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, 2019 and 2018
We operate our business through the following
five wholly-owned subsidiaries:
|
·
|
Grom Social, Inc. (“Grom Social”) was incorporated in the State of Florida on March 5, 2012 and operates our social media network designed for children.
|
|
·
|
TD Holdings Limited (“TD Holdings”), which was acquired in July 2016, was incorporated in Hong Kong on September 15, 2005. 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 are the production of animated films based in Manila, the Philippines.
|
|
·
|
Grom Educational Services, Inc. (“GES”), was incorporated in the State of Florida on January 17, 2017, and operates our NetSpective Webfiltering services to schools and libraries.
|
|
·
|
Grom Nutritional Services, Inc. (“GNS”) was incorporated in the State of Florida on April 19, 2017. We intend to market and distribute four flavors of a nutritional supplement to children through GNS. GNS did not record any revenue in 2018.
|
|
·
|
Illumination America Lighting, Inc. (“IAL”), was incorporated in the State of Florida on August 21, 2017. IAL operates our LED lighting business that was our principal business prior to the Share Exchange. IAL did not record any revenue in 2018.
|
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 the 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.
The Company does not expect that existing
operational cash flow will be sufficient to fund presently anticipated operations and has incurred significant operating losses
since inception and has a working capital deficit which 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 the sale of common stock
or other securities, and short-term loans. The Company will be required to continue to so until its consolidated operations become
profitable. However, there can be no assurance that the Company will be successful in raising sufficient capital when needed.
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, 2018 and 2017, as presented in the Company’s
Form 10-K filed on April 16, 2019 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, 2019, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Grom
Social, TD Holdings, GES, 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
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"). ASU
2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance provided in ASC Topic
606 ("ASC 606") requires entities to use a five-step model to recognize revenue by allocating the consideration from
contracts to performance obligations on a relative standalone selling price basis. Revenue is recognized when a customer obtains
control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange
for those goods or services. The standard also requires new disclosures regarding the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. ASC 606 also includes Subtopic 340-40,
Other Assets and Deferred
Costs - Contracts with Customers
, which requires the deferral of incremental costs of obtaining a contract with a customer.
This new guidance was initially effective for annual reporting periods (including interim reporting periods within those periods)
beginning after December 15, 2016, and early adoption was not permitted. However, in July 2015, the FASB voted to defer the effective
date of this ASU by one year for reporting periods beginning after December 15, 2017, with early adoption permitted as of the original
effective date. As a result, the effective date for the Company is January 1, 2018.
Entities have the option of using either
a full retrospective or a modified approach to adopt the guidance. The Company adopted this ASU in accordance with the modified
retrospective method, effective January 1, 2018, for all contracts 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 continue to be reported in accordance with
legacy GAAP.
Under the applicable revenue recognition
guidance for fiscal years 2017 and prior, these transactions were recognized when the amounts were billed to the customer.
As a result
of the Company’s transition to ASC 606, the Company recorded a net change in beginning retained earnings of $263,741 on
January 1, 2018, due to the cumulative effect of adopting ASC 606. For three months ended March 31, 2019, the Company recorded
a total of $1,793,763 of animation revenue from contracts with customers which include $296,734 in additional revenue as a result
of the adoption of ASC 606.
Under ASC 606 the Company’s animation
revenues are generated primarily from contracts with customers for preproduction and production services related to the development
of animated movies and television series. TDA preproduction activities include producing storyboards, location design, model and
props design, background color and color styling. For production, TDA focuses on library creation, digital asset management, background
layout scene assembly, posing, animation and after-effects. We provide our services under fixed-price contracts. Under fixed-price
contracts, we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates
upon which the price was negotiated, we will generate more or less profit or could incur a loss.
We account for a contract after it has
been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract
has commercial substance and collectability of consideration is probable.
We evaluate the services promised in each
contract at inception to determine whether the contract should be accounted for as having one or more performance obligations.
The services in our contracts are distinct from one another as the referring parties typically can direct all, limited, or single
portions of the various preproduction and production activities required to create and design an entire episode to us and we, therefore,
have a history of developing stand-alone selling prices for all of these distinct components. Accordingly, our contracts are typically
accounted for as containing multiple performance obligations.
We determine the transaction price for
each contract based on the consideration we expect to receive for the distinct services being provided under the contract.
