Grom Social Enterprises, Inc. - Quarter Report: 2021 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

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

For the transition period from ________ to _________

Commission File Number: 001-40409

Grom Social Enterprises, Inc.

(Exact name of registrant as specified in its charter)

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

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

Registrant’s telephone number, including area code: (561) 287-5776

Securities registered pursuant to Section 12(b) of the Act:

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

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

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

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

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

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

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

As of November 19, 2021, 12,601,687 shares of the registrant’s common stock were outstanding.

GROM SOCIAL ENTERPRISES, INC.

Table of Contents

Part I – FINANCIAL INFORMATION		Page

Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42

Part II – OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	45

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

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

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

adverse economic conditions;

the Company’s ability to raise capital to fund its operations

the Company’s ability to monetize its gromsocial.com database of users

industry competition

the Company’s ability to integrate its acquisitions

the Company’s ability to attract and retain qualified senior management and technical personnel;

the continued effect of the Covid-19 pandemic on the Company’s operations; and

other risks and uncertainties related to the social media, animation services, nutritional products, and web filtering services marketplace and our business strategy.

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

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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GROM SOCIAL ENTERPRISES INC.

Consolidated Balance Sheets


	September 30,			December 31,
	2021			2020

ASSETS
Current assets:
Cash and cash equivalents	$	9,102,728		$	120,300
Accounts receivable, net		472,059			587,932
Inventory, net		127,626			48,198
Prepaid expenses and other current assets		714,284			386,165
Total current assets		10,416,697			1,142,595
Operating lease right of use assets		379,493			602,775
Property and equipment, net		628,773			965,109
Goodwill		12,758,924			8,380,504
Intangible assets, net		6,433,865			5,566,339
Deferred tax assets, net -- noncurrent		502,145			531,557
Other assets		73,738			76,175
Total assets	$	31,193,635		$	17,265,054

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	639,472		$	1,126,114
Accrued liabilities		408,338			1,794,232
Advanced payments and deferred revenues		557,528			967,053
Convertible notes, net -- current		1,879,853			2,349,677
Loans payable -- current		–			189,963
Related party payables		50,000			143,741
Income taxes payable		–			102,870
Lease liabilities -- current		303,554			304,326
Total current liabilities		3,838,745			6,977,976
Convertible notes, net of loan discounts		1,312,335			897,349
Lease liabilities		101,299			328,772
Loans payable		–			95,931
Other noncurrent liabilities		458,926			367,544
Total liabilities		5,711,305			8,667,572

Commitments and contingencies		–			–

Stockholders' Equity:
Series A preferred stock, $0.001 par value. 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		–			–
Series B preferred stock, $0.001 par value. 10,000,000 shares authorized; 0 and 5,625,884 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		–			5,626
Series C preferred stock, $0.001 par value. 10,000,000 shares authorized; 9,400,259 and 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		9,400			–
Common stock, $0.001 par value. 500,000,000 shares authorized; 12,325,736 and 5,886,073 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		12,326			5,886
Additional paid-in capital		88,490,096			64,417,218
Accumulated deficit		(62,920,855	)		(55,791,914	)
Accumulated other comprehensive loss		(85,061	)		(39,334	)
Total Grom Social Enterprises Inc. stockholders' equity		25,505,906			8,597,482
Noncontrolling interests		(23,576	)		–
Total stockholders' equity		25,482,330			8,597,482
Total liabilities and equity	$	31,193,635		$	17,265,054

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

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Operations and Comprehensive Loss (Unaudited)


	Three Months Ended September 30,			Three Months Ended September 30,			Nine Months Ended September 30,			Nine Months Ended September 30,
	2021			2020			2021			2020

Sales	$	1,514,692		$	1,439,155		$	4,778,527		$	4,478,373
Cost of goods sold		741,436			573,455			2,375,551			1,846,728
Gross profit		773,256			865,700			2,402,976			2,631,645
Operating expenses:
Depreciation and amortization		196,168			234,461			620,666			623,660
Selling and marketing		51,256			35,420			130,167			91,697
General and administrative		1,892,327			1,009,162			4,683,481			3,552,390
Professional fees		326,800			311,813			839,831			419,291
Stock based compensation		460,146			–			460,146			62,600
Total operating expenses		2,926,697			1,590,856			6,734,291			4,749,638
Loss from operations		(2,153,441	)		(725,156	)		(4,331,315	)		(2,117,993	)
Other income (expense)
Interest expense, net		(492,783	)		(330,006	)		(2,236,545	)		(1,220,148	)
Loss on settlement of debt		–			(1,191,089	)		(947,179	)		(1,191,089	)
Unrealized gain on change in fair value of derivative liabilities		–			22,764			–			8,831
Other gains (losses)		313,787			2,467			362,522			(563	)
Total other income (expense)		(178,996	)		(1,495,864	)		(2,821,202	)		(2,402,969	)
Loss before income taxes		(2,332,437	)		(2,221,020	)		(7,152,517	)		(4,520,962	)
Provision for income taxes (benefit)		–			–			–			–
Net loss		(2,332,437	)		(2,221,020	)		(7,152,517	)		(4,520,962	)
Loss attributable to noncontrolling interest		(23,576	)		–			(23,576	)		–
Net loss attributable to Grom Social Enterprises Inc. stockholders		(2,308,861	)		(2,221,020	)		(7,128,941	)		(4,520,962	)

Convertible preferred stock beneficial conversion feature and other discounts accreted as a deemed dividend		–			(277,500	)		–			(277,500	)

Net loss attributable to Grom Social Enterprises Inc. common stockholders	$	(2,308,861	)	$	(2,498,520	)	$	(7,128,941	)	$	(4,798,462	)

Basic and diluted loss per common share	$	(0.21	)	$	(0.45	)	$	(0.91	)	$	(0.87	)

Weighted-average number of common shares outstanding:
Basic and diluted		11,118,290			5,540,233			7,808,344			5,528,061

Comprehensive loss:
Net loss	$	(2,332,437	)	$	(2,221,020	)	$	(7,152,517	)	$	(4,520,962	)
Foreign currency translation adjustment		(67,596	)		60,721			(45,727	)		123,557
Comprehensive loss		(2,400,033	)		(2,160,299	)		(7,198,244	)		(4,397,405	)
Comprehensive loss attributable to noncontrolling interests		(23,576	)		–			(23,576	)		–
Comprehensive loss attributable to Grom Social Enterprises Inc. stockholders	$	(2,376,457	)	$	(2,160,299	)	$	(7,174,668	)	$	(4,397,405	)

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

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

Series A Preferred Stock

Series B Preferred Stock

Series C Preferred Stock

Shares

Value

Shares

Value

Shares

Value

Balance, June 30, 2020

925,000

925

250,000

250

–

Net income (loss)

–

Change in foreign currency translation

–

Exchange of Series A preferred stock for Series B preferred stock

(925,000

)

(925

)

1,202,500

1,202

–

Accretion of Series B preferred stock

–

Deemed dividend on accretion of Series B preferred stock

–

Issuance of Series B preferred stock with common stock in connection with sales made under private offerings

–

233,500

234

–

Exchange of convertible notes and accrued interest for Series B preferred stock

–

3,623,884

3,624

–

Issuance of common stock in exchange for consulting, professional and other services

–

Conversion of convertible notes and accrued interest into common stock

–

Balance, September 30, 2020

–

5,309,884

5,310

–

Series A Preferred Stock

Series B Preferred Stock

Series C Preferred Stock

Shares

Value

Shares

Value

Shares

Value

Balance, June 30, 2021

–

9,315,059

9,315

Net income (loss)

–

Change in foreign currency translation

–

Exchange of convertible notes and accrued interest for Series C preferred stock

–

85,200

Issuance of common stock in connection with sales made under public offerings

–

Issuance of common stock as compensation to employees, officers and/or directors

–

Issuance of common stock in exchange for consulting, professional and other services

–

Issuance of common stock in connection with the issuance of convertible note(s)

–

Issuance of common stock warrants in connection with the issuance of convertible note(s)

–

Issuance of common stock in connection with the acquisition of a business

–

Conversion of convertible notes and accrued interest into common stock

–

Stock based compensation expense related to stock options

–

Balance, September 30, 2021

–

9,400,259

9,400

GROM SOCIAL ENTERPRISES INC.

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

Series A Preferred Stock

Series B Preferred Stock

Series C Preferred Stock

Shares

Value

Shares

Value

Shares

Value

Balance, December 31, 2019

925,000

925

–

Net income (loss)

–

Change in foreign currency translation

–

Exchange of Series A preferred stock for Series B preferred stock

(925,000

)

(925

)

1,202,500

1,202

–

Accretion of Series B preferred stock

–

Deemed dividend on accretion of Series B preferred stock

–

Issuance of Series B preferred stock with common stock in connection with sales made under private offerings

–

483,500

484

–

Exchange of convertible notes and accrued interest for Series B preferred stock

–

3,623,884

3,624

–

Issuance of common stock as compensation to employees, officers and/or directors

–

Issuance of common stock in exchange for consulting, professional and other services

–

Issuance of common stock in lieu of cash for accounts payable, loans payable and other accrued obligations

–

Issuance of common stock in connection with the issuance of convertible note(s)

–

Conversion of convertible notes and accrued interest into

Conversion of convertible notes and accrued interest into common stock

–

Recognition of beneficial conversion features related to convertible notes

–

Balance, September 30, 2020

–

5,309,884

5,310

–

Series A Preferred Stock

Series B Preferred Stock

Series C Preferred Stock

Shares

Value

Shares

Value

Shares

Value

Balance, December 31, 2020

–

5,625,884

5,626

–

Net income (loss)

–

Change in foreign currency translation

–

Issuance of Series B preferred stock with common stock in connection with sales made under private offerings

–

950,000

950

–

Issuance of Series B preferred stock in exchange for consulting, professional and other services

–

75,000

–

Exchange of convertible notes and accrued interest for Series B preferred stock

–

2,564,175

2,564

–

Exchange of Series B preferred stock for Series C preferred stock

–

(9,215,059

)

(9,215

)

9,215,059

9,215

Exchange of convertible notes and accrued interest for Series C preferred stock

–

85,200

Issuance of Series C preferred stock with common stock in connection with sales made under private offerings

–

100,000

100

Issuance of common stock in connection with sales made under public offerings

–

Issuance of common stock in connection with the exercise of common stock purchase warrants

–

Issuance of common stock as compensation to employees, officers and/or directors

–

Issuance of common stock in exchange for consulting, professional and other services

–

Issuance of common stock in connection with the issuance of convertible note(s)

–

Issuance of common stock warrants in connection with the issuance of convertible note(s)

–

Issuance of common stock in connection with the acquisition of a business

–

Conversion of convertible notes and accrued interest into common stock

–

Recognition of beneficial conversion features related to convertible notes

–

Stock based compensation expense related to stock options

–

Balance, September 30, 2021

–

9,400,259

9,400

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

GROM SOCIAL ENTERPRISES INC.

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


											Accumulated
					Additional						Other					Total
	Common Stock				Paid-in			Retained			Comprehensive			Noncontrolling		Stockholders'
	Shares		Value		Capital			Earnings			Income			Interests		Equity

Balance, June 30, 2020		5,752,647	$	5,753	$	59,844,058		$	(52,348,423	)	$	(34,724	)	$	–	$	7,467,839

Net income (loss)		–		–		–			(2,221,020	)		–			–		(2,221,020	)
Change in foreign currency translation		–		–		–			–			60,721			–		60,721
Exchange of Series A preferred stock for Series B preferred stock		–		–		(277	)		–			–			–		–
Accretion of Series B preferred stock		–		–		277,500			–			–			–		277,500
Deemed dividend on accretion of Series B preferred stock		–		–		(277,500	)		–			–			–		(277,500	)
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings		–		–		233,266			–			–			–		233,500
Exchange of convertible notes and accrued interest for Series B preferred stock		–		–		3,620,260			–			–			–		3,623,884
Issuance of common stock in exchange for consulting, professional and other services		53,422		53		173,182			–			–			–		173,235
Conversion of convertible notes and accrued interest into common stock		20,312		20		26,029			–			–			–		26,049

Balance, September 30, 2020		5,826,381	$	5,826	$	63,896,518		$	(54,569,443	)	$	25,997		$	–	$	9,364,208

										Accumulated
					Additional					Other						Total
	Common Stock				Paid-in		Retained			Comprehensive			Noncontrolling			Stockholders'
	Shares		Value		Capital		Earnings			Income			Interests			Equity

Balance, June 30, 2021		9,560,074	$	9,560	$	79,454,922	$	(60,611,994	)	$	(17,465	)	$	–		$	18,844,338

Net income (loss)		–		–		–		(2,308,861	)		–			(23,576	)		(2,332,437	)
Change in foreign currency translation		–		–		–		–			(67,596	)		–			(67,596	)
Exchange of convertible notes and accrued interest for Series C preferred stock		–		–		85,165		–			–			–			85,250
Issuance of common stock in connection with sales made under public offerings		361,445		361		1,361,347		–			–			–			1,361,708
Issuance of common stock as compensation to employees, officers and/or directors		157,943		158		426,288		–			–			–			426,446
Issuance of common stock in exchange for consulting, professional and other services		86,522		86		255,011		–			–			–			255,097
Issuance of common stock in connection with the issuance of convertible note(s)		4,464		5		9,995		–			–			–			10,000
Issuance of common stock warrants in connection with the issuance of convertible note(s)		–		–		1,200,434		–			–			–			1,200,434
Issuance of common stock in connection with the acquisition of a business		1,771,883		1,772		4,998,228		–			–			–			5,000,000
Conversion of convertible notes and accrued interest into common stock		383,405		384		665,008		–			–			–			665,392
Stock based compensation expense related to stock options		–		–		33,698		–			–			–			33,698

Balance, September 30, 2021		12,325,736	$	12,326	$	88,490,096	$	(62,920,855	)	$	(85,061	)	$	(23,576	)	$	25,482,330

GROM SOCIAL ENTERPRISES INC.

