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.
The accompanying notes are an integral part
of the consolidated financial statements.
Notes to Consolidated Unaudited Financial
Statements
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 and operates 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.
|
|
·
|
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.
|
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
Annual Report on Form 10-K filed on April 16, 2019 with the SEC.
Basis of Presentation
The consolidated financial statements of
the Company have been prepared in accordance with GAAP and are expressed in United States dollars. For the three and nine months
ended September 30, 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 manage the NetSpective assets and business which were acquired on January 1, 2017. GNS, which
was formed in April 2017, has 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 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.
Animation Revenue
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 North America 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 September 30, 2019, and December 31, 2018:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Animation contract assets
|
|
$
|
1,042,548
|
|
|
$
|
1,040,309
|
|
NetSpective contract assets
|
|
|
14,868
|
|
|
|
74,743
|
|
Other contract assets
|
|
|
8,701
|
|
|
|
8,441
|
|
Total contract assets
|
|
$
|
1,066,117
|
|
|
$
|
1,123,493
|
|
|
|
|
|
|
|
|
|
|
Animation contract liabilities
|
|
$
|
406,585
|
|
|
$
|
380,749
|
|
NetSpective contract liabilities
|
|
|
700,699
|
|
|
|
727,979
|
|
Other contract liabilities
|
|
|
11,500
|
|
|
|
11,500
|
|
Total contract liabilities
|
|
$
|
1,118,784
|
|
|
$
|
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 September 30, 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 September 30, 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, September 30, 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, and saleable computer hardware used by customers to facilitate the Company’s
NetSpective webfiltering services.
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 estimated 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 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 a right of use (“ROU”) asset and a lease liability and requires leases to be classified as either an operating or
a finance type lease. The standard excludes leases of intangible assets or inventory. 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. 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 $1,032,898 and operating lease liabilities of $1,032,898.
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 September 30, 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 6,560,325 shares
from convertible notes, 25,517,850 vested stock options and 5,731,901 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 September 30, 2019, and December 31, 2018:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Billed accounts receivable
|
|
$
|
732,589
|
|
|
$
|
419,802
|
|
Unbilled accounts receivable
|
|
|
333,528
|
|
|
|
703,691
|
|
Total accounts receivable
|
|
$
|
1,066,117
|
|
|
$
|
1,123,493
|
|
As of September 30, 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 nine-month period ended September 30, 2019 and the year ended December 31,
2018.
During the nine-month period ended September
30, 2019, the Company had five customers that accounted for 61.2% of revenues and two customers that accounted for 40.1% 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 September 30, 2019, and December 31, 2018:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Collaborative development agreement
|
|
$
|
23,942
|
|
|
$
|
95,766
|
|
Prepaid rent
|
|
|
32,618
|
|
|
|
31,773
|
|
Vendor advances
|
|
|
17,378
|
|
|
|
7,867
|
|
Prepaid service agreements
|
|
|
243,185
|
|
|
|
174,920
|
|
Employee advance and other payroll related items
|
|
|
22,579
|
|
|
|
16,208
|
|
Other prepaid expenses and current assets
|
|
|
52,944
|
|
|
|
123,306
|
|
Total
|
|
$
|
392,646
|
|
|
$
|
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 September 30, 2019 and December 31, 2018:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers, software and office equipment
|
|
$
|
2,118,169
|
|
|
$
|
(1,766,484
|
)
|
|
$
|
351,685
|
|
|
$
|
1,937,987
|
|
|
$
|
(1,508,104
|
)
|
|
$
|
429,883
|
|
Construction in progress
|
|
|
38,648
|
|
|
|
(–
|
)
|
|
|
38,648
|
|
|
|
–
|
|
|
|
(–
|
)
|
|
|
–
|
|
Machinery and equipment
|
|
|
172,192
|
|
|
|
(117,937
|
)
|
|
|
54,255
|
|
|
|
167,731
|
|
|
|
(99,900
|
)
|
|
|
67,831
|
|
Vehicles
|
|
|
156,771
|
|
|
|
(72,404
|
)
|
|
|
84,367
|
|
|
|
153,927
|
|
|
|
(120,728
|
)
|
|
|
33,199
|
|
Furniture and fixtures
|
|
|
391,916
|
|
|
|
(311,266
|
)
|
|
|
80,650
|
|
|
|
381,248
|
|
|
|
(284,410
|
)
|
|
|
96,838
|
|
Leasehold improvements
|
|
|
1,059,125
|
|
|
|
(722,372
|
)
|
|
|
336,753
|
|
|
|
1,031,687
|
|
|
|
(623,125
|
)
|
|
|
408,562
|
|
Total fixed assets
|
|
$
|
3,936,821
|
|
|
$
|
(2,990,463
|
)
|
|
$
|
946,358
|
|
|
$
|
3,672,580
|
|
|
$
|
(2,636,267
|
)
|
|
$
|
1,036,313
|
|
For the nine-month periods ended September
30, 2019 and 2018, the Company recorded depreciation expense of $374,584 and $279,692, 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 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 Consolidated
Balance Sheet.