We recognize revenue as performance obligations
are satisfied and the customer obtains control of the services. In determining when performance obligations are satisfied, we consider
factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially
all of our revenue is recognized over time as we perform under the contract due to the contractual terms present in each contract
which irrevocably transfer control of the work product to the customer as the services are performed.
For performance obligations recognized
over time, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using
the percentage-of-completion cost-to-cost measure of progress for our contracts because it best depicts the transfer of control
to the customer as we incur costs on our contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent
of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete
the performance obligation.
Webfiltering revenue
Revenue from subscription sales for webfiltering
at NetSpective is 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,
and control of the hardware has passed to the customer. The advanced billing for software and service is initially recorded as
deferred revenue and subsequently recognized as revenue over time evenly throughout the subscription period. Adoption of
ASC 606 had no impact on NetSpective’s revenues.
Substantially all of the revenue at TDA
and Netspective comes from the North American in the form of animation and webfiltering services, respectively. Historically and
going forward, TDA’s business is concentrated on five to eight key clients, that vary from year to year based upon discrete
projects which become available based on the popularity of a particular TV series, or the expected acceptance of new animated series.
TDA receives advance payments for a significant portion of the work it performs. Netspective, as consistent with industry practice
receives full payment in advance of providing webfiltering services over a period of one to five years. Revenue recognition under
ASC 606 and historically was unrelated to the timing of milestone or advance payments. Netspective’s business is focused
on forty to fifty US-based school districts located in the US. Both TDA and Netspective earn revenue via services transferred over
time to the client. Approximately 10% of Netspective’s business is recognized at a point in time due to the non-refundable
sale of computer hardware associated with web filtering services.
Contract Assets and Liabilities
Revenues from NetSpective contracts are
all billed in advance and therefore represent contract liabilities until fully recognized on a ratable basis over the contract
life. Animation revenue contracts vary with movie contracts typically allowing for progress billings over the contract term while
other episodic development activities are typically billable upon delivery of the performance obligation for an episode. These
episodic activities typically create unbilled contract assets between episode delivery dates while movies can create contract assets
or liabilities based on the progress of activities versus the arranged billing schedule.
The following table depicts the composition
of our contract assets and liabilities as of March 31, 2019, and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Animation contract assets
|
|
$
|
716,004
|
|
|
$
|
1,040,309
|
|
NetSpective contract assets
|
|
|
32,157
|
|
|
|
74,743
|
|
Other contract assets
|
|
|
8,701
|
|
|
|
8,441
|
|
Total contract assets
|
|
$
|
756,862
|
|
|
$
|
1,123,493
|
|
|
|
|
|
|
|
|
|
|
Animation contract liabilities
|
|
$
|
377,024
|
|
|
$
|
380,749
|
|
NetSpective contract liabilities
|
|
|
656,507
|
|
|
|
727,979
|
|
Other contract liabilities
|
|
|
11,500
|
|
|
|
11,500
|
|
Total contract liabilities
|
|
$
|
1,045,031
|
|
|
$
|
1,120,228
|
|
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, 2019, and December 31,
2018. 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 change
in the Company’s financial assets and liabilities measured at fair value as of March 31, 2019, and December 31, 2018.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Earnout liability
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
429,000
|
|
Fair value, December 31, 2017
|
|
$
|
429,000
|
|
Change in fair value
|
|
|
–
|
|
Fair value, December 31, 2018
|
|
$
|
429,000
|
|
Change in fair value
|
|
|
–
|
|
Fair value, March 31, 2019
|
|
$
|
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 more than 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
Inventory consists of animation supplies used
for the sole purpose of completing animation projects at Top Draw.
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 the lease term or estimated useful life
|
Construction in process is not depreciated
until the construction is completed and the asset is placed into service.
Goodwill and Intangible Assets
Goodwill represents the future economic
benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising
from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized
on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets
consist of customer relationships and non-compete agreements. Their useful lives range from 1.5 to 10 years. The Company’s
indefinite-lived intangible assets consist of trade names.
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 an impairment test prior to scheduled annual impairment tests.
The Company performed its annual fair value
assessment at December 31, 2018, 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 December 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.
Right of use assets and lease liabilities
In February 2016, the FASB issued ASU No.