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

											Accumulated
					Additional						Other					Total
	Common Stock				Paid-in			Retained			Comprehensive			Noncontrolling		Stockholders'
	Shares		Value		Capital			Earnings			Income			Interests		Equity

Balance, December 31, 2019		5,230,713	$	5,231	$	58,316,882		$	(50,048,481	)	$	(97,560	)	$	–	$	8,176,997

Net income (loss)		–		–		–			(4,520,962	)		–			–		(4,520,962	)
Change in foreign currency translation		–		–		–			–			123,557			–		123,557
Exchange of Series A preferred stock for Series B preferred stock		–		–		(277	)		–			–			–		–
Accretion of Series B preferred stock		–		–		277,500			–			–			–		277,500
Deemed dividend on accretion of Series B preferred stock		–		–		(277,500	)		–			–			–		(277,500	)
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings		–		–		483,016			–			–			–		483,500
Exchange of convertible notes and accrued interest for Series B preferred stock		–		–		3,620,260			–			–			–		3,623,884
Issuance of common stock as compensation to employees, officers and/or directors		13,125		13		35,587			–			–			–		35,600
Issuance of common stock in exchange for consulting, professional and other services		191,034		191		555,249			–			–			–		555,440
Issuance of common stock in lieu of cash for accounts payable, loans payable and other accrued obligations		15,625		15		49,985			–			–			–		50,000
Issuance of common stock in connection with the issuance of convertible note(s)		339,678		340		735,674			–			–			–		736,014
Conversion of convertible notes and accrued interest into common stock		36,206		36		56,013			–			–			–		56,049
Recognition of beneficial conversion features related to convertible notes		–		–		44,129			–			–			–		44,129

Balance, September 30, 2020		5,826,381	$	5,826	$	63,896,518		$	(54,569,443	)	$	25,997		$	–	$	9,364,208

											Accumulated
					Additional						Other						Total
	Common Stock				Paid-in			Retained			Comprehensive			Noncontrolling			Stockholders'
	Shares		Value		Capital			Earnings			Income			Interests			Equity

Balance, December 31, 2020		5,886,073	$	5,886	$	64,417,218		$	(55,791,914	)	$	(39,334	)	$	–		$	8,597,482

Net income (loss)		–		–		–			(7,128,941	)		–			(23,576	)		(7,152,517	)
Change in foreign currency translation		–		–		–			–			(45,727	)		–			(45,727	)
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings		–		–		949,050			–			–			–			950,000
Issuance of Series B preferred stock in exchange for consulting, professional and other services		–		–		74,925			–			–			–			75,000
Exchange of convertible notes and accrued interest for Series B preferred stock		–		–		2,561,611			–			–			–			2,564,175
Exchange of Series B preferred stock for Series C preferred stock		–		–		–			–			–			–			–
Exchange of convertible notes and accrued interest for Series C preferred stock		–		–		85,165			–			–			–			85,250
Issuance of Series C preferred stock with common stock in connection with sales made under private offerings		–		–		99,900			–			–			–			100,000
Issuance of common stock in connection with sales made under public offerings		2,771,084		2,771		10,312,553			–			–			–			10,315,324
Issuance of common stock in connection with the exercise of common stock purchase warrants		105,648		106		(106	)		–			–			–			–
Issuance of common stock as compensation to employees, officers and/or directors		157,943		158		426,288			–			–			–			426,446
Issuance of common stock in exchange for consulting, professional and other services		150,393		150		511,308			–			–			–			511,458
Issuance of common stock in connection with the issuance of convertible note(s)		17,746		18		39,732			–			–			–			39,750
Issuance of common stock warrants in connection with the issuance of convertible note(s)		–		–		1,895,078			–			–			–			1,895,078
Issuance of common stock in connection with the acquisition of a business		1,771,883		1,772		4,998,228			–			–			–			5,000,000
Conversion of convertible notes and accrued interest into common stock		1,464,966		1,465		1,766,832			–			–			–			1,768,297
Recognition of beneficial conversion features related to convertible notes		–		–		318,616			–			–			–			318,616
Stock based compensation expense related to stock options		–		–		33,698			–			–			–			33,698

Balance, September 30, 2021		12,325,736	$	12,326	$	88,490,096		$	(62,920,855	)	$	(85,061	)	$	(23,576	)	$	25,482,330

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

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended September 30,			Nine Months Ended September 30,
	2021			2020
Cash flows from operating activities:
Net loss	$	(7,152,517	)	$	(4,520,962	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		620,666			623,660
Amortization of debt discount		1,623,921			510,252
Common stock issued for financing costs		10,000			167,614
Common stock issued in exchange for fees and services		586,457			555,440
Convertible notes issued for financing costs		59,633			–
Deferred taxes		29,412			(27,472	)
Stock based compensation		460,146			62,600
Loss on extinguishment of debt		718,267			1,191,089
Unrealized gain on change in fair value of derivative liabilities		–			(8,831	)
Changes in operating assets and liabilities:
Accounts receivable		115,873			99,185
Inventory		33,979			(778	)
Prepaid expenses and other current assets		(326,067	)		(12,717	)
Operating lease right of use assets		(5,014	)		28,233
Other assets		2,437			5,899
Accounts payable		(485,433	)		542,321
Accrued liabilities		(1,148,692	)		288,891
Advanced payments and deferred revenues		(409,525	)		115,176
Income taxes payable and other noncurrent liabilities		(11,489	)		(37,471	)
Related party payables		(95,741	)		(248,904	)
Net cash used in operating activities		(5,373,687	)		(666,775	)

Cash flows from investing activities:
Cash consideration for acquisition of business		(400,000	)		–
Purchase of fixed assets		(25,789	)		(571,563	)
Net cash used in investing activities		(425,789	)		(571,563	)

Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs		1,050,000			483,500
Proceeds from issuance of common stock, net of issuance costs		10,317,324			–
Proceeds from issuance of convertible notes		4,516,700			3,655,000
Proceeds from loans payable		–			253,912
Repayments of convertible notes		(1,058,307	)		(3,368,812	)
Repayments of loans payable		(56,982	)		–
Net cash provided by financing activities		14,768,735			1,023,600

Effect of exchange rates on cash and cash equivalents		(13,239	)		101,492
Net increase (decrease) in cash and cash equivalents		8,956,020			(113,246	)
Cash and cash equivalents at beginning of period		146,708			506,219
Cash and cash equivalents at end of period	$	9,102,728		$	392,973

Supplemental disclosure of cash flow information:
Cash paid for interest	$	74,299		$	–
Cash paid for income taxes	$	–		$	–

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued related to acquisition of business	$	5,000,000		$	–
Common stock issued for financing costs incurred in connection with convertible and promissory notes	$	29,750		$	568,400
Common stock issued to reduce accounts payable and other accrued liabilities	$	–		$	50,000
Common stock warrants issued in connection with convertible promissory notes	$	1,895,078		$	–
Conversion of convertible notes and accrued interest into common stock	$	1,766,297		$	30,000
Conversion of convertible notes and accrued interest into preferred stock	$	1,616,996		$	–
Debt issued related to acquisition of a business	$	278,000		$	–
Discount for beneficial conversion features on convertible notes	$	318,616		$	44,129

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

GROM SOCIAL ENTERPRISES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1.	NATURE OF OPERATIONS

Grom Social Enterprises, Inc. (the “Company”, “Grom” “we”, “us” or “our”), a Florida corporation f/k/a Illumination America, Inc. (“Illumination”), is a media, technology and entertainment company that focuses on delivering content to children under the age of 13 years in a safe secure platform that is compliant with the Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians.

The Company conducts its business through the following five operating subsidiaries:

Grom Social, Inc. (“Grom Social”) was incorporated in the State of Florida on March 5, 2012 and operates the Company’s social media network designed for children under the age of 13 years.

TD Holdings Limited (“TD Holdings”) was incorporated in Hong Kong on September 15, 2005. TD Holdings operates through its two subsidiary companies: (i) Top Draw Animation Hong Kong Limited (“TDAHK”), a Hong Kong corporation and (ii) Top Draw Animation, Inc. (“Top Draw” or “TDA”), a Philippines corporation. The group’s principal activities are the production of animated films and televisions series.

Grom Educational Services, Inc. (“GES”) was incorporated in the State of Florida on January 17, 2017. GES operates the Company’s web filtering services provided to schools and government agencies.

Grom Nutritional Services, Inc. (“GNS”) was incorporated in the State of Florida on April 19, 2017. GNS intends to market and distribute nutritional supplements to children. GNS has not generated any revenue since its inception.

Curiosity Ink Media, LLC (“Curiosity”), organized in the State of Delaware on January 5, 2017, acquires and develops kids and family entertainment properties and associated business opportunities.

The Company owns 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Impact of COVID-19

On January 30, 2020, the World Health Organization announced a global health emergency because of the spread of a new strain of the novel coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic. COVID-19 has and continues to significantly affect the United States and global economies.

The Company has experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and delays caused government-imposed quarantines, office closings and travel restrictions, which affect both the Company’s and its service providers. The Company has significant operations in Manila, Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result of the Philippines government’s call to contain COVID-19, the Company’s animation studio, located in Manila, Philippines, which accounts for approximately 90% of the Company’s total revenues on a consolidated basis, has been mostly closed.

In response to the outbreak and business disruption, the Company has instituted employee safety protocols to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, social distancing and various temporary closures of its administrative offices and production studio. The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity.

The outbreak has and may continue to spread, which could materially impact the Company’s business. The full extent of potential impacts on the Company’s business, financing activities and the global economy will depend on future developments, which cannot be predicted due to the uncertain nature of the continued COVID-19 pandemic, government mandated shut downs, and its adverse effects, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. These effects could have a material adverse impact on the Company’s business, operations, financial condition and results of operations.

Management’s Representation of Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote 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 condensed 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto at December 31, 2020, as presented in the Company’s Annual Report on Form 10-K filed on April 13, 2021 with the SEC.

Basis of Presentation

The condensed 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, 2021, the condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Grom Social, TD Holdings, GES, and GNS. 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

The Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 outlines a single comprehensive model for revenue arising from contracts with customers. The guidance provided in Accounting Standards Codification (“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.

Animation Revenue

For the nine months ended September 30, 2021 and 2020, the Company recorded a total of $4,373,409 and $4,015,061, respectively, of animation revenue from contracts with customers.

Animation revenue is primarily generated from contracts with customers for preproduction and production services related to the development of animated movies and television series. Preproduction activities include producing storyboards, location design, model and props design, background color and color styling. Production focuses on library creation, digital asset management, background layout scene assembly, posing, animation and aftereffects. The Company provides services under fixed-price contracts. Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined price. To the extent actual costs vary from estimated costs, the Company’s profit may increase, decrease, or result in a loss.

The Company identifies a contract under ASC 606 once (i) it is approved by all parties, (ii) the rights of the parties are identified, (iii) the payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable.

The Company evaluates 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 the Company’s 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 and entire episode to us and we therefore have a history of developing standalone selling prices for all of these distinct components. Accordingly, our contracts are typically accounted for as containing multiple performance obligations.

The Company determines the transaction price for each contract based on the consideration it expects to receive for the distinct services being provided under the contract.