Operating lease ROU 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 ROU assets and lease liabilities for operating leases of approximately $938,884 in assets and $955,487 in liabilities
as of September 30, 2019. In the nine months ended September 30, 2019, the Company recognized approximately $281,322 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:
|
|
|
Nine Months Ended
September 30, 2019
|
|
Cash paid for operating lease liabilities
|
|
|
$
|
264,519
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
3.6
|
|
Weighted-average discount rate
|
|
|
|
10%
|
|
Minimum future lease payments
|
|
|
$
|
1,170,089
|
|
The following table presents the Company’s future minimum lease obligation under ASC 840 as of September 30 2019:
|
|
|
|
|
|
2019
|
|
|
|
85,318
|
|
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 September 30, 2019, and December 31, 2018:
Balance, December 31, 2017
|
$
|
8,800,761
|
|
Acquisition of Bonnie Boat & Friends assets
|
|
52,500
|
|
Balance, December 31, 2018
|
$
|
8,853,261
|
|
Activity for the period ended September 30, 2019
|
|
–
|
|
Balance September 30, 2019
|
$
|
8,853,261
|
|
The following table sets forth the components
of the Company’s intangible assets at September 30, 2019, and December 31, 2018:
|
|
September 30, 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
|
|
|
|
(516,393
|
)
|
|
|
1,083,893
|
|
|
$
|
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
|
|
|
|
(623,939
|
)
|
|
|
510,496
|
|
|
|
1,134,435
|
|
|
|
(453,774
|
)
|
|
|
680,661
|
|
Noncompete agreements
|
|
|
1.50
|
|
|
|
846,638
|
|
|
|
(846,638
|
)
|
|
|
–
|
|
|
|
846,638
|
|
|
|
(846,638
|
)
|
|
|
–
|
|
Subtotal
|
|
|
|
|
|
|
3,863,859
|
|
|
|
(2,269,470
|
)
|
|
|
1,594,389
|
|
|
|
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
|
|
|
$
|
(2,269,470
|
)
|
|
$
|
6,049,984
|
|
|
$
|
8,319,454
|
|
|
$
|
(1,979,283
|
)
|
|
$
|
6,340,171
|
|
The Company recorded amortization expense
for intangible assets subject to amortization of $290,187 and $331,958 for the nine months ended September 30, 2019 and 2018, respectively.
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 September 30, 2019, and December 31, 2018.
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Earnout consideration payable in connection with NetSpective acquisition
|
|
$
|
–
|
|
|
$
|
362,500
|
|
Executive and employee compensation
|
|
|
1,138,424
|
|
|
|
792,402
|
|
Interest on convertible debentures and promissory notes
|
|
|
163,747
|
|
|
|
210,221
|
|
Other accrued expenses and liabilities
|
|
|
35,175
|
|
|
|
67,914
|
|
Total accrued liabilities
|
|
$
|
1,337,346
|
|
|
$
|
1,433,037
|
|
On July 1, 2019, the Company issued 465,113
shares of its common stock in satisfaction of the earnout consideration payable related to the NetSpective acquisition.
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 nine-month period ended September 30, 2019, these individuals were paid a total of $70,800.
|
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 ended 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
|
|
|
Conversion Price per Share
|
|
|
Closing Price of Common Stock on Conversion Date
|
|
|
Shares of Common Stock 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
|
|
As of September 30, 2019 and December 31,
2018, the outstanding amounts due to Mr. Marks totaled $362,930 and $469,506, respectively, and the outstanding amounts due to
Mr. Leiner totaled $336,629 and $451,944, respectively.