2016-02, "Leases" (ASC 842). The standard requires lessees to recognize almost all leases on the balance sheet
as an ROU asset and a lease liability and requires leases to be classified as either an operating or a finance type lease. The
standard excludes leases of intangible assets or inventory. The standard became effective for the Company beginning January 1,
2019. The Company adopted ASC 842 using the modified retrospective approach, by applying the new standard to all leases existing
at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are
presented under ASC 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical
accounting under ASC 840. The Company elected the package of practical expedients permitted under the standard, which also allowed
the Company to carry forward historical lease classifications. The Company also elected the practical expedient related to treating
lease and non-lease components as a single lease component for all equipment leases as well as electing a policy exclusion permitting
leases with an original lease term of less than one year to be excluded from the ROU assets and lease liabilities.
Under ASC 842, the Company determines if
an arrangement is a lease at inception. Right-of-Use ("ROU") assets and liabilities are recognized at commencement date
based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments
that are fixed and determinable at the time of commencement. As most of the Company's leases do not provide an implicit rate, the
Company estimated the incremental borrowing rate in determining the present value of lease payments. The ROU asset also includes
any lease payments made prior to commencement and is recorded net of any lease incentives received. The Company lease terms may
include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.
Operating leases are included in operating
lease right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current on the Company's condensed
consolidated balance sheets.
As a result of the adoption of ASC 842
on January 1, 2019, the Company recorded both operating lease ROU assets of $1,068,213 and operating lease liabilities of $1,073,761
for the three months ended March 31, 2019. The adoption did not impact the Company's beginning retained earnings, or prior year
consolidated statements of income and statements of cash flows.
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 the allowance for doubtful accounts, accumulated depreciation, and accumulated amortization, respectively,
due to foreign currency translation. These translation adjustments are reflected in accumulated other comprehensive income, a separate
component of the Company's stockholders' equity.
Comprehensive Gain or Loss
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, 2019, and December 31, 2018, the Company determined that it had items that represented components of comprehensive
income (loss) and, therefore, has included a statement of comprehensive income (loss) in the financial statements.
Advertising expenses
Advertising costs are expensed as incurred
and included in selling and marketing expenses.
Shipping and handling costs
Shipping and handling costs related to
the acquisition of goods from vendors are included in the 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. These potential dilutive shares include 6,630,103 shares
from convertible notes, 14,814,815 shares related to the conversion rights of the TDH Sellers Note, 31,043,000 vested stock options
and 781,910 stock purchase warrants. In computing diluted EPS, the average stock price for the period is used in determining the
number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential
shares if their effect is anti-dilutive.
Recent accounting pronouncements
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
pronouncements that have been issued that might have a material impact on its financial position or results of operations.
3.
|
ACCOUNTS RECEIVABLE, NET
|
The following table sets forth the components
of the Company’s accounts receivable at March 31, 2019, and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Billed accounts receivable
|
|
$
|
484,752
|
|
|
$
|
419,802
|
|
Unbilled accounts receivable
|
|
|
272,110
|
|
|
|
703,691
|
|
Total accounts receivable
|
|
$
|
756,862
|
|
|
$
|
1,123,493
|
|
As of March 31, 2019, and December 31,
2018, 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, 2019 and the year ended December 31, 2018.
During the three-month period ended March
31, 2019, the Company had three customers that accounted for 71% revenues and one of those same customers that accounted for 23.5%
of accounts receivable.