The Company recognizes revenue as performance obligations are satisfied and the customer obtains control of the services. In determining when performance obligations are satisfied, the Company considers factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of the Company’s revenue is recognized over time as it performs 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 made towards completion of the performance obligation. The Company uses the percentage-of-completion cost-to-cost measure of progress because it best depicts the transfer of control to the customer as the Company incurs costs against its 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. The percentage-of-completion cost-to-cost method requires management to make estimates and assumptions that affect the reported amounts of contract 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 the total estimated amount of costs that will be incurred for a project or job.

Web Filtering Revenue

For the nine months ended September 30, 2021 and 2020, the Company recorded a total of $403,676 and $460,984, respectively, of web filtering revenue from contracts with customers.

Web filtering revenue from subscription sales is recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases computer hardware and a software and support service license for a period of use between one year to five years. The subscriber is billed in full at the time of the sale. The Company immediately recognizes revenue attributable to the computer hardware as it is non-refundable and control passes to the customer. The advanced billing component for software and service is initially recorded as deferred revenue and subsequently recognized as revenue on a straight-line basis over the subscription period.

Contract Assets and Liabilities

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. Revenues from web filtering contracts are all billed in advance and therefore represent contract liabilities until fully recognized on a ratable basis over the contract life.

The following table depicts the composition of the Company’s contract assets and liabilities as of September 30, 2021 and December 31, 2020:



	September 30, 2021		December 31, 2020

Animation contract assets	$	459,634	$	525,709
Web filtering contract assets		5,088		54,886
Other contract assets		7,337		7,337
Total contract assets	$	472,059	$	587,932

Animation contract liabilities	$	96,697	$	410,709
Web filtering contract liabilities		449,331		544,844
Other contract liabilities		11,500		11,500
Total contract liabilities	$	557,528	$	967,053

Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations except as noted below:

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under this pronouncement, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment change for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis.

On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 amends the effective date for ASU 2017-04 to fiscal years beginning after December 15, 2022, and interim periods therein.

Early adoption continues to be permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on its financial statements for both annual and interim reporting periods.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is evaluating the impact of this amendment on its consolidated financial statements.

In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is evaluating the impact of this guidance on its unaudited condensed consolidated financial statements.

3.	BUSINESS COMBINATIONS

Acquisition of Curiosity Ink Media, LLC

On July 29, 2021, the Company entered into a membership interest purchase agreement (the “Purchase Agreement”) with Curiosity Ink Media LLC, a Delaware limited liability company (“Curiosity”) and the holders of all of Curiosity’s outstanding membership interests (the “Sellers”), for the purchase of 80% of Curiosity’s outstanding membership interests (the “Purchased Interests”) from the Sellers (the “Acquisition).

On August 19, 2021, pursuant to the terms of the Purchase Agreement, the Company consummated the Acquisition and acquired the Purchased Interests in consideration for the issuance to the Sellers of an aggregate of 1,771,883 shares of the Company’s common stock to the Sellers, pro rata to their membership interests immediately prior to the closing of the Acquisition. The shares were valued at $2.82 per share which represents to the 20-day volume-weighted average price of the Company’s common stock on August 19, 2021.

Pursuant to the Purchase Agreement, the Company also paid $400,000 and issued an 8% eighteen-month convertible promissory note in the principal amount $278,000 (the “Note”) to pay-down and refinance certain outstanding loans and advances previously made to Curiosity by Russell Hicks and Brett Watts.

The Note is convertible into shares of common stock of the Company at a conversion price of $3.28 per share but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The Note may be prepaid at any time, in whole or in part. The Note is subordinate to the Company’s senior indebtedness.

The Sellers also have the ability to earn up to $17,500,000 (payable 50% in cash and 50% in stock) upon the achievement of certain performance milestones as of December 31, 2025.


Consideration Paid:
Cash and cash equivalents	$	400,000
Common stock		5,000,000
Convertible notes		278,000
Fair value of total consideration	$	5,678,000

Recognized amount of identifiable assets acquired, and liabilities assumed:
Financial assets:
Cash and cash equivalents	$	26,408
Inventory		113,408
Prepaids and other assets		2,052
Intangible assets		1,157,712
Goodwill		4,378,420
Total identifiable assets acquired, and liabilities assumed	$	5,678,000

The Company expects to perform a valuation study on this acquisition by December 31, 2021 to determine the level of intangible assets.

4.	ACCOUNTS RECEIVABLE, NET

The following table sets forth the components of the Company’s accounts receivable at September 30, 2021, and December 31, 2020:

Schedule of accounts receivable

	September 30, 2021			December 31, 2020

Billed accounts receivable	$	376,529		$	443,806
Unbilled accounts receivable		137,408			188,029
Allowance for doubtful accounts		(41,878	)		(43,903	)
Total accounts receivable, net	$	472,059		$	587,932

During the nine months ended September 30, 2021, the Company had four customers that accounted for 81.0% of revenues and four customers that accounted for 82.4% of accounts receivable. During the year ended December 31, 2020, the Company had three customers that accounted for 68.5% of revenues and one customer that accounted for 29.9% of accounts receivable.

5.	PROPERTY AND EQUIPMENT

The following table sets forth the components of the Company’s property and equipment at September 30, 2021 and December 31, 2020:

Schedule of property and equipment

	September 30, 2021							December 31, 2020
	Cost		Accumulated Depreciation			Net Book Value		Cost		Accumulated Depreciation			Net Book Value
Capital assets subject to depreciation:
Computers, software and office equipment	$	2,696,708	$	(2,347,083	)	$	349,625	$	2,800,872	$	(2,257,797	)	$	543,075
Machinery and equipment		184,368		(158,822	)		25,546		192,988		(152,149	)		40,839
Vehicles		158,590		(124,667	)		33,923		163,525		(106,826	)		56,699
Furniture and fixtures		405,192		(366,052	)		39,140		422,234		(364,655	)		57,579
Leasehold improvements		1,090,960		(935,789	)		155,171		1,143,704		(903,381	)		240,323
Total fixed assets		4,535,818		(3,932,413	)		603,405		4,723,323		(3,784,808	)		938,515
Capital assets not subject to depreciation:
Construction in progress		25,368		–			25,368		26,594		–			26,594
Total fixed assets	$	4,561,186	$	(3,932,413	)	$	628,773	$	4,749,917	$	(3,784,808	)	$	965,109

For the three months ended September 30, 2021 and 2020, the Company recorded depreciation expense of $330,479 and $333,473, respectively.

6.	LEASES

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.

In the United States, the Company leases approximately 2,100 square feet of office space in Boca Raton, Florida at the rate of $4,000 per month pursuant to a three-year lease which expires in October 2021. The Florida office space is the location of the Company’s corporate headquarters and administrative staff.

The Company’s animation operations leases portions of three floors aggregating approximately 28,800 square feet in the West Tower of the Philippine Stock Exchange Centre in Pasig City, Manila. The space is used for administration and production purposes. The Company pays approximately $24,000 per month in the aggregate for such space (which increases by approximately 5% annually). These leases expire in December 2022.

The Company’s web filtering operations lease approximately 1,400 square feet of office space in Norcross, Georgia. The Company pays approximately $2,100 per month pursuant to a five-year lease which expires in December 2023. The lease payment increases by approximately 3% annually.

These operating leases are listed as separate line items on the Company's condensed consolidated financial statements 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 condensed consolidated financial statements.

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 ROU assets and lease liabilities for operating leases of approximately $379,493 in assets, $303,168303,554 in current liabilities and $101,685101,299 in noncurrent liabilities as of September 30, 2021. For the nine months ended September 30, 2021, the Company recognized approximately $272,980 in total lease costs.

The following table presents the remaining amortization of the Company’s lease liabilities under ASC 842 for each of the following years ending December 31:



2021	$	76,082
2022		302,781
2023		25,990
Total	$	404,853

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 ROU assets and related lease liabilities are as follows:



	Nine Months Ended September 30, 2021
Cash paid for operating lease liabilities	$	277,994
Weighted-average remaining lease term		1.7
Weighted-average discount rate		10%
Minimum future lease payments	$	453,889

The remaining future minimum payment obligations at September 30, 2021 for operating leases are as follows:



2021	$	89,642
2022	$	335,659
2023	$	28,588

7.	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.

The following table sets forth the changes in the carrying amount of the Company’s goodwill at September 30, 2021:

Schedule of Goodwill
Balance, January 1, 2021	$	8,380,504
Acquisition of Curiosity		4,378,420
Balance, September 30, 2021	$	12,758,924

See Note 3 – Business Combinations for more information.

The following table sets forth the components of the Company’s intangible assets at September 30, 2021 and December 31, 2020:

Schedule of intangible assets

	September 30, 2021									December 31, 2020
	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	$	(836,450	)	$	763,836	$	1,600,286	$	(716,429	)	$	883,857
Licensed and produced content		5.00		1,157,712		–			1,157,712		–		–			–
Web filtering software		5.00		1,134,435		(1,077,713	)		56,722		1,134,435		(907,548	)		226,887
Subtotal		–		3,892,443		(1,914,163	)		1,978,270		2,734,721		(1,623,977	)		1,110,744
Intangible assets not subject to amortization:
Trade names		–		4,455,595		–			4,455,595		4,455,595		–			4,455,595
Total intangible assets		–	$	8,251,299	$	(1,914,163	)	$	6,433,865	$	7,190,316	$	(1,623,977	)	$	5,566,339

For the nine months ended September 30, 2021 and 2020, the Company recorded amortization expense of $290,187 for intangible assets subject to amortization.

The following table provides information regarding estimated remaining amortization expense for intangible assets subject to amortization for each of the following years ending December 31:

Schedule of amortization


2021	$	150,162
2022		391,571
2023		391,571
2024		391,571
2025		391,571
Thereafter		261,824
Future amortization total	$	1,978,270

8.	ACCRUED LIABILITIES

The following table sets forth the components of the Company’s accrued liabilities at September 30, 2021 and December 31, 2020:

Accrued Liabilities

	September 30, 2021		December 31, 2020

Executive and employee compensation	$	380,158	$	1,642,959
Interest on convertible notes and promissory notes		27,562		135,980
Other accrued expenses and liabilities		618		15,293
Total accrued liabilities	$	408,338	$	1,794,232

9.	RELATED PARTY TRANSACTIONS AND PAYABLES

Marks’s Family

The Company has engaged the family of Darren Marks, its Chief Executive Officer, to assist in the development of the Grom Social website and mobile application. These individuals have created over 1,400 hours of original short form content. Sarah Marks, the wife of Mr. Marks, and Zach Marks, Luke Marks, Jack Marks, Dawson Marks, Caroline Marks and Victoria Marks, each Mr. Marks’s children, are, or have been, employed by or independently contracted with the Company.

Compensation for services provided by the Marks family is expected to continue for the foreseeable future. Each member of the Marks family is actively involved in the creation of content for the website and mobile app, including numerous videos focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special events.

Liabilities Due to Executive and Other Officers

Pursuant to verbal agreements, Messrs. Marks and Leiner have made loans to the Company to help fund operations. These loans are non-interest bearing and callable on demand. No such loans were made to the Company during the three months ended September 30, 2021.

On July 11, 2018, our director Dr. Thomas Rutherford loaned the Company $50,000. The loan bears interest at a rate of 10% per annum and was due on August 11, 2018. No notice of default or demand for payment has been received by the Company.

As of September 30, 2021 and December 31, 2020, the aggregate related party payables were $50,000 and $143,741, respectively.

10.

CONVERTIBLE NOTES

The following tables set forth the components of the Company’s convertible notes as of September 30, 2021 and December 31, 2020:

Schedule of convertible debt

	September 30, 2021			December 31, 2020
8% Unsecured Convertible Notes (Curiosity)	$	278,000		$	–
8% - 12% Convertible Promissory Notes (Bridge Notes)		–			373,587
10% Unsecured Convertible Redeemable Notes – Variable Conversion Price		–			265,000
10% Senior Secured Convertible Note with Original Issuance Discount (L1 Capital Global Master Fund or “L1”)		4,400,000			–
10% Secured Convertible Notes with Original Issuance Discounts (OID Notes)		75,000			153,250
12% Senior Secured Convertible Notes (Newbridge)		–			52,572
12% Senior Secured Convertible Notes (Original TDH Notes)		–			882,175
12% Senior Secured Convertible Notes (TDH Secured Notes)		359,056			1,645,393
12% Senior Secured Convertible Notes (Additional Secured Notes)		68,221			260,315
Loan discounts		(1,988,089	)		(385,266	)
Total convertible notes, net		3,192,188			3,247,026
Less: current portion of convertible notes, net		(1,879,853	)		(2,349,677	)
Convertible notes, net	$	1,312,335		$	897,349

8% Unsecured Convertible Notes (Curiosity)

On July 29, 2021, the Company entered into a membership interest purchase agreement with Curiosity and the holders of all of Curiosity’s outstanding membership interests, for the purchase of 80% of Curiosity’s outstanding membership interests from the sellers. Pursuant to the purchase agreement, the Company issued 8% eighteen-month convertible promissory notes in the aggregate principal amount $278,000 to pay-down and refinance certain outstanding loans and advances previously made by certain of its principals. The notes are convertible into shares of common stock of the Company at a conversion price of $3.28 per share but may not be converted if, after giving effect to such conversion, the noteholder and its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding common stock. The notes may be prepaid at any time, in whole or in part. The notes are subordinate to the Company’s senior indebtedness.

