINGENCIES
|
In the United States we lease approximately
1,000 square feet of office space in Boca Raton, Florida at the rate of $2,000 per month pursuant to a three-year lease expiring
in October 2018. Our Florida office houses our corporate headquarters and administrative staff.
Our animation business leases portions
of 3 floors comprising in the aggregate approximately 28,800 square feet in the West Tower of the Philippine Stock Exchange Centre
in Pasig City, Manila. The space is used for administration and production purposes and we pay approximately $22,533 per month
in the aggregate for such space (which increases by approximately 5% per year. These leases expire in December 2022.
We
opened a new 1,400 square foot office in Norcross, Georgia on January 1, 2018 to house our NetSpective division. The monthly
rent pursuant to a five-year lease which expires in December 2023, is $2,055 per month which increases by approximately 3% annually.
Subsequent to March 31, 2018 the Company
has issued $461,111 in two-year convertible OID notes at 15% interest to four accredited investors.