During the year ended December 31, 2018,
the Company had three customers that accounted for 50.1% of revenues and one customer that accounted for 9.2% 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 March 31, 2019, and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Collaborative development agreement
|
|
$
|
71,824
|
|
|
$
|
95,766
|
|
Prepaid rent
|
|
|
32,111
|
|
|
|
31,773
|
|
Vendor advances
|
|
|
6,159
|
|
|
|
7,867
|
|
Prepaid service agreements
|
|
|
183,884
|
|
|
|
174,920
|
|
Employee advance and other payroll related items
|
|
|
20,903
|
|
|
|
16,208
|
|
Other prepaid expenses and current assets
|
|
|
257,216
|
|
|
|
123,306
|
|
Total
|
|
$
|
572,097
|
|
|
$
|
449,840
|
|
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, 2019 and December 31, 2018:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
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
|
|
$
|
2,024,205
|
|
|
$
|
(1,597,372
|
)
|
|
$
|
426,833
|
|
|
$
|
1,937,987
|
|
|
$
|
(1,508,104
|
)
|
|
$
|
429,883
|
|
Machinery and equipment
|
|
|
169,515
|
|
|
|
(106,220
|
)
|
|
|
63,295
|
|
|
|
167,731
|
|
|
|
(99,900
|
)
|
|
|
67,831
|
|
Vehicles
|
|
|
148,580
|
|
|
|
(100,394
|
)
|
|
|
48,186
|
|
|
|
153,927
|
|
|
|
(120,728
|
)
|
|
|
33,199
|
|
Furniture and fixtures
|
|
|
385,605
|
|
|
|
(293,744
|
)
|
|
|
91,861
|
|
|
|
381,248
|
|
|
|
(284,410
|
)
|
|
|
96,838
|
|
Leasehold improvements
|
|
|
1,042,662
|
|
|
|
(656,982
|
)
|
|
|
385,680
|
|
|
|
1,031,687
|
|
|
|
(623,125
|
)
|
|
|
408,562
|
|
Total
fixed assets
|
|
$
|
3,770,567
|
|
|
$
|
(
2,754,712
|
)
|
|
$
|
1,015,855
|
|
|
$
|
3,672,580
|
|
|
$
|
(2,636,267
|
)
|
|
$
|
1,036,313
|
|
For the three-month period ended March
31, 2019, and the year ended December 31, 2018, the Company recorded depreciation expense of $125,699 and $395,556, respectively.
The Company has entered into operating leases primarily for real estate. These leases have terms which range
from three years to five years, and often include one or more options to renew or in the case of equipment rental, to purchase
the equipment. These operating leases are listed as separate line items on the Company's March 31, 2019 Consolidated Balance Sheet
and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make
lease payments are also listed as separate line items on the Company's March 31, 2019 Consolidated Balance Sheet.
Operating lease right-of-use assets and
liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over
the lease term. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases,
the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $1,068,213 in assets and
$1,045,031 in liabilities as of March 31, 2019. In the three months ended March 31, 2019, the Company recognized approximately
$93,242 in total lease costs
Because the rate implicit in each lease
is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating right-of-use
assets and related lease liabilities were as follows:
|
Three Months Ended
March 31, 2019
|
|
Cash paid for operating lease liabilities
|
$
|
87,459
|
|
Weighted-average remaining lease term
|
|
|
|
Weighted-average discount rate
|
|
10%
|
|
Minimum future lease payments ended March 31, 2019
|
$
|
1,347,149
|
|
|
|
|
|
2020
|
|
352,888
|
|
2021
|
|
367,636
|
|
2022
|
|
335,659
|
|
2023
|
|
28,589
|
|
7.
|
GOODWILL AND INTANGIBLE ASSETS
|
The following table sets forth the changes
in the carrying amount of the Company’s goodwill at March 31, 2019, and December 31, 2018:
Balance, December 31, 2017
|
$
|
8,800,761
|
|
Acquisition of Bonnie Boat assets
|
|
52,500
|
|
Balance, December 31, 2018
|
$
|
8,853,261
|
|
Activity for the period ended March 31, 2019
|
|
–
|
|
Balance March 31, 2019
|
$
|
8,853,261
|
|
The Company recorded amortization expense
for intangible assets subject to amortization of $96,729 for the three months ended March 31, 2019, and $1,092,592 for the year
ended December 31, 2018.