At September 30, 2021, the principal balance of the Curiosity notes was $278,000.

8% - 12% Convertible Promissory Notes (Bridge Notes)

On November 30, 2020, the Company entered into a securities purchase agreement with EMA Financial, LLC (“EMA”) pursuant to which the Company issued to EMA a nine-month 8% convertible promissory note in the principal amount of $260,000 (the “EMA Note”) for a $234,000 investment. The term of the EMA Note may be extended by EMA up to an additional year. The EMA Note is convertible into common stock of the Company at any time after 180 days from issuance. The conversion price of the EMA Note is equal to the lower of: (i) $1.92 per share, or (ii) 70% of the lowest trading price of the common stock during the ten consecutive trading days including and immediately preceding the conversion date.

On February 17, 2021, the terms of the EMA financing were amended to (i) reduce the conversion rate to $1.28, and (ii) add a three-year3 warrant to purchase up to 81,250 shares of the Company’s common stock, at an exercise price of $1.60 per share. On May 19, 2021, the terms of the EMA financing were further amended to (i) increase the interest rate to 12%, and (ii) add a three-year warrant (the “EMA Warrant”) to purchase up to 38,855 shares of the Company’s common stock, at an exercise price of $1.92 per share.

ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. In connection with the EMA warrant issuance, the Company allocated an aggregate fair value of $104,760 to the stock warrants and recorded a debt discount which will be amortized to interest expense over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of the warrants at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant ranging between $1.60 and $4.48, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate of 0.19% and (iv) an expected volatility of the price of the underlying common stock ranging between 224.9% and 258.6%.

On May 24, 2021, EMA Warrant was amended to delete the full-ratchet anti-dilution provision and the EMA Note was amended to delete the variable conversion price feature.

On June 2, 2021, the Company issued 10,000 shares of common stock to EMA upon the conversion of $11,800 in note principal and $1,000 in conversion fees. On June 17, 2021, the Company issued 100,000 shares of common stock to EMA upon the conversion of $127,000 in note principal and $1,000 in conversion fees. On August 20, 2021, the Company issued 108,978 shares of common stock to EMA upon the conversion of $121,200 in note principal and $17,292 in accrued interest and conversion fees.

At September 30, 2021, the principal balance of the EMA Note was $0 and all associated loan discounts were fully amortized.

On December 17, 2020, the Company entered into a note purchase agreement with Quick Capital, LLC (“Quick Capital”) pursuant to which the Company issued Quick Capital a nine-month convertible promissory note in the principal amount of $113,587 (the “Quick Note”) for a $100,000 investment, which included an original issuance discount of 8% and a $4,500 credit for Quick Capital’s transaction expenses. The Quick Note may be converted into shares of common stock at (i) a 30% discount to the lowest price per share of any debt or securities offering by the Company if the Company’s common stock is listed on NASDAQ or NYSE within 90 days of the Quick Note issuance; (ii) the lesser of (A) $1.28 or (B) a 30% discount to the average of the two lowest closing prices during the ten trading days prior to the conversion date; (iii) $1.28 per share, upon an event of default as described in the Note.

The Company analyzed the conversion feature of the note 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 allocable fair value was determined to be $12,621. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.

In connection with the Quick Note issuance, the Company also issued a 3three-year warrant (the “Quick Warrant”) to purchase up to an aggregate of 36,975 shares of the Company’s common stock at an exercise price of $1.60 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $1.60, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate of 0.19% and (iv) an expected volatility of the price of the underlying common stock of 224.3%. As a result, the Company allocated a fair value of $33,056 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.

On May 21, 2021, the Quick Note was amended to replace the variable conversion price with a fixed conversion price of $1.28 per share and the Quick Warrant was amended to delete the full-ratchet anti-dilution provision.

On June 21, 2021, the Company issued 290,000 shares of common stock to Quick Capital upon the conversion of $27,487 in note principal and $65,313 in penalties and accrued interest. On June 28, 2021, the Company issued 269,061 shares of common stock to Quick Capital upon the conversion of $86,100 in note principal.

At September 30, 2021, the principal balance of the Quick Note was $0 and all associated loan discounts were fully amortized.

On February 9, 2021, the Company entered into a securities purchase agreement with Auctus Fund, LLC (“Auctus”) pursuant to which the Company issued to Auctus a twelve-month 12% convertible promissory note in the principal amount of $500,000 (the “Auctus Note”). The note is convertible into shares common stock at a conversion price of $1.92 per share. The Company received net proceeds of $428,000 after deducting fees and expenses related to the transaction.

The Company analyzed the conversion feature of the note 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 allocable fair value was determined to be $155,875. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.

In connection with the note issuance, Auctus was also issued a 5five-year warrant (the “Auctus Warrant”) to purchase up to an aggregate of 195,313 shares of the Company’s common stock, at an exercise price of $1.92 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $4.48, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.48% and (iv) an expected volatility of the price of the underlying common stock of 259.2%. As a result, the Company allocated a fair value of $272,125 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.

On May 25, 2021, Auctus Warrant was amended to delete the full-ratchet anti-dilution provision.

On July 14, 2021, the Company issued 274,427 shares of common stock to Auctus upon the conversion of $500,000 in note principal and $26,900 in accrued interest and conversion fees.

At September 30, 2021, the principal balance of the Auctus Note was $0 and all associated loan discounts were fully amortized.

On March 11, 2021, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”) pursuant to which the Company issued to FirstFire a twelve-month 12% convertible promissory note in the principal amount of $300,000 (the “FirstFire Note”). The first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. At any time after 180 days from the date of issuance, FirstFire may convert any amount due under the note into shares of the Company’s common stock at a conversion price of $1.92 per share. The Company received net proceeds of $238,500 after deducting fees and expenses related to the transaction.

The Company analyzed the conversion feature of the note 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 allocable fair value was determined to be $93,220. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.

In connection with the issuance of the note, FirstFire was also issued a five-year warrant (the “FirstFire Warrant”) to purchase up to an aggregate of 117,188 shares of the Company’s common stock, at an exercise price of $1.92 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $4.16, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.78% and (iv) an expected volatility of the price of the underlying common stock of 258.6%. As a result, the Company allocated a fair value of $145,280 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.

On May 20, 2021, the FirstFire Note was amended to replace the variable conversion feature price with a fixed conversion price of $1.92 and the FirstFire Warrant was amended to delete the full ratchet anti-dilution provision.

On June 17, 2021, the Company issued 175,000 shares of common stock to FirstFire upon the conversion of $300,000 in note principal and $36,000 in accrued interest.

At September 30, 2021, the principal balance of the FirstFire Note was $0 and all associated loan discounts were fully amortized.

On April 16, 2021, the Company entered into a securities purchase agreement with Labrys Fund, LP (“Labrys”), pursuant to which the Company issued to Labrys a one-year convertible promissory note in the principal amount of $300,000 (the “Labrys Note”). The Labrys Note bears interest at a rate of 12% per annum. The first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. Labrys may convert any amount due under the Labrys Note into shares of the Company’s common stock at a conversion price of $1.92 per share. The Company received net proceeds of $266,000, after deducting fees and expenses related to the transaction.

In connection with the issuance of the note, Labrys was also issued a five-year warrant to purchase up to an aggregate of 117,118 shares of the Company’s common stock (the “Labrys Warrant”), at an exercise price of $1.92 per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $6.37, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.84% and (iv) an expected volatility of the price of the underlying common stock of 251.2%. As a result, the Company allocated a fair value of $172,479 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.

On May 22, 2021, the Labrys Warrant was amended to delete the full-ratchet anti-dilution provision.

On June 17, 2021, the Company issued 175,000 shares of common stock to Labrys upon the conversion of $300,000 in note principal and $36,000 in accrued interest.

At September 30, 2021, the principal balance of the Labrys Note was $0 and all associated loan discounts were fully amortized.

10% Unsecured Convertible Redeemable Note – Variable Conversion Price

On March 1, 2020, the Company issued a convertible redeemable note to an unrelated party in the principal amount of $100,000. The note accrues interest at a rate of 10% per annum, was due on August 31, 2020 and is convertible into common stock of the Company at the option of the noteholder 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 note 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 allocable fair value was determined to be $44,129. This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.

In connection with the note issuance, the Company also issued a five-year warrant to purchase up to an aggregate of 15,625 shares of the Company’s common stock at an exercise price of $3.20 per share. ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. This resulted in the debt being recorded at a discount which will be amortized to interest expense over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $3.20, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.89% and (iv) an expected volatility of the price of the underlying common stock of 144.4%. As a result, the Company allocated a fair value of $30,935 to the stock warrants.

On April 14, 2021, the Company issued 62,500 shares of common stock to the noteholder upon the conversion of $100,000 in note principal and $11,205 of accrued interest.

At September 30, 2021, the principal balance of this note was $0 and all associated loan discounts were fully amortized.

On November 20, 2020, the Company issued a convertible redeemable note to an unrelated party in the principal amount of $165,000 less a $15,000 original issuance discount resulting in net cash proceeds to the Company of $150,000. The note accrues interest at a rate of 10% per annum, was due on February 15, 2021 and is convertible into common stock of the Company at the option of the noteholder 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 note 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 allocable fair value was determined to be $50,871. This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.

On February 17, 2021, the Company entered into a debt exchange agreement with the holder of the convertible promissory note, in the aggregate amount of $169,000 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreement, the holder exchanged the outstanding note, and all amounts owed by the Company thereunder, for 169,000 shares of the Company’s 8% Series B convertible preferred stock. At the time of the exchange, all amounts due under the note was deemed to be paid in full and the note was cancelled.

At September 30, 2021, the principal balance of this note was $0 and all associated loan discounts were fully amortized.

10% Senior Secured Convertible Note with Original Issuance Discount (L1)

On September 14, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with L1 Capital Global Master Fund (“L1”) pursuant to which it issued (i) a 10% original issue discount senior secured convertible note in the principal amount of $4,400,000 to L1 (the “L1 Note”) and (ii) a 5five-year warrant to purchase 813,278 shares of the Company’s common stock at an exercise price of $4.20 per share (“Warrant Shares”) in exchange for $3,960,000 (the “First Tranche Financing”). The Purchase Agreement also provided, subject to shareholder approval, for the issuance, subject to certain conditions, of an additional $1,500,000 of notes and warrants to purchase 277,777 shares of common stock (the “Second Tranche Financing”) on the same terms.

The L1 Note is convertible by L1 into common stock of the Company at a price of $4.20 per share, or approximately 1,047,619 shares. It is repayable in 18eighteen equal monthly installments with certain deferments or an acceleration of up to three months' payments. The Company may repay the L1 Note in cash or shares of common stock at a price equal to the lesser of the then conversion price or 95% of the lowest daily VWAP during the ten consecutive trading days immediately preceding the monthly payment date, but in no event less than $1.92. In the event that VWAP drops below $1.92, the Company will have the right to pay at such VWAP with any shortfall paid in cash. The L1 Note is senior to all other Company indebtedness and the Company’s obligations under the note are secured by all of the assets of the Company’s subsidiaries.

The Company estimated the fair value of the warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $2.70, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.79% and (iv) an expected volatility of the price of the underlying common stock of 299.8%. As a result, the Company allocated a fair value of $1,200,434 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.

As of September 30, 2021, the principal balance of these notes was $4,400,000 and the remaining balance on the associated loan discounts was $1,936,894.

10% Secured Convertible Notes with Original Issuance Discounts (“OID Notes”)

During the year ended December 31, 2017, the Company issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $601,223. The notes were issued with original issuance discounts of 10.0%, or $60,122, bear interest at a rate of 10% per annum, are payable semiannually in cash, and carry a two-year term with a fixed conversion price of 24.96. In connection with the issuance of these notes, the Company issued to such investors an aggregate of 4,698 shares of common stock as an inducement to lend. These shares were valued at $78,321 with share prices ranging between $15.36 and $22.40 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.