As of September 30, 2019 and December 31,
2018, the Company owed $50,000 to Dr. Thomas Rutherford, a director on its board, who extended a short-term loan to the Company.
Additionally, as of September 30, 2019 and December 31, 2018, the Company owed $22,992 and $210,145, respectively, to Wayne and
Stella Dearing, collectively, who extended loans to Top Draw Animation. These loans were made to the Company to finance working
capital needs.
As of September 30, 2019 and December 31,
2018, the aggregate balance of related party payables was $772,551 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 September 30, 2019 and December 31, 2018 amounted to $230,776 and $224,797 respectively.
Convertible Debentures
The following tables set forth the components
of the Company’s, convertible debentures as of September 30, 2019, and December 31, 2018:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Redeemable unsecured convertible note - TeleMate
|
|
$
|
1,000,000
|
|
|
|
1,000,000
|
|
Principal value of secured convertible notes
|
|
|
6,738,708
|
|
|
|
2,822,708
|
|
Loan discounts
|
|
|
(446,388
|
)
|
|
|
(735,871
|
)
|
Less: Current portion
|
|
|
(7,050,901
|
)
|
|
|
(676,223
|
)
|
Total convertible notes, net - noncurrent
|
|
$
|
241,419
|
|
|
$
|
2,410,614
|
|
Redeemable Convertible Note –
Variable Conversion Price
On July 9, 2019, the Company entered into
a convertible note payable with an unrelated party for $100,000 of which included $5,000 in third party fees resulting in net cash
proceeds to the Company of $95,000. The convertible note payable carries interest at a rate of 10% per annum, is due on July 9,
2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal
to a 30% discount from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading
days.
The Company analyzed the conversion feature
of the agreement for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed.
The beneficial conversion feature was measured using the commitment-date stock price and its fair value was determined to be $51,730.
This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.
The Company analyzed the conversion feature
of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified
as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate.
The aggregate fair value of the derivative
at the issuance date of the note was $85,410 which was recorded as a derivative liability on the balance sheet. The Company recorded
a debt discount of $43,270 which was up to the face value of the convertible note with the excess fair value at initial measurement
of $42,140 being recognized as derivative expense.
At September 30, 2019, the Company remeasured
the fair value of its derivative liability at $98,883 and recorded a $13,473 loss from change in fair value for the nine months
ended September 30, 2019. The fair value of the embedded derivative was determined using a Black-Scholes option pricing model based
on the following assumptions: (1) expected volatility of 107%, (2) risk-free interest rate of 1.75%, (3) an exercise price of $0.084,
and (4) an expected life of 0.78 of a year.
First Amendment of TDH Share Sale
Agreement
On January 3, 2018, we entered into an
amendment (the “First Amendment”) to the TDH share sale agreement with the individuals that sold TDH to the Company
(“TDH Sellers”). Under the terms of the First Amendment:
|
·
|
the maturity date of the $4.0 million promissory note issued to the TDH Sellers by the Company on June 20, 2016 as part of the acquisition of TDH by the Company (the “TDH Note”), was extended from July 1, 2018 until July 1, 2019 (the “Note Extension Period”);
|
|
·
|
the interest rate on the TDH Note was increased from 5% to 10% during the Note Extension Period;
|
|
·
|
during the Note Extension Period, the interest payments terms were changed to be paid quarterly in arrears, instead of annually in arrears; and
|
|
·
|
the period eligible for additional consideration to be earned by the TDH Sellers contingent upon the achievement of certain milestones, as defined in the TDH share sale agreement, was extended to December 31, 2019.
|
As consideration for the First Amendment,
the Company issued an additional 800,000 shares of its common stock to the TDH Sellers.
Second Amendment of the TDH Share
Sale Agreement
On January 15, 2019, we entered into a
second amendment to the TDH share sale agreement (the “Second Amendment”). Under the terms of the Second Amendment:
|
·
|
the maturity date of the TDH Note was extended from July 1, 2019, to April 2, 2020.
|
|
·
|
in the event the TDH 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 the Company acquired TDH.
|
|
·
|
the TDH Sellers shall have the right to convert the TDH 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 Second 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 and subsequent reissuance of the TDH Note as a convertible promissory note. As a result, the Company recorded a
loss from the extinguishment of debt of $363,468 related to the Second Amendment during the nine months ended September 30, 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 (the “Telemate Note”) to Telemate.Net Software LLC (“Telemate”)
in connection with the acquisition of the NetSpective Webfiltering assets. All Telemate Note principal and accrued interest is
payable January 1, 2020. The Telemate 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 Telemate 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,
dated January 1, 2017, between Telemate and the Company, 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 asset purchase agreement (the “Modification”).