The following table sets forth the components
of the Company’s intangible assets at March 31, 2019, and December 31, 2018:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
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
|
|
|
|
(436,378
|
)
|
|
|
1,163,908
|
|
|
$
|
1,600,286
|
|
|
$
|
(396,371
|
)
|
|
$
|
1,203,915
|
|
Mobile software applications
|
|
|
2.00
|
|
|
|
282,500
|
|
|
|
(282,500
|
)
|
|
|
–
|
|
|
|
282,500
|
|
|
|
(282,500
|
)
|
|
|
–
|
|
NetSpective webfiltering software
|
|
|
2.00
|
|
|
|
1,134,435
|
|
|
|
(510,496
|
)
|
|
|
623,939
|
|
|
|
1,134,435
|
|
|
|
(453,774
|
)
|
|
|
680,661
|
|
Noncompete
agreements
|
|
|
1.50
|
|
|
|
846,638
|
|
|
|
(846,638
|
)
|
|
|
–
|
|
|
|
846,638
|
|
|
|
(846,638
|
)
|
|
|
–
|
|
Subtotal
|
|
|
|
|
|
|
3,863,859
|
|
|
|
(2,076,012
|
)
|
|
|
1,787,847
|
|
|
|
3,863,859
|
|
|
|
(1,979,283
|
)
|
|
|
1,884,576
|
|
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
|
|
|
$
|
(2,076,012
|
)
|
|
$
|
6,243,442
|
|
|
$
|
8,319,454
|
|
|
$
|
(1,979,283
|
)
|
|
$
|
6,340,171
|
|
The following table provides information
regarding estimated amortization expense for intangible assets subject to amortization for each of the following years ending December
31:
|
2019
|
|
|
$
|
290,185
|
|
|
2020
|
|
|
|
386,916
|
|
|
2021
|
|
|
|
386,916
|
|
|
2022
|
|
|
|
160,029
|
|
|
2023
|
|
|
|
160,029
|
|
|
Thereafter
|
|
|
|
403,772
|
|
|
|
|
|
$
|
1,787,847
|
|
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 the expected amount required to settle the obligation or liability.
The following table sets forth the components
of the Company’s accrued liabilities on March 31, 2019, and December 31, 2018.
|
March 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
|
Earnout consideration payable in connection with Netspective acquisition
|
$
|
362,500
|
|
$
|
362,500
|
|
Executive and employee compensation
|
|
772,571
|
|
|
792,402
|
|
Interest on convertible debentures and promissory notes
|
|
268,176
|
|
|
210,221
|
|
Other accrued expenses and liabilities
|
|
35,468
|
|
|
67,914
|
|
Total accrued liabilities
|
$
|
1,438,715
|
|
$
|
1,433,037
|
|
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
|
The Company has engaged the Chief Executive
Officer, Darren Mark’s family to assist in the development of the Grom Social website and to create original content for
the site. Since these individuals have been responsible for creating in excess of 500 episodes of original content. Mr. Marks wife
Sarah; his sons Zach the founder of Grom, Luke, Jack, Dawson, and his daughters Caroline and Victoria all work for the Company
either as employees or contractors.
|
·
|
The amount they were paid for the year
ended December 31, 2018 are as follows: Sarah $33,600, Zach $90,000, Luke $33,800, Jack $5,400, Victoria $6,750 and Caroline $11,250.
The total annual compensation payable to these six individuals for the period ended December 31, 2018, was $180,800.
|
|
·
|
For the three-month period ended March
31, 2019, these individuals were paid a total of $39,638.
|
The Company believes the amounts paid to
these individuals is below market rate for the value of the services performed. This expenditure for services provided by the Marks
family is expected to continue for the foreseeable future. Members of the Marks family are actively involved on a daily basis in
creating all of the current content for the website which includes numerous videos on social responsibility, anti-bullying, digital
citizenship, unique blogs, and special events.
Liabilities Due to Executive and Other
Officers
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. No such loans have been made to the Company since the year December 31, 2017. The loan balances are classified
as short-term obligations under Related Party Payables on the Company’s balance sheet.
During 2017 and 2018 Mr. Marks and Mr. Leiner
on several occasions agreed to convert a portion of their loans into equity. These transactions are summarized as follows:
Name
|
|
Date
|
|
|
Amount of Loan Principal Converted to Equity
|
|
|
Share Price Used for conversion
|
|
|
Closing price of Grom common stock on the date of conversion
|
|
|
Shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Darren Marks
|
|
|
12/29/2017
|
|
|
|
333,333
|
|
|
$
|
0.50
|
|
|
|
0.30
|
|
|
|
666,666
|
|
|
|
|
10/15/2018
|
|
|
|
333,333
|
|
|
$
|
0.31
|
|
|
|
0.19
|
|
|
|
1,075,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melvin Leiner
|
|
|
12/29/2017
|
|
|
|
166,667
|
|
|
$
|
0.50
|
|
|
|
0.30
|
|
|
|
333,334
|
|
|
|
|
10/15/2018
|
|
|
|
166,667
|
|
|
$
|
0.31
|
|
|
|
0.19
|
|
|
|
537,635
|
|
The outstanding amount due to Mr. Marks
and Mr. Leiner’s LLC’s were $418,488 and $469,506; and $404,246 and $451,944 as of March 31, 2019, and December 31,
2018, respectively. Additionally, we owed $50,000 to Dr. Rutherford our director who extended a short-term loan to the Company,
and $154,623 to Wayne and his wife Stella Dearing who have extended loans to Top Draw animation to assist with its liquidity. The
amounts due to Mr. Rutherford and the Dearings were outstanding as of March 31, 2019 and December 31, 2018.