On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of 331,954 shares of the Company’s Series B preferred stock (“Series B Stock) were issued to noteholders for an aggregate of $211,223 of outstanding principal and accrued and unpaid interest. On November 30, 2020, the Company entered into a debt exchange agreement with the remaining holder of these 10% convertible notes pursuant to which an aggregate of 158,000 shares of Series B Stock were issued to the noteholder for an aggregate of $111,250 of outstanding principal and accrued and unpaid interest.

At September 30, 2021, the principal balance of these notes was $0 and all associated loan discounts were fully amortized.

During the year ended December 31, 2018, the Company issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $1,313,485 in a private offering. The notes were issued with original issuance discounts of 10.0%, or $131,348, bear interest at a rate of 10% per annum, are payable semiannually in cash, and carry a two-year term with a fixed conversion price of $24.96. In connection with the issuance of these notes, the Company issued to such investors an aggregate of 10,262 shares of common stock as an inducement to lend. These shares were valued at $198,259 with share prices ranging between $9.60 and $25.92 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.

On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of 316,000 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $200,000 of outstanding principal and accrued and unpaid interest. On September 10, 2021, the Company entered into a debt exchange agreement with a holder of a 10% convertible note pursuant to which 85,250 shares of the Company’s Series C Stock was issued for $85,250 of outstanding principal and accrued and unpaid interest.

As of September 30, 2021, the principal balance of these notes was $25,000 and all associated loan discounts were fully amortized. No notices of default or demands for payment have been received by the Company.

During the year ended December 31, 2018, the Company also issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $356,000 in a private offering. The notes were issued with original issuance discounts of 20.0%, or $71,200, bear interest at a rate of 10% per annum, are payable semiannually in cash, and carry a two-year term with a fixed conversion price of $16.00. In connection with the issuance of these notes, the Company issued to such investors an aggregate of 6,344 shares of common stock as an inducement to lend. These shares were valued at $62,269 with share prices ranging between $9.28 and $11.20 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.

On July 19, 2021, the Company repaid $6,329 outstanding principal and accrued and unpaid interest to a 10% secured convertible noteholder.

As of September 30, 2021, the principal balance of these notes was $50,000 and all associated loan discounts were fully amortized. No notices of default or demands for payment have been received by the Company.

12% Senior Secured Convertible Notes (Newbridge Offering)

On November 30, 2018, the Company closed a private offering in which it sold 12% secured convertible promissory notes (“12% Notes”) in an aggregate principal amount of $552,000 and issued an aggregate of 22,843 shares of its common stock to nine accredited investors pursuant to a private placement memorandum and subscription agreement. The 12% 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 the shareholders of TD Holdings in connection with a share sale agreement dated June 30, 2016, as amended. Messrs. Marks and Leiner pledged an aggregate of 312,500 shares of common stock of the Company pursuant to a pledge and security agreement to secure the timely payment of the 12% Notes. The 12% Notes are convertible, in whole or in part, by the noteholders at a conversion rate of $12.80 if the Company’s common stock trades or is quoted at more than $12.80 per share for 10 consecutive days. The conversion price is subject to 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 12% Notes is payable monthly in 21 equal installments commencing four months after the issuance of the 12% Notes. Upon the occurrence of an event of default, the interest rate will increase to 15% and the 12% Notes will become immediately due and payable. The Company may prepay the 12% 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) 3,550 shares of common stock, and (iii) $11,040, representing a non-accountable expense allowance for its services.

As of September 30, 2021, the principal balance of these notes was $0 and all associated loan discounts were fully amortized.

12% Senior Secured Convertible Notes (Original TDH Notes)

On June 20, 2016, the Company issued $4,000,000 of senior secured promissory notes to the shareholders of TD Holdings (the “TDH Sellers”) in connection with a share sale agreement pursuant to which the Company acquired 100% of the common stock of TD Holdings (“the TDH Share Sale Agreement”). The notes bear interest at 5.0% per annum and are due on the earlier of (i) June 20, 2018 or (ii) the date on which the Company successfully completes a qualified initial public offering as defined in the agreement. The notes are collateralized by all of the assets of TD Holdings.

First Amendment to the TDH Share Sale Agreement

On January 3, 2018, the Company entered into an amendment to the TDH Share Sale Agreement (the “First Amendment”). Under the terms of the First Amendment:

The maturity date of the notes was extended from July 1, 2018 until July 1, 2019.

The interest rate on the notes during for one-year extension period from July 2, 2018 to July 1, 2019 was increased to 10%.

Interest is payable quarterly in arrears during the one-year extension period, instead of annually in arrears. The first such quarterly interest payment of $100,000 is due on September 30, 2018.

Under the terms of the terms of TDH Share Sale Agreement, the TDH Sellers could earn up to an additional $5.0 million in contingent earnout payments. The original earnout period ended on December 31, 2018. The First Amendment extended the earnout period by one year to December 31, 2019.

As consideration to enter into the First Amendment, the Company issued 25,000 shares of its common stock valued at $480,000 to the TDH Sellers.

Second Amendment to the TDH Share Sale Agreement

On January 15, 2019, the Company 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 notes was extended from July 1, 2019 to April 2, 2020.

	·	The TDH Sellers shall have the right to convert the notes at a conversion price of $8.64 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.

	·	In the event that the notes are not repaid prior to July 2, 2019, no funds will be transferred by TDH to the Company.

	·	The payment terms of the contingent earnout was modified from 50% payable in cash and 50% payable in stock to 75% payable in cash and 25% payable in stock.

As consideration to enter into the Second Amendment, the Company issued an additional 25,000 shares of its common stock valued at $220,000 to the TDH Sellers.

Due to the inclusion of a conversion feature, the Second Amendment was considered an extinguishment and subsequent reissuance of the notes under the guidelines of ASC 470-20-40-7 through 40-9. As a result, the Company recorded a loss on the extinguishment of debt of $363,468 related to the Second Amendment during the year ended December 31, 2019.

The principal value of the notes was reclassified to convertible notes, net – current on the Company’s condensed consolidated financial statements.

Third Amendment to the TDH Share Sale Agreement

On March 16, 2020, the Company entered into a third amendment (the “Third Amendment”) to the TDH Share Sale Agreement, pursuant to which the Company’s subsidiary, Grom Holdings, had acquired 100% of the common stock of TDH (representing ownership of the animation studio) from certain individuals (the “TDH Sellers”). The Company used the proceeds received from the TDH Secured Notes Offering to pay the TDH Sellers $3,000,000 of the principal due under the Original TDH Notes, leaving a principal amount due to the TDH Sellers of $1,000,000 (plus accrued interest and costs). In addition, the accrued interest of $361,767 due to the TDH Sellers pursuant to the Original TDH Notes was paid in three monthly payments of $93,922, commencing April 16, 2020, and twelve-monthly installments of $6,667 commencing April 16, 2020.

Pursuant to the Third Amendment, the TDH Sellers and the Company agreed, among other things:

	·	To extend the maturity date of the remaining Original TDH Notes by one year to June 30, 2021;

	·	To increase the interest rate on the remaining Original TDH Notes to 12%;

	·	To grant a first priority security interest on the shares of TDH and TDAHK to the TDH Sellers, pari passu with the holders of the TDH Secured Notes; and

	·	To pay the balance of the Original TDH Notes monthly in arrears, amortized over a four-year period.

On August 18, 2021, the Company paid the TDH Sellers an aggregate of $834,760, representing all remaining amounts due and payable under the TDH Secured Notes. As a result, the TDH Sellers released the pledged shares of TDH and its subsidiary, Top Draw Animation Hong Kong Limited from escrow. The TDH Sellers have no further security interest in the assets of the Company or its subsidiaries.

As of September 30, 2021, the principal balance of the Original TDH Notes was $0.

12% Senior Secured Convertible Notes (“TDH Secured Notes”)

On March 16, 2020, the Company sold (the “TDH Secured Notes Offering”) an aggregate $3,000,000 of its 12% senior secured convertible notes (the “TDH Secured Notes”), to eleven accredited investors (the “TDH Secured Note Lenders”), pursuant to a subscription agreement with the TDH Secured Note Lenders. Interest on the TDH Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the TDH Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024. Pursuant to the TDH Secured Notes, TD Holdings will pay amounts due under the TDH Secured Notes. Prepayment of amounts due under TDH Secured Notes is subject to a prepayment penalty in an amount equal to 4% of the amount prepaid.

The TDH Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $3.20 per share.

The Company’s obligations under the TDH Secured Notes, are secured by Grom Holdings’ shares of stock of TDH, and of its wholly owned subsidiary, TDAHK. The TDH Secured Notes rank equally and ratably on a pari passu basis with (i) the other TDH Secured Notes and (ii) the Original TDH Notes issued by the Company pursuant to TDH Share Sale Agreement.

If the Company sells the animation studio located in Manila, Philippines, which is currently owned by TDH through TDAHK (the “Animation Studio”), for more than $12,000,000, and so long as any amount of principal is outstanding under the TDH Secured Notes, the Company will pay the TDH Secured Notes holders from the proceeds of the sale (i) all amounts of principal outstanding under the TDH Secured Notes, (ii) such amount of interest which would be due and payable assuming the TDH Secured Notes were held to maturity (minus any amounts of interest previously paid hereunder), and (iii) an additional 10% of the amount of principal outstanding under the TDH Secured Notes within five days of the closing of such sale.

In connection with the issuance of the TDH Secured Notes, the Company issued to each TDH Secured Note holder shares of common stock equal to 20% of the principal amount of such holder’s TDH Secured Note, divided by $3.20. Accordingly, an aggregate of 187,500 shares of common stock were issued to the TDH Secured Note holders on March 16, 2020. These shares were valued at $420,000, or $2.24 per share, which represents fair market value. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the notes.

On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 1,739,580 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $1,101,000 of outstanding principal and accrued and unpaid interest.

On November 30, 2020, the Company entered into a debt exchange agreement with another holder of these 12% TDH Secured Notes pursuant to which an aggregate of 158,000 shares of Series B Stock were issued to the noteholder for an aggregate of $99,633 of outstanding principal and accrued and unpaid interest.

On February 17, 2021, the Company entered into debt exchange agreements with certain holders of these 12% TDH Secured Notes pursuant to which an aggregate of 2,106,825 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $1,256,722 of outstanding principal and accrued and unpaid interest.

As of September 30, 2021, the principal balance of these notes was $359,056 and the remaining balance on the associated loan discounts was $43,021.

12% Senior Secured Convertible Notes (Additional Secured Notes)

On March 16, 2020, the Company issued to seven accredited investors (the “Additional Secured Note Lenders”) an aggregate of $1,060,000 of its 12% senior secured convertible notes (the “Additional Secured Notes”) in a private offering pursuant to a subscription agreement with substantially the same terms as the TDH Secured Notes except that the Additional Secured Notes are secured by all of the assets of the Company other than the shares and other assets of TDH and TDAHK, pursuant to a security agreement by and among the Company and the Additional Secured Note Lenders.

Interest on the Additional Secured Notes accrues on the outstanding principal amount at the rate of 12% per annum. Principal and interest on the Additional Secured Notes are payable monthly, on an amortized basis over 48 months, with the last payment due on March 16, 2024. Prepayment of the amounts due under the Additional Secured Notes is subject to a prepayment penalty of 4% of the amount prepaid.

The Additional Secured Notes are convertible at the option of the holders at 75% of the average sales price of the Company’s common stock over the 60 trading days immediately preceding conversion provided that the conversion price shall not be less than $0.10 per share.

In connection with the issuance of the Additional Secured Notes, the Company issued to each Additional Secured Note Lender shares of common stock equal to 20% of the principal amount of such holder’s Additional Secured Note, divided by $3.20. Accordingly, an aggregate of 66,250 shares of common stock were issued. These shares were valued at $148,000, or $2.24 per share, which represents fair market value. 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.

On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 12% Additional Secured Notes pursuant to which an aggregate of 1,236,350 shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $782,500 of outstanding principal and accrued and unpaid interest.

On February 17, 2021, the Company entered into a debt exchange agreement with another holder of these 12% Additional Secured Notes pursuant to which an aggregate of 288,350 shares of the Company’s Series B Stock were issued to the noteholder for an aggregate of $191,273 of outstanding principal and accrued and unpaid interest.

As of September 30, 2021, the principal balance of these notes was $68,221 and the remaining balance on the associated loan discounts was $8,174.

Future Minimum Principal Payments

The remaining principal repayments based upon the maturity dates of the Company’s borrowings for each of the next five years are as follows:



2021	$	721,308
2022	$	4,215,130
2023	$	167,792
2024	$	76,047
2025 and thereafter	$	–
	$	5,180,277

11.