Under the terms of the Modification, TeleMate
agreed:
|
·
|
to pay the Company $10,000 per month against their outstanding balance of $146,822;
|
|
·
|
not to exercise the conversion feature of its $1.0 million promissory note, nor will any of the $362,500 earnout shares (464,744) be issued until all payments are made in full;
|
|
·
|
to extend the December 31, 2019 maturity date of the Telemate Note indefinitely until all payments are made in full; and
|
|
·
|
that all interest payments ($6,800 annually) due from the Company to TeleMate under the Telemate Note be suspended indefinitely until all payments are made in full.
|
Telemate completed repaying its obligation
to the Company in full in April 2019. In the event that TeleMate converts the Telemate Note, the number of shares converted thereunder
will be subject to a one-year leakout agreement. In the event that TeleMate does not convert the Telemate Note 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 notes 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
|
|
|
$
|
676,223
|
|
2020
|
|
|
$
|
7,062,485
|
|
Preferred Stock
The Company is authorized to issue 25,000,000
shares of preferred stock at a par value of $0.001.
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”). The Series A Stock is convertible, at any time, into five shares of common stock of the Company.
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 accredited investors in private offerings
pursuant to Section 4(a)(2) and/or Rule 506(b) of Regulation D, as promulgated under the Securities Act of 1933, as amended (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.
On April 2, 2019, the Company received
$125,000 from the sale of 125,000 shares of Series A Stock to an accredited investor in a private offering 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, the investor also received 625,000 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 $740,899.
As of September 30, 2019, an aggregate
925,000 shares of Series A Stock were issued and outstanding. No shares of preferred stock were issued and outstanding as of December
31, 2018.
Common stock
The Company is authorized to issue 500,000,000
shares of common stock at a par value of $0.001 and had 152,317,806 and 138,553,655 shares of common stock issued and outstanding
as of September 30, 2019, and December 31, 2018, respectively.
On June 12, 2019, the Company filed Articles
of Amendment to its Articles of Incorporation with the Secretary of State of Florida to increase the Company’s authorized
shares of common stock from 200,000,000 shares to 500,000,000 shares, which amendment was approved by the Company’s board
of directors on April 4, 2019 and its shareholders by consent solicitation on May 31, 2019.
Common Stock Issued in Private Placements
During the nine-month period ended September
30, 2019, the Company issued 4,950,000 shares of common stock and warrants to purchase 4,950,000 shares of common stock at an exercise
price of $0.25 in private placements for proceeds of $495,000.
During the nine-month period ended September
30, 2018 the Company issued 304,870 shares of stock in private placements for proceeds of $76,218 with a share price of approximately
$0.25 per share.
Common Stock Issued in Connection
with the Exercise of Warrants
During the nine months ended September
30, 2019, no common stock purchase warrants were exercised.
During the nine months ended September
30, 2018, the Company issued 256,455 shares of common stock for proceeds of $61,500 under a series of stock warrant exercises with
an exercise price of $0.24 per share.
Common Stock Issued in Exchange for
Consulting, Professional and Other Services
During the nine months ended September
30, 2019, the Company did not issue any of its shares of common stock to employees, officers, and directors. The Company issued
2,664,058 shares of common stock with a fair value of $606,796 to consultants and other professionals in lieu of cash payments
for services provided to the Company.
During the nine months ended September
30, 2018, the Company issued 595,321 shares of common stock with a fair market value of $292,443 to employees, officers and directors
in lieu of cash payments. Additionally, the Company issued 834,500 shares of common stock with a fair value of $402,250 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 OTC markets on the date the services
were performed.
Common Stock Issued in lieu of Cash
for Loans Payable and Other Accrued Obligations
During the nine months ended September
30, 2019, the Company issued 564,833 shares of common stock with a fair market value of $389,440 to satisfy loans payable and other
accrued obligations. See Note – Accounts Payable and Accrued Liabilities for more information.