As of March 31, 2019, and December 31,
2018, the balances in related party payables were $1,027,430 and $1,181,645 respectively.
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, 2019 and December 31, 2018 amounted to $227,189 and $224,797 respectively.
Convertible Debentures
The following tables set forth the components
of the Company’s, convertible debentures as of March 31, 2019, and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Redeemable unsecured convertible note -TeleMate
|
|
$
|
1,000,000
|
|
|
|
1,000,000
|
|
Principal value of secured convertible notes
|
|
|
6,822,708
|
|
|
|
2,822,708
|
|
Loan discounts
|
|
|
(641,996)
|
|
|
|
(735,871)
|
|
Less: Current portion
|
|
|
(2,212,125)
|
|
|
|
(676,223
|
)
|
Total convertible notes, net
|
|
$
|
4,968,587
|
|
|
$
|
2,410,614
|
|
The Company did not issue any convertible
notes or debt instruments during the three-month period ended March 31, 2019.
First Amendment of TDH Acquisition
Agreement
On January 3, 2018, we entered into an
amendment (the “First Amendment”) to the TDH Acquisition Agreement with the individuals that sold TDH to Grom (“TDA
Sellers”). Under the terms of the First Amendment:
|
·
|
the maturity date of the $4.0 Million Sellers Note extended by the TDH Sellers to Grom as part of the acquisition of TDH by Grom, was extended from July 1, 2018 until July 1, 2019 (the “First Note Extension Period”);
|
|
·
|
the interest rate on the Note was increased from 5% to 10% during the Note Extension Period;
|
|
·
|
during the Note Extension Period, the interest will be paid quarterly in arrears, instead of annually in arrears. The first such quarterly interest payment of $100,000 was due on September 30, 2018; and
|
|
·
|
the Earnout Period was extended to December 31, 2019.
|
Also, as consideration for the First Amendment,
we issued an additional 800,000 shares of our common stock to the TDA Sellers.
Second Amendment of the TDH Acquisition
Agreement
On January 15, 2019, we entered into a
second amendment to the TDH Acquisition Agreement (the “Second Amendment”). Under the terms of the Second Amendment:
|
·
|
the maturity date of the Note was extended from July 1, 2019, to April 2, 2020.
|
|
·
|
in the event the Note is not repaid prior to July 2, 2019: (i) no management fee shall be paid by TDA to the Company as provided in the Share Sale Agreement in which Grom acquired TDH. Management fees paid by TDA to the Company to date are approximately $100,000 per month. Non-payment of the management fees to the Company by TDA due to the non-payment of the Note would have a material adverse impact on the Company
|
|
·
|
the TDA Sellers shall have the right to convert the Note at a conversion price of $0.27 per share, either in whole or in part at any time prior to the maturity, subject to the terms and conditions set forth in the Amendment
|
As a result of the inclusion of a $0.27
conversion feature, under the guidelines of ASC 470-20-40-7 through 40-9, this element of the Second Amendment was considered an
“extinguishment of debt” and re-issuance of the Note as a convertible note. As a result, the Company recorded a loss
of $363,468 related to the Second Amendment for the three months ended March 31, 2019.
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. net 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 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, TeleMate
agreed to the following terms:
Telemate paid of the remainder of the Note
in full by April 2019, therefore the Telemate Note has been classified as a current obligation retroactive to March 31, 2019. If
TeleMate converts the note, the number of shares converted thereunder will be subject to a one-year leakout agreement If TeleMate
does not convert the TeleMate Note to equity by October 1, 2019, the Company has the right to force conversion at a conversion
price of $0.48 per share.