STOCKHOLDERS’ EQUITY

Preferred Stock

The Company is authorized to issue 25,000,000 shares of preferred stock, par value of $0.001 per share.

Series A Preferred Stock

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”). Each share of Series A Stock is convertible, at any time, into 0.15625 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 62,500 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 19,532 restricted shares of the Company’s common stock.

As a result of the issuance of the Series A Stock, the Company recorded a beneficial conversion feature and other discounts as a deemed dividend in its condensed consolidated financial statements of $740,899.

On August 6, 2020, the Company entered into exchange agreements with the holders of 925,000 issued and outstanding shares of the Company’s Series A Stock pursuant to which such shares of Series A Stock were exchanged for an aggregate of 1,202,500 shares of the Company’s Series B Stock.

As of September 30, 2021 and December 31, 2020, the Company had no shares of Series A Stock issued and outstanding.

Series B Preferred Stock

On August 4, 2020, the Company filed with the Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series B Stock designating 10,000,000 shares as Series B Preferred Stock (the “Series B Stock”). The Series B Stock ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.

The holder may at any time after the 12-month anniversary of the issuance of the shares of Series B Stock convert such shares into common stock at a conversion price equal to the 30-day volume weighted average price (“VWAP”) of a share of common stock for each share of Series B Stock to be converted. In addition, the Company at any time may require conversion of all or any of the Series B Stock then outstanding at a 50% discount to the 30-day VWAP.

Each share of Series B Stock entitles the holder to 1.5625 votes for each share of Series B Stock. The consent of the holders of at least two-thirds of the shares of Series B Stock is required for the amendment to any of the terms of the Series B Stock, to create any additional class of stock unless the stock ranks junior to the Series B Stock, to make any distribution or dividend on any securities ranking junior to the Series B Stock, to merge or sell all or substantially all of the assets of the Company or acquire another business or effectuate any liquidation of the Company.

Cumulative dividends accrue on each share of Series B Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in common stock in arrears quarterly commencing 90 days from issuance.

Upon a liquidation, dissolution or winding up of the Company, the holders of the Series B Stock are entitled to $1.00 per share plus all accrued and unpaid dividends. No distribution may be made to holders of shares of capital stock ranking junior to the Series B Stock upon a liquidation until Series B stockholders receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series B Stock, may elect to deem a merger, reorganization or consolidation of the Company into or with another corporation, not affiliated with said majority, or other similar transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of in exchange for property, rights or securities distributed to holders thereof by the acquiring person, firm or other entity, or the sale of all or substantially all of the assets of the Company.

On June 19, 2020, the Company received gross cash proceeds of $250,000 from one accredited investor, pursuant to the terms of a subscription agreement, and subsequently issued an aggregate of 250,000 shares of Series B Stock on August 6, 2020.

On August 6, 2020, the Company, entered into debt exchange agreements with holders of the Company’s (i) OID Notes in the aggregate amount of $411,223 of outstanding principal and accrued and unpaid interest; (ii) TDH Secured Notes, in the aggregate amount of $1,101,000 of outstanding principal and accrued and unpaid interest; and (iii) Additional Secured Notes, which were secured by all of the other assets of the Company in the aggregate amount of $782,500 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders of the notes exchanged outstanding and all amounts owed by the Company thereunder, for an aggregate of 3,623,884 shares of the Company’s Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid-in-full and the notes were cancelled.

In addition, on August 6, 2020, the Company entered into exchange agreements (the “Series A Exchange Agreements”) with the holders of 925,000 issued and outstanding shares of the Company’s Series A Stock. Pursuant to the terms of the Series A Exchange Agreements, the holders of Series A Stock exchanged their shares for an aggregate of 1,202,500 shares of the Company’s Series B Stock. At the time of the exchange, all of the exchanged shares of Series A Stock were cancelled.

On September 22, 2020, the Company received gross cash proceeds of $233,500 from two accredited investors, pursuant to the terms of a subscription agreement, and subsequently issued an aggregate of 233,500 shares of Series B Stock on November 30, 2020.

On November 30, 2020, the Company entered into debt exchange agreements with holders of the Company’s (i) OID Notes in the aggregate amount of $111,250 of outstanding principal and accrued and unpaid interest; and (ii) TDH Secured Notes, in the aggregate amount of $99,633 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders of the outstanding notes exchanged all amounts owed by the Company thereunder, for an aggregate of 316,000 shares of the Company’s Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid-in-full and the notes were cancelled.

On February 17, 2021, the Company entered into debt exchange agreements with holders of three of the Company’s convertible promissory notes in the aggregate amount of $1,700,905 of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders exchanged the outstanding notes, and all amounts owed by the Company thereunder, for an aggregate of 2,564,175 shares of the Company’s Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid in full and the notes were cancelled.

On February 17, 2021, the Company entered into subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 300,000 shares of Series B Stock for aggregate gross proceeds of $300,000.

On March 31, 2021, the Company entered into subscription agreements with two accredited investors, pursuant to which the Company sold the investors an aggregate of 650,000 shares of Series B Stock for aggregate gross proceeds of $650,000.

On March 31, 2021, the Company issued 75,000 shares of Series B Stock with a fair market value of $75,000 to its attorneys for legal services rendered.

On May 20, 2021, the Company entered into exchange agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed to exchange all of the issued and outstanding shares of Series B Stock for shares of the Company’s newly-designated Series C Stock, on a one for one basis. As a result of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059 shares of Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.

As of September 30, 2021 and December 31, 2020, the Company had no shares and 5,625,884 shares of Series B Stock issued and outstanding, respectively.

Series C Preferred Stock

On May 20, 2021, the Company filed with the Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series C Stock designating 10,000,000 shares as Series C Preferred Stock (the “Series C Stock”). The Series C Stock ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.

The holder may, at any time after the 6-month anniversary of the issuance of the shares of Series C Preferred Stock, convert such shares into common stock at a conversion rate of $1.92 per share. In addition, the Company may, at any time after the issuance of the shares, convert any or all of the outstanding shares of Series C Preferred Stock at a conversion rate of $1.92 per share

Each share of Series C Stock entitles the holder to 1.5625 votes for each share of Series C Stock. The consent of the holders of at least two-thirds of the shares of Series C Stock is required for the amendment to any of the terms of the Series C Stock, to create any additional class of stock unless the stock ranks junior to the Series C Stock, to make any distribution or dividend on any securities ranking junior to the Series C Stock, to merge or sell all or substantially all of the assets of the Company or acquire another business or effectuate any liquidation of the Company.

Cumulative dividends accrue on each share of Series C Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in common stock in arrears quarterly commencing 90 days from issuance.

Upon a liquidation, dissolution or winding up of the Company, the holders of the Series C Stock are entitled to $1.00 per share plus all accrued and unpaid dividends. No distribution may be made to holders of shares of capital stock ranking junior to the Series C Stock upon a liquidation until Series C stockholders receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series C Stock, may elect to deem a merger, reorganization or consolidation of the Company into or with another corporation, not affiliated with said majority, or other similar transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of in exchange for property, rights or securities distributed to holders thereof by the acquiring person, firm or other entity, or the sale of all or substantially all of the assets of the Company.

On May 20, 2021, the Company entered into exchange agreements with all of the holders of Series B Stock (the “Series B Holders”), pursuant to which the Series B Holders agreed to exchange all of the issued and outstanding shares of Series B Stock for shares of Series C Stock, on a one for one basis. As a result of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059 shares of the Company’s Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.

On June 11, 2021, the Company entered into subscription agreements with an accredited investor, pursuant to which the Company sold the investor an aggregate of 100,000 shares of Series C Stock for aggregate gross proceeds of $100,000.

On September 10, 2021, the Company entered into a debt exchange agreement with a holder of a 10% convertible note pursuant to which 85,250 shares of the Company’s Series C Stock was issued for $85,250 of outstanding principal and accrued and unpaid interest.

As of September 30, 2021 and December 31, 2020, the Company had 9,400,259 and no shares of Series C Stock issued and outstanding, respectively.

Common Stock

The Company is authorized to issue 500,000,000 shares of common stock, par value of $0.001 per share and had 12,325,736 and 5,886,073 shares of common stock issued and outstanding as of September 30, 2021 and December 31, 2020, respectively.

Reverse Stock Split

On April 7, 2021, the board of directors of the Company approved, and on April 8, 2021, the Company’s shareholders approved, an increase to the range of the ratio for a reverse stock split to a ratio of no less than 1-for-2 and no more than 1-for-50. On May 6, 2021, the board fixed the ratio for a reverse stock split at 1-for-32 and, on May 7, 2021, the Company filed a certificate of amendment to its articles of incorporation with the Secretary of State of the State of Florida to effect the reverse stock split which became effective as of May 13, 2021. The Company’s common stock began being quoted on the OTCQB on a post-reverse split basis beginning on May 19, 2021.

Registered Offering

On June 21, 2021, the Company sold an aggregate of 2,409,639 units (“Units”), at a price to the public of $4.15 per Unit (the “Offering”), each Unit consisting of one share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price of $4.565 per share (the “Warrants”), pursuant to a underwriting agreement, dated as of June 16, 2021 (the “Underwriting Agreement”), between the Company and EF Hutton, division of Benchmark Investments, LLC, as representative (“EF Hutton”) of the several underwriters named in the Underwriting Agreement. In addition, pursuant to the Underwriting Agreement, the Company granted EF Hutton a 45-day option (the “Over-Allotment Option”) to purchase up to 361,445 additional Units, to cover over-allotments in connection with the Offering, which EF Hutton exercised with respect to Warrants exercisable for up to an additional 361,445 shares of common stock. The Company received gross proceeds of approximately $10,000,000 in the Offering, before deducting underwriting discounts and commissions and other offering expenses.

On July 15, 2021, EF Hutton exercised in full the Over-Allotment Option with respect to all 361,445 additional shares of the Company’s common stock for total gross proceeds to the Company of approximately $1,500,000, before deducting underwriting discounts and commissions and other offering expenses.

Common Stock Issued as Compensation to Employees, Officers and/or Directors

During the nine months ended September 30, 2021, the Company issued 157,943 shares of common stock with a fair market value of $426,446 to an officer as compensation.

During the nine months ended September 30, 2020, the Company issued 13,125 shares of common stock with a fair market value of $35,600 to employees, officers and/or directors as compensation.

Common Stock Issued in Exchange for Consulting, Professional and Other Services

During the nine months ended September 30, 2021, the Company issued 150,393 shares of common stock with a fair market value of $511,458 to contractors for services rendered.

During the nine months ended September 30, 2020, the Company issued 191,034 shares of common stock with a fair market value of $555,440 to contractors for services rendered.

Common Stock Issued in lieu of Cash for Loans Payable and Other Accrued Obligations

During the nine months ended September 30, 2020, the Company issued 15,625 shares of common stock with a fair market value of $50,000 to satisfy loans payable and other accrued obligations.

Common Stock Issued in Connection with the Conversion of Convertible Note Principal and Accrued Interest

During the nine months ended September 30 2021, the Company issued 1,464,966 shares of common stock upon the conversion of $1,766,832 in convertible note principal and accrued interest.

During the nine months ended September 30 2020, the Company issued 36,206 shares of common stock upon the conversion of $56,049 in convertible note principal and accrued interest.

Common Stock Issued in Connection with the Issuance of Convertible Promissory Notes

During the nine months ended September 30, 2021, the Company issued 17,746 shares of common stock valued at $39,750 in connection with the issuance of convertible notes.

During the nine months ended September 30, 2020, the Company issued 339,678 shares of common stock valued at $736,014 in connection with the issuance of convertible notes.

Common Stock Issued in the Acquisition of a Business

During the nine months ended September 30, 2021, the Company issued 1,771,883 shares of common stock valued at $5,000,000 in connection with the acquisition of a business.

Stock Purchase Warrants

Stock purchase warrants are accounted for as equity in accordance with 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, 2021 and December 31, 2020. All warrants are exercisable for a period of three to five years from the date of issuance:

Schedule of warrants

	Number of Warrants Outstanding			Weighted Average Exercise Price		Weighted Average Contractual Life (Yrs.)

Balance January 1, 2020		177,028		$	8.91		1.79
Warrants issued		52,600		$	2.08
Warrants exercised		–		$	–
Warrants forfeited		–		$	–
December 31, 2020		229,628		$	7.34		1.66
Warrants issued		4,241,504		$	4.15
Warrants exercised		(117,188	)	$	–
Warrants forfeited		(4,307	)	$	–
Balance September 30, 2021		4,349,637		$	4.36		1.82

On June 24, 2021, the Company issued 105,648 shares of common stock to Labrys upon the cashless exercise of a warrant to purchase 117,188 shares of common stock.