During the nine months ended September
30, 2018, the Company issued 1,898,530 shares of common stock with a fair market value of $671,376 to satisfy loans payable
and other accrued obligations.
Common Stock Issued in Connection
with the Issuance of Convertible Debentures
During the nine months ended September
30, 2019, the Company issued 160,260 shares of common stock as a result of certain penalties incurred in connection with certain
unsecured, convertible note agreements. The fair value of the shares aggregated $32,418 and was recorded as interest expense in
the Company’s consolidated financial statements.
During the nine months ended September
30, 2018, the Company issued 538,093 shares of common stock with a fair market value of $264,179 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 the Acquisition
of a Business
During the nine months ended September
30, 2018, the Company issued 150,000 shares valued at $52,000 in connection with the acquisition of the assets of Bonnie Boat &
Friends.
Common Stock Issued in Connection
with the Amendments of the Terms of a Promissory Note
During each of the nine months ended September
30, 2019 and September 30, 2018, the Company 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 – Debt for more information.
During the nine months ended September
30, 2018, the Company also issued 5,000 shares valued at $2,250 in connection with the amendment of a $40,000 promissory note.
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 September 30, 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
|
|
|
4,950,000
|
|
|
|
0.25
|
|
|
|
3.00
|
|
Warrants forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Warrants exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Balance September 30, 2019
|
|
|
5,731,910
|
|
|
$
|
0.40
|
|
|
|
1.87
|
|
Stock Options
The following table represents all outstanding
and exercisable stock options as of September 30, 2019.
|
|
|
Options
Issued
|
|
|
Options
Forfeited
|
|
|
Options
Outstanding
|
|
|
Vested
Options
|
|
|
Exercise Price
|
|
|
Weighted Average Remaining Life in Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,862,850
|
|
|
|
3,961,500
|
|
|
|
6,901,350
|
|
|
|
6,901,350
|
|
|
$
|
0.24
|
|
|
|
3.97
|
|
|
|
|
|
|
9,695,250
|
|
|
|
9,695,250
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.36
|
|
|
|
–
|
|
|
|
|
|
|
938,250
|
|
|
|
938,250
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.48
|
|
|
|
–
|
|
|
|
|
|
|
13,135,500
|
|
|
|
–
|
|
|
|
13,135,500
|
|
|
|
13,135,500
|
|
|
$
|
0.72
|
|
|
|
0.41
|
|
|
|
|
|
|
5,481,000
|
|
|
|
–
|
|
|
|
5,481,000
|
|
|
|
5,481,000
|
|
|
$
|
0.78
|
|
|
|
1.75
|
|
|
Total
|
|
|
|
40,112,850
|
|
|
|
14,595,000
|
|
|
|
25,517,850
|
|
|
|
25,517,850
|
|
|
$
|
0.60
|
|
|
|
2.34
|
|
The Company did not issue any stock options
during the nine months ended September 30, 2019 or for the nine months ended September 30, 2018.
For the nine months ended September 30,
2019 and 2018, the Company recorded no expense and $920, respectively in stock-based compensation expense related to these stock
options.
14.
|
COMMITMENTS AND CONTINGENCIES
|
In the United States, the Company leases
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. The Florida office is the location of the Company’s corporate headquarters and administrative staff.
The Company’s animation business
leases portions of three 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. The monthly rent is approximately $22,533
for the aggregate space (which increases by approximately 5% annually). These leases expire in December 2022.
The
Company opened a 1,400 square foot office in Norcross, Georgia on January 1, 2018, to operate its NetSpective division. The monthly
rent is $2,055 which increases by approximately 3% annually, pursuant to a five-year lease which expires in December 2023.
In accordance with FASB ASC 855-10 Subsequent
Events, the Company has analyzed its operations subsequent to September 30, 2019 to the date these consolidated financial statements
were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial
statements, except as follows:
As of November 11, 2019, the Company entered
into Debt Exchange Agreements (each, a “Debt Exchange Agreement”) with a total of 21 purchasers (the “Holders”),
pursuant to which the Holders exchanged an aggregate of $1,774,597 of indebtedness evidenced by 10% convertible promissory notes
(the “Notes”) for an aggregate of 10,095,259 shares of common stock of the Company (the “Shares”). The
price per Share in the debt exchange was $0.175. The Shares were issued without any restrictions.