Newbridge Offering
On November 30, 2018, the Company closed
a private offering in which it sold 12% secured convertible promissory notes in an aggregate principal amount of $552,000 and issued
an aggregate of 730,974 shares of its common stock to nine accredited investors pursuant to a private placement memorandum and
subscription agreement. The Notes which are due and payable two years from issuance are secured by certain assets of the Company
and rank senior to all other indebtedness of the Company except for the $4,000,000 promissory notes (the “TD Notes”)
issued to TD Holdings in connection with the Share Sale Agreement, dated June 30, 2016, as amended. Messrs. Marks and Leiner also
pledged an aggregate of 10,000,000 shares pursuant to a pledge and security agreement to secure the timely payment of the Notes.
The Notes are convertible, in whole or in part, by the note holder at a conversion rate of $0.40 if the Company’s common
stock trades or is quoted at more than $0.40 per share for 10 consecutive days. The conversion price is subject to an adjustment
resulting from certain corporate actions including the subdivision or combination of stock, payment of dividends, reorganization,
reclassification, consolidations, merger or sale of the Company.
Interest on the Note is payable monthly
in 21 equal installments commencing four months after the issuance of the Notes. Upon the occurrence of an “event of default”
as described in the Notes, the interest rate will increase to 15% and the Notes shall become immediately due and payable. The Company
may prepay the Notes in full at any time by paying accrued interest and 110% of the outstanding principal balance. Newbridge Securities
Corporation acted as exclusive placement agent for the offering and received (i) $55,200, (ii) 113,586 shares of common stock;
and (iii) $11,040, representing a non-accountable expense allowance, for its services.
Secured Convertible Notes 2018
During the year ended December 31, 2018,
the Company issued to accredited investors in private offerings two-year secured, convertible, original issue discount (“OID”)
notes for aggregate gross proceeds of $1,238,485. The notes were issued with OID discounts of 20%, or $247,697, have an interest
rate of 10% per annum, are payable semiannually in cash, and are convertible into shares of common stock at a fixed conversion
price of $0.50 per share if converted within one year of issuance and $0.78 per share thereafter.
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 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 a fixed conversion price of $0.78.
In connection with the issuance of the
above convertible notes, the Company also issued 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 notes.
Maturities of the Company’s borrowings for each of the next two years are
as follows:
|
2019
|
|
|
$
|
1,676,223
|
|
|
2020
|
|
|
$
|
6,145,485
|
|
Preferred Stock
The Company is authorized to issue 25,000,000
shares of preferred stock at a par value of $0.001. 800,000 shares of preferred stock were issued and outstanding as of March 31,
2019. No shares of preferred stock were issued and outstanding as of December 31, 2018. On February 22, 2019, the Company designated
2,000,000 shares of its preferred stock as 10% Series A Convertible preferred stock, par value $0.001 per share (“Series
A Stock”). On each of February 27, 2019 and March 11, 2019, the Company received $400,000 from the sale of 400,000 shares
of Series A Stock to an accredited investor in private offerings pursuant to Section 4(a)(2) and/or Rule 506(b) of Regulation D,
as promulgated under the Securities Act, As an inducement to purchase the Series A Stock, each investor also received 2,000,000
restricted shares of the Company’s common stock.
As a result of the issuance of the Series
A Stock we recorded a beneficial conversion feature and other discounts as a deemed dividend on our income statement of $644,205.
Common stock
The Company is authorized to issue 200,000,000
shares of common stock at a par value of $0.001 and had 144,830,713 and 138,553,655 shares of common stock issued and outstanding
as of March 31, 2019, and December 31, 2018, respectively.
Common Stock Issued in Private Placements
During the three-month period ended March
31, 2019 and 2018, the Company issued -0- and 256,455 shares of common stock in private placements for proceeds of $-0- and $61,500,
respectively.
Common Stock Issued in Connection
with the Exercise of Warrants
During the three months ended March
31, 2019 no warrants were exercised.
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 $0.24 per share.
Common Stock Issued in Exchange for
Consulting, Professional and Other Services
During the three months ended March 31,
2019, the Company did not issue any of its shares of common stock to employees, officers, and directors. The Company issued 1,377,338
shares of common stock with a fair value of $349,645 to consultants and other professionals in lieu of cash payments.
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 for services provided to the Company.
Each share issuance made in exchange
for services was valued based upon the trading price of the Company’s common stock, on the date the services were performed,
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,
2019, the Company issued 99,720 shares of common stock with a fair market value of $26,940 to satisfy 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.