As of September 30, 2021, the outstanding warrants had an aggregate intrinsic value of $950,142.

Stock Options

The following table represents all outstanding and exercisable stock options as of September 30, 2021.

Schedule of options

Year Issued	Options Issued		Options Forfeited			Options Outstanding		Vested Options		Strike Price		Weighted Average Remaining Life (Yrs.)

2013		241,730		(26,063	)		215,667		215,667	$	7.68		1.97
2016		169,406		(169,406	)		–		–	$	–		–
2018		1,875		–			1,875		1,875		24.96		1.58
2021		208,500		–			208,500		–	$	2.98		4.83
Total		621,511		(195,469	)		426,042		217,542	$	5.46		2.48

On July 29, 2021, the Company granted stock options to purchase an aggregate of 208,500 shares to new employees at an exercise price of $2.98. The options vest annually in equal installments over a three-year period and expire in 5five years from the date of grant. Using the Black Sholes model with a volatility of 326.5%, with no dividends paid since inception and a risk-free interest rate of 0.37%; resulted in stock-based compensation expense of $585,728 which will be amortized over a 36-month period, or $166,270 per month.

During the three and nine months ended September 30, 2021, the Company recorded $33,699 in stock-based compensation expense related to stock options. No stock-based compensation expense related to stock options was recorded during the three and nine months ended September 30, 2020.

As of September 30, 2021, the outstanding exercisable stock options had an aggregate intrinsic value of $0.

12.

COMMITMENTS AND CONTINGENCIES

None.

13.

SUBSEQUENT EVENTS

In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to September 30, 2021 to the date these condensed consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these condensed consolidated financial statements, except as follows:

On September 14, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with L1 Capital Global Master Fund (“L1”) pursuant to which it issued (i) a 10% original issue discount senior secured convertible note in the principal amount of $4,400,000 to L1 (the “L1 Note”) and (ii) a five-year warrant to purchase 813,278 shares of the Company’s common stock at an exercise price of $4.20 per share (“Warrant Shares”) in exchange for $3,960,000 (the “First Tranche Financing”). The Purchase Agreement also provided, subject to shareholder approval, for the issuance, subject to certain conditions, of an additional $1,500,000 of notes and warrants to purchase 277,777 shares of common stock (the “Second Tranche Financing”) on the same terms.

Pursuant to the Purchase Agreement, the Company entered into a registration rights agreement which, among other things, requires the Company to file a registration statement with the SEC to register for resale the shares issuable upon the conversion of the note and the exercise of the warrant within 35 days of entering into the Purchase Agreement, and have such registration statement deemed effective within 60 days or, in the event of a “full review” by the SEC within 75 days. L1 also has certain rights with respect to certain future debt or equity financings.

Prior to maturity on March 13, 2023, the L1 Note is convertible by L1 into common stock of the Company at a price of $4.20 per share (based on 150% of the value weighted average price (“VWAP”) of the common stock for five consecutive trading days prior to September 14, 2021, or approximately 1,047,619 shares, subject to anti-dilution adjustments in the event of financings at less than $4.20 but in no effect less than $0.54. If the stock price is below $4.20 and an event of default (as described in the Purchase Agreement) occurs, the conversion price will equal 80% of the lowest VWAP in the ten prior trading days.

The L1 Note is repayable in eighteen equal monthly installments with certain deferments or an acceleration of up to three months' payments as described in the Note. The Company may repay the L1 Note in cash or shares of common stock at a price equal to the lesser of the then conversion price or 95% of the lowest daily VWAP during the ten consecutive trading days immediately preceding the monthly payment date, but in no event less than $1.92. In the event that VWAP drops below $1.92, the Company will have the right to pay at such VWAP with any shortfall paid in cash. If such monthly conversion price is less than $0.54, the Company is obligated to pay in cash. The L1 Note is senior to all other Company indebtedness and the Company’s obligations under the note are secured by all of the assets of the Company’s subsidiaries.

The L1 Note may not be converted and the warrant may not be exercised to the extent that after giving effect to the conversion or exercise, the noteholder or warrant holder, as the case may be, and its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock immediately after giving effect to such conversion or exercise provided such percentage may be increased to 9.99% upon 61 days prior notice to the Company of such proposed conversion or exercise. The warrant contains anti-dilution protection and provides for cashless exercise if no registration statement covering resale of the shares issuable upon the exercise of the warrant is effective.

The Company’s obligations under the Purchase Agreement and related transaction documents are guaranteed by the Company’s subsidiaries and its obligations under the L1 Note are secured by all of the assets of the Company and its subsidiaries.

The Company paid $35,000 to L1 for its legal fees and expenses and $316,800 to EF Hutton, division of Benchmark Investment, LLC, as placement agent for the financing.

On October 20, 2021, the Company and L1 entered into an amended and restated purchase agreement which increased the amount of the Second Tranche Financing from $1,500,000 to $6,000,000 and provides (i) for an amended and restated 10% original issue discount senior secured convertible note to be issued in exchange for the L1 Note pursuant to the Purchase Agreement and (ii) for the issuance of a five-year warrant to purchase 1,041,194 shares of the Company’s common stock at an exercise price of $4.20 per share.

In the event the principal amount of the L1 Note issued in the First Tranche Financing, when aggregated with the L1 Note to be issued in the Second Tranche Financing, exceeds 25% of the market capitalization of the Company’s common stock as reported by Bloomberg L.P, then the principal amount to be issued in the Second Tranche Financing will be limited to 25%, in the aggregate of both L1 Notes, unless waived in the sole discretion of the Purchaser.

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

The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto. The management's discussion and analysis contain forward-looking statements, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect" and the like, and/or future tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under "Risk Factors," which appear in our registration statement on Form S-1, which we filed with the Securities and Exchange Commission on May 12, 2021, that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

Overview

The Company is a media, technology and entertainment company that focuses on delivering content to children under the age of 13 years in a safe secure platform that is compliant with Children’s Online Privacy Protection Act (“COPPA”) and can be monitored by parents or guardians. We conduct our business through the following five operating subsidiaries:

Grom Social, Inc. was incorporated in the State of Florida on March 5, 2012 and operates our social media network designed for children under the age of 13 years.

TD Holdings Limited (“TD Holdings”) was incorporated in Hong Kong on September 15, 2005. TD Holdings operates through its two subsidiary companies: (i) Top Draw Animation Hong Kong Limited, a Hong Kong corporation and (ii) Top Draw Animation, Inc., a Philippines corporation. The group’s principal activities are the production of animated films and televisions series.

Grom Educational Services, Inc. (“GES”) was incorporated in the State of Florida on January 17, 2017. GES operates our web filtering services provided to schools and government agencies.

We own 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity.

Impact of COVID-19

The Company has experienced significant disruptions to its business and operations due to circumstances related to COVID-19, and delays as a result of government-imposed quarantines, office closings and travel restrictions, which affect both the Company and its service providers. The Company has significant operations in Manila, Philippines, which was locked down by the government on March 12, 2020 due to concerns related to the spread of COVID-19. As a result of the Philippines government’s call to contain COVID-19, the Company’s animation studio, located in Manila, Philippines, which accounts for approximately 92% of the Company’s total revenues on a consolidated basis, has been mostly closed.

Recent Events

Curiosity Acquisition

The Sellers also have the ability to earn up to $17,500,000 (payable 50% in cash and 50% in stock) upon the achievement of certain performance milestones as of December 31, 2025.

Payoff of TDH Sellers Notes

On August 18, 2021, the Company paid the TDH Secured Note Lenders an aggregate of $834,759.77, representing all remaining amounts due and payable under the TDH Secured Notes. Upon receipt of such payment by the TDH Secured Note Lenders, the pledged shares of TDH and its subsidiary, Top Draw Animation Hong Kong Limited were released from escrow, and the TDH Secured Note Lenders had no further security interest in the assets of the Company or its subsidiaries.

Executive Officers

On July 26, 2021, Melvin Leiner resigned as Chief Financial Officer, Secretary and Treasurer of the Company. Mr. Leiner remains the Company’s Executive Vice President and Chief Operating Officer, and a director.

On July 26, 2021, upon Mr. Leiner’s resignation, Jason Williams was appointed the Company’s Chief Financial Officer, Secretary and Treasurer.

L1 Capital Global Master Fund Financing

On September 14, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with L1 Capital Global Opportunities Master Fund (“L1 Capital”), pursuant to which it sold L1 Capital (i) a 10% Original Issue Discount Senior Secured Convertible Note in the principal amount of $4,400,000, due March 13, 2023 (the “Original Note”), and (ii) a five-year warrant to purchase 813,278 shares of the Company’s common stock at an exercise price of $4.20 per share (the “Original Warrant”), for consideration of $3,960,000 (the “First Tranche”).

EF Hutton acted as exclusive placement agent for the offering and received a fee of $316,800.

The Original Note is convertible into common stock at a rate of $4.20 per share (the “Conversion Price”), and is repayable in 18 equal monthly installments, in cash, or, at the discretion of the Company, and if the Equity Conditions described below are met, by issuance of shares of common stock at a price equal to 95% of the volume weighted average price (“VWAP”) prior to the respective monthly redemption dates (with a floor of $1.92), multiplied by 102% of the amount due on such date. In the event that the 10-day VWAP drops below $1.92, the Company will have the right to pay in shares of common stock at said VWAP, with any shortfall to be paid in cash. The Conversion Price may be adjusted in the event of dilutive issuances but in no event to less than $0.54. In addition, under the terms of the Original Note, L1 Capital had the right to accelerate up to three of the monthly payments. Neither the Company, nor L1 Capital, may convert any portion of the Original Note to the extent that, after giving effect to such conversion, L1 Capital (together with any affiliated parties) would beneficially own in excess of 4.99% of the Company’s outstanding common stock.

The Equity Conditions required to be met in order for the Company to redeem the Original Note with shares of common stock in lieu of a monthly cash payment, include that (i) a registration statement must be in effect with respect to the resale of the shares issuable upon conversion or redemption of the Original Note (or, that an exemption under Rule 144 is available), and (ii) that the average daily trading volume of the Company’s common stock will be at least $250,000 immediately prior to the date of the monthly redemption.

The Original Warrant has the same anti-dilution protection as the Original Note and same adjustment floor. The Original Warrant is exercisable for cash, or on a cashless basis only for so long as no registration statement covering resale of the shares is in effect. L1 Capital shall not have the right to exercise any portion of the Original Warrant to the extent that, after giving effect to such exercise, L1 Capital (together with any affiliated parties), would beneficially own in excess of 4.99% of the Company’s outstanding common stock.

The Company entered into a Security Agreement with L1 Capital pursuant to which L1Capital was granted a security interest in all of the assets of the Company and certain of its subsidiaries. As further inducement for L1 Capital to enter into the Security Agreement, certain of the Company’s pre-existing secured creditors agreed to give up their exclusive senior security interest in the assets of TD Holdings, in exchange for a shared senior secured interest with L1 Capital on a pari pasu basis on all assets of the Company. Repayment of the Note is also guaranteed by certain subsidiaries of the Company pursuant to a subsidiary guaranty.

The Company agreed to file a registration statement with the SEC within 35 days of the closing of the First Tranche registering all Conversion Shares and Warrant Shares for resale, to go effective no later than 75 days after the closing of the First Tranche.

The Purchase Agreement also contemplated the purchase by L1 Capital (the “Second Tranche”) of an additional 10% Original Issue Discount Senior Secured Convertible Note in the principal amount of $1,500,000, and warrants to purchase approximately 277,000 shares (presuming current market prices) of common stock on identical terms to the Original Note and Warrant, subject to, and upon receipt of, shareholder approval under Nasdaq rules and effectiveness of a registration statement covering the resale of the shares issuable under the Original Note and Warrant issued in the First Tranche.

Amendment to L1 Capital Purchase Agreement and Original Note

On October 20, 2021, the Company and L1 Capital entered into an Amended and Restated Purchase Agreement (the “Amended Purchase Agreement”), pursuant to which the amount of the proposed Second Tranche investment was increased from $1,500,000 to $6,000,000. In the event that the conditions to closing the Second Tranche investment are satisfied, the Company intends on issuing (i) a 10% Original Issue Discount Senior Secured Convertible Note in the principal amount of $6,000,000 (the “Additional Note”), identical to the Original Note, but due 18 months from the closing of the Second Tranche, and (ii) a five-year warrant to purchase 1,041,194 at an exercise price of $4.20 per share (the “Additional Warrant”), for consideration of $5,400,000.