Common Stock Issued in Connection
with the Issuance of Convertible Debentures
During the three months ended March 31,
2019, the Company did not issue any shares to investors as an inducement to lend in connection with the issuance of its unsecured,
convertible notes.
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.
Common Stock issued in Connection
with the Amendment of the Terms of a Promissory note
During each of the three months ended March
31, 2019 and March 31, 2018, we issued 800,000 shares valued at $480,000 and $220,000 respectively, in connection with the amendment
to the $4.0 million TDA Sellers Note -see Note 12.
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, 2019, and December 31, 2018. 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
|
|
|
|
2.00
|
|
Less: Warrants exercised
|
|
|
(7,107,765
|
)
|
|
$
|
0.24
|
|
|
|
|
|
Warrants forfeited
|
|
|
(29,190
|
)
|
|
$
|
0.24
|
|
|
|
|
|
December 31, 2017
|
|
|
1,038,365
|
|
|
$
|
1.36
|
|
|
|
2.38
|
|
Warrants issued
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Warrants exercised
|
|
|
(256,455
|
)
|
|
|
–
|
|
|
|
|
|
Balance 31, 2018
|
|
|
781,910
|
|
|
$
|
1.36
|
|
|
|
1.38
|
|
Warrants issued
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Warrants forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Warrants exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2019
|
|
|
781,910
|
|
|
$
|
1.36
|
|
|
|
1.13
|
|
Stock Options
The following table represents all outstanding
and exercisable stock options as of March 31, 2019.
|
|
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
|
|
|
4.02
|
|
|
|
9,695,250
|
|
|
|
417,000
|
|
|
|
9,278,250
|
|
|
|
9,278,250
|
|
|
$
|
0.36
|
|
|
0
.20
|
|
|
|
938,250
|
|
|
|
938,250
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.48
|
|
|
–
|
|
|
|
13,135,500
|
|
|
|
3,544,500
|
|
|
|
9,591,000
|
|
|
|
9,591,000
|
|
|
$
|
0.72
|
|
|
1.00
|
|
|
|
5,481,000
|
|
|
|
1,042,500
|
|
|
|
4,438,500
|
|
|
|
4,438,500
|
|
|
$
|
0.78
|
|
|
1.96
|
Total
|
|
|
36,985,350
|
|
|
|
5,942,250
|
|
|
|
31,043,100
|
|
|
|
31
,043,100
|
|
|
$
|
0.50
|
|
|
1.65
|
The Company did not issue any stock options
during the three months ended March 31, 2019 or for the three months ended March 31, 2018.
For the three months ended March 31, 2019,
and 2018, the Company recorded $16,200 and $76,193, respectively in stock-based compensation expense related to these stock options.
14.
|
COMMITMENTS AND CONTINGENCIES
|
In the United States, we lease approximately
1550 square feet of office space in Boca Raton, Florida for $4,227 per month pursuant to a three-year lease expiring on September
30, 2021. Our Florida office houses our corporate headquarters and administrative staff.
Our animation business leases portions
of 3 floors comprising in the aggregate of approximately 28,800 square feet in the West Tower of the Philippine Stock Exchange
Centre in Pasig City, Manila for administration and production purposes. 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 1,400 square foot office in Norcross, Georgia on January 1, 2018, to house our NetSpective division. The
monthly rent for 2018 was $2,055 which increases by approximately 3% annually,
pursuant
to a five-year lease which expires in December 2023.
We believe our leased space for the present
time is adequate and additional space at comparable prices is available at all locations.
On May 1, 2019, the Company filed a
consent solicitation on Schedule 14A with the SEC to obtain the approval of the majority of stockholders entitled to vote on
an amendment to the Company’s Articles of Incorporation to increase the authorized common stock of the Company from
200,000,000 shares to 500,000,000 shares. The Company’s Board of Directors fixed April 5, 2019, as the record date for
holders of its common stock and Series A preferred stock who will be entitled to participate in the consent solicitation. A
Notice of Consent Solicitation was mailed on May 1, 2019 to all holders of its common stock and Series A preferred stock as
of the record date. In order to approve the proposed amendment, consents must be received by May 31, 2019.
On April 2, 2019, we sold 125,000 shares
of Series A Stock to an accredited investor and received proceeds of $125,000. In connection with this purchase, the investor received
625,000 restricted shares of the Company’s common stock.
The Series A Stock is convertible, at any
time, into five shares of common stock of the Company.