The closing of the Second Tranche is subject to a registration statement being declared effective by the SEC covering the shares issuable upon conversion or redemption of the Original Note and Original Warrant, shareholder consent being obtained as required by Nasdaq Rule 5635(d), and a limitation on the principal amount of notes that may be issued to no more than 30% of the Company’s market capitalization as reported by Bloomberg L.P., which requirement may be waived by L1 Capital.

The conversion and redemption terms, as well as all other material terms of the Additional Note, and exercise price of terms of the warrants to be issued in the Second Tranche, are identical in all other material respects as the originally issued note and warrants, except for the amendments provided herein.

As of October 20, 2021, and as part of the terms of the Amended Purchase Agreement, the Original Note was amended (the “Amended Original Note”) to increase the monthly redemption amount for the 18 monthly installments from $275,000 to $280,500. In addition, the Amended Original Note provides that, in the event that the Second Tranche closes, the Equity Conditions required to be satisfied in order for the Company to elect to make monthly note payments by issuance of common stock in lieu of cash (and in addition to the requirement that a registration statement is in effect or an exemption exists) the average trading volume of the Company’s common stock must be at least $550,000 (increased from $250,000) during the five trading days prior to the respective monthly redemption. Except as described above, the other terms of the Original Note as previously disclosed remain in full force and effect. In addition, if the Second Tranche is consummated, L1 Capital will have the right to accelerate up to six of the monthly payments as opposed to three.

Results of Operations

Comparison of Results of Operations for the Three Months Ended September 30, 2021 and 2020

Revenue

Revenue for the three months ended September 30, 2021 was $1,514,692, compared to revenue of $1,439,155 during the three months ended September 30, 2020, representing an increase of $75,537 or 5.3%.

Animation revenue for the three months ended September 30, 2021 was $1,383,196, compared to animation revenue of $1,327,448 during the three months ended September 30, 2020, representing an increase of $55,748 or 4.2%. The increase in animation revenue is primarily attributable to an increase in the overall number of contracts completed offset, in part, by client delays caused by concerns related to the spread of COVID-19.

Web filtering revenue for the three months ended September 30, 2021 was $130,928, compared to web filtering revenue of $110,986 during the three months ended September 30, 2020, representing an increase of $19,942 or 18.0%. The increase is primarily due to an increase in organic sales growth, and the timing or loss of multi-year contract renewals.

Subscription and advertising revenue from our Grom Social website, Grom Social mobile application and MamaBear safety mobile application have been nominal. Subscription and advertising revenue for the three months ended September 30, 2021 was $568 compared to subscription and advertising revenue of $721 during the three months ended September 30, 2020, representing a decrease of $153 or 21.2%, primarily attributable to a decrease in marketing and promotion activities.

Gross Profit

Our gross profits vary significantly by subsidiary. Historically, our animation business has realized gross profits between 45% and 55%, while our web filtering business has realized gross profits between 75% and 90%. Additionally, our gross profits may vary from period to period due to the nature of the business of each subsidiary, and the timing and volume of customer contracts and projects. Current gross margins percentages may not be indicative of future gross margin performance.

Gross profit for the three months ended September 30, 2021 and 2020 was $773,256, or 51.1%, and $865,700, or 60.2%, respectively. The decrease in gross profit is primarily attributable to the absorption of fixed overhead expenses against reduced revenue levels and certain projects exceeding budgeted costs in our animation business.

Operating expenses

Operating expenses for the three months ended September 30, 2021 were $2,926,697, compared to operating expenses of $1,590,856 during the three months ended September 30, 2020, representing an increase of $1,335,841 or 84.0%. The increase is primarily attributable to an increase in general and administrative costs resulting from the acquisition of Curiosity and stock based compensation from the grant of stock and stock option awards. General and administrative expenses were $1,892,327 for the three months ended September 30, 2021, compared to $1,009,162 for the three months ended September 30, 2020, representing an increase of $883,165 or 87.5%. Stock based compensation was $460,146 for the three months ended September 30, 2021, compared to $0 for the three months ended September 30, 2020.

Other Income (Expense)

Net other expense for the three months ended September 30, 2021 was $178,996, compared to a net other expense of $1,495,864 for the three months ended September 30, 2020, representing a decrease of $1,316,868 or 88.0%. The decrease in net other expense is primarily attributable to an extinguishment loss of $1,191,089 related to the exchange of $2,294,723 in principal and interest accrued under certain convertible notes for 3,623,884 shares of our Series B Stock during the three months ended September 30, 2020 as compared to a gain from the forgiveness of PPP loans of $228,912 during the three months ended September 30, 2021.

Interest expense is comprised of interest incurred on our convertible notes and from the amortization of note discounts. Interest expense was $492,783 for the three months ended September 30, 2021, compared to $330,006 during the three months ended September 30, 2020, representing an increase of $162,777 or 49.3%. The increase is primarily attributable to an increase in amortization expense associated with debt discounts recorded during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Net Loss Attributable to Grom Social Enterprises Inc. Common Stockholders

We realized a net loss attributable to common stockholders of $2,308,861, or $0.21 per share, for the three months ended September 30, 2021, compared to a net loss attributable to common stockholders of $2,498,520, or $0.45 per share, during the three months ended September 30, 2020, representing a decrease in net loss attributable to common stockholders of $189,659 or 7.6%.

Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020

Revenue

Revenue for the nine months ended September 30, 2021 was $4,778,527, compared to revenue of $4,478,373 during the nine months ended September 30, 2020, representing an increase of $300,154 or 6.7%.

Animation revenue for the nine months ended September 30, 2021 was $4,373,409, compared to animation revenue of $4,015,061 during the nine months ended September 30, 2020, representing an increase of $358,348 or 8.9%. The increase in animation revenue is primarily attributable an increase in the overall number of contracts completed offset, in part, by client delays caused by concerns related to the spread of COVID-19.

Web filtering revenue for the nine months ended September 30, 2021 was $403,676, compared to web filtering revenue of $460,984 during the nine months ended September 30, 2020, representing a decrease of $57,308 or 12.4%. The decrease is primarily due to the timing or loss of multi-year contract renewals.

Subscription and advertising revenue from our Grom Social website, Grom Social mobile application and MamaBear safety mobile application have been nominal. Subscription and advertising revenue for the nine months ended September 30, 2021 was $1,442 compared to subscription and advertising revenue of $2,327 during the nine months ended September 30, 2020, representing a decrease of $885 or 38.0%, primarily attributable to a decrease in marketing and promotion activities.

Gross Profit

Gross profit for the nine months ended September 30, 2021 and 2020 was $2,402,976, or 50.3%, and $2,631,645, or 58.8%, respectively. The decrease in gross profit is primarily attributable to the absorption of fixed overhead expenses and certain projects exceeding budgeted costs in our animation business.

Operating expenses

Operating expenses for the nine months ended September 30, 2021 were $6,734,291, compared to operating expenses of $4,749,638 during the nine months ended September 30, 2020, representing an increase of $1,984,653 or 41.8%. The increase is primarily attributable to an increase in general and administrative costs and fees for professional services rendered during the nine months ended September 30, 2021 due to the Company’s registered offering, Nasdaq stock exchange uplisting, the acquisition of Curiosity, and stock based compensation from the grant of stock and stock option awards. General and administrative expenses were $4,683,481 for the nine months ended September 30, 2021, compared to $3,552,390 for the nine months ended September 30, 2020, representing an increase of $1,131,091 or 31.8%. Professional fees were $839,831 for the nine months ended September 30, 2021, compared to $419,291 for the nine months ended September 30, 2020, representing an increase of $420,540 or 100.3%. Stock based compensation was $460,146 for the nine months ended September 30, 2021, compared to $0 for the nine months ended September 30, 2020.

Other Income (Expense)

Net other expense for the nine months ended September 30, 2021 was $2,821,202, compared to a net other expense of $2,402,969 for the nine months ended September 30, 2020, representing an increase of $418,223 or 17.4%. The increase in net other expense is primarily attributable to increased interest expense related to the amortization of debt discounts, and a one-time extinguishment loss of $947,179 related to the exchange of $1,447,996 in principal and interest accrued under certain convertible notes for 2,395,175 shares of our Series B Stock.

Interest expense is comprised of interest incurred on our convertible notes and from the amortization of note discounts. Interest expense was $2,236,545 for the nine months ended September 30, 2021, compared to $1,220,148 during the nine months ended September 30, 2020, representing an increase of $1,016,397 or 95.9%. The increase is primarily attributable to an increase in amortization expense associated with debt discounts recorded during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Net Loss Attributable to Grom Social Enterprises Inc. Common Stockholders

We realized a net loss attributable to common stockholders of $7,128,941, or $0.92 per share, for the nine months ended September 30, 2021, compared to a net loss attributable to common stockholders of $4,798,462, or $0.87 per share, during the nine months ended September 30, 2020, representing an increase in net loss attributable to common stockholders of $2,354,055 or 49.1%.

Liquidity and Capital Resources

At September 30, 2021, we had cash and cash equivalents of $9,102,728.

Net cash used in operating activities for the nine months ended September 30, 2021 was $5,373,687, compared to net cash used in operating activities of $666,775 during the nine months ended September 30, 2020, representing an increase in cash used of $4,706,912, primarily due to the increase in our loss from operations and the change in working capital assets and liabilities.

Net cash used in investing activities for the nine months ended September 30, 2020 was $425,789, compared to net cash used in investing activities of $571,563 during the nine months ended September 30, 2020 representing a decrease in cash used of $145,774. This change is attributable to a decrease in the amount of fixed assets purchased and/or leasehold improvements made by our animation studio in Manilla, Philippines during the nine months ended September 30, 2021, offset by $400,000 in cash paid as consideration for the acquisition of Curiosity.

Net cash provided by financing activities for the nine months ended September 30, 2021 was $14,768,735, compared to net cash provided by financing activities of $1,023,600 for the nine months ended September 30, 2020, representing an increase in cash provided of $13,745,135. Our primary sources of cash from financing activities were attributable to $10,317,324 in proceeds from the sale of our common stock, $4,516,700 in proceeds from the sale of convertible notes, and $950,000 and $100,000 in proceeds from the sale of our Series B Stock and Series C Stock, respectively, during the nine months ended September 30, 2021, as compared to $3,655,000 in proceeds from the sale of convertible notes and $483,500 in proceeds from the sale of our Series B Stock during the nine months ended September 30, 2020. On August 19, 2021, the Company repaid $792,846 in principal due to the former shareholders of TD Holdings Limited on a convertible note originally dated September 20, 2016, as compared to the repayment of $3,000,000 in principal on the same convertible note due to the former shareholders of TD Holdings Limited on March 16, 2020.

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

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Estimates

Our financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position. Our critical accounting estimates are more fully discussed in Note 2 to our unaudited financial statements contained herein.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of September 30, 2021, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2021 to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act were recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Act Commission's rules and forms and that our disclosure controls are effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

Changes in Internal Control over Financial Reporting

During the period covered by this Report, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in “Risk Factors” in our Registration Statement on Form S-1, filed with the SEC on May 24, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

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

On July 2, 2021, the Company issued 4,464 shares of common stock to a noteholder for accrued interest.

On July 6, 2021, the Company issued 2,700 shares of common stock to a technology design firm for services provided to the Company.

On July 13, 2021, the Company issued 2,364 shares of common stock to a public relations firm for services provided to the Company.

On July 16, 2021, the Company issued 1,101 shares of common stock to a public relations firm for services provided to the Company.

On July 19, 2021, the Company issued 1,101 shares of common stock to a public relations firm for services provided to the Company.

On July 22, 2021, the Company issued 42,891 shares of common stock to an investment bank for financial advisory services provided to the Company.

On August 2, 2021, the Company issued 157,943 shares of common stock to an officer as bonus compensation.

On August 6, 2021, the Company issued 3,573 shares of common stock to a technology design firm for services provided to the Company.

On August 6, 2021, the Company issued 1,812 shares of common stock to a public relations firm for services provided to the Company.

On August 10, 2021, the Company issued 1,812 shares of common stock to a public relations firm for services provided to the Company.

On September 2, 2021, the Company issued 3,374 shares of common stock to a technology design firm for services provided to the Company.

On September 17, 2021, the Company issued 24,438 shares of common stock to a consultant for business advisory services provided to the Company.

On September 17, 2021, the Company issued 1,357 shares of common stock to a public relations firm for services provided to the Company.

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

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.		Description

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

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

SIGNATURES

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

Date: November 22, 2021	By:	/s/ Darren Marks
		Darren Marks
		Chief Executive Officer and President (Principal Executive Officer)


Date: November 22, 2021	By:	/s/ Jason Williams
		Jason Williams
		Chief Financial Officer (Principal Financial and Accounting Officer)