Grom Social Enterprises, Inc. - Quarter Report: 2021 June (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 June 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
Not applicable	Not applicable	Not applicable

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 o

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 o

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 August 20, 2021, 12,222,025 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	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	41

Part II – OTHER INFORMATION

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	43
Item 6.	Exhibits	43

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


	June 30,			December 31,
	2021			2020

ASSETS
Current assets:
Cash and cash equivalents	$	8,161,908		$	120,300
Accounts receivable, net		705,321			587,932
Inventory, net		26,789			48,198
Prepaid expenses and other current assets		324,748			386,165
Total current assets		9,218,766			1,142,595
Operating lease right of use assets		453,920			602,775
Property and equipment, net		736,858			965,109
Goodwill		8,380,504			8,380,504
Intangible assets, net		5,372,882			5,566,339
Deferred tax assets, net -- noncurrent		531,557			531,557
Other assets		64,970			76,175
Total assets	$	24,759,457		$	17,265,054

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	498,672		$	1,126,114
Accrued liabilities		1,840,043			1,794,232
Advanced payments and deferred revenues		637,178			967,053
Convertible notes, net -- current		1,396,379			2,349,677
Loans payable -- current		190,438			189,963
Related party payables		92,494			143,741
Income taxes payable		–			102,870
Lease liabilities -- current		303,554			304,326
Total current liabilities		4,958,758			6,977,976
Convertible notes, net of loan discounts		251,674			897,349
Lease liabilities		177,380			328,772
Loans payable		53,832			95,931
Other noncurrent liabilities		473,475			367,544
Total liabilities		5,915,119			8,667,572

Commitments and contingencies		–			–

Stockholders' Equity:
Series A preferred stock, $0.001 par value. 10,000,000 shares authorized; zero 0 shares issued and outstanding as of June 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 June 30, 2021 and December 31, 2020, respectively		–			5,626
Series C preferred stock, $0.001 par value. 10,000,000 shares authorized; 9,315,884 and 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		9,315			–
Common stock, $0.001 par value. 500,000,000 shares authorized; 9,560,074 and 5,886,073 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		9,560			5,886
Additional paid-in capital		79,454,922			64,417,218
Accumulated earnings (deficit)		(60,611,994	)		(55,791,914	)
Accumulated other comprehensive income		(17,465	)		(39,334	)
Total stockholders' equity		18,844,338			8,597,482
Total liabilities and equity	$	24,759,457		$	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 June 30,			Three Months Ended June 30,			Six Months Ended June 30,			Six Months Ended June 30,
	2021			2020			2021			2020

Sales	$	1,388,551		$	1,746,979		$	3,263,835		$	3,039,218
Cost of goods sold		833,681			661,180			1,634,115			1,273,273
Gross margin		554,870			1,085,799			1,629,720			1,765,945
Operating expenses:
Depreciation and amortization		206,983			193,234			424,498			389,199
Selling and marketing		48,635			21,960			78,911			56,277
General and administrative		1,440,355			1,093,880			2,791,154			2,543,228
Professional fees		325,922			54,760			513,031			107,478
Stock based compensation		–			46,400			–			62,600
Total operating expenses		2,021,895			1,410,234			3,807,594			3,158,782
Loss from operations		(1,467,025	)		(324,435	)		(2,177,874	)		(1,392,837	)
Other income (expense)
Interest income (expense), net		(1,094,916	)		(612,379	)		(1,743,762	)		(890,142	)
Gain (loss) on settlement of debt		–			–			(947,179	)		–
Unrealized gain (loss) on change in fair value of derivative liabilities		–			(13,166	)		–			(13,933	)
Other gains (losses)		57,436			(3,128	)		48,735			(3,030	)
Total other income (expense)		(1,037,480	)		(628,673	)		(2,642,206	)		(907,105	)
Loss before income taxes		(2,504,505	)		(953,108	)		(4,820,080	)		(2,299,942	)
Provision for income taxes (benefit)		–			–			–			–
Net loss		(2,504,505	)		(953,108	)		(4,820,080	)		(2,299,942	)

Convertible preferred stock beneficial conversion feature and other discounts accreted as a deemed dividend		–			–			–			–

Net loss attributable to common stockholders	$	(2,504,505	)	$	(953,108	)	$	(4,820,080	)	$	(2,299,942	)

Basic and diluted loss per common share	$	(0.42	)	$	(0.18	)	$	(0.79	)	$	(0.42	)

Weighted-average number of common shares outstanding:
Basic and diluted		5,936,750			5,400,415			6,125,941			5,528,061

Comprehensive loss:
Net loss	$	(2,504,505	)	$	(953,108	)	$	(4,820,080	)	$	(2,299,942	)
Foreign currency translation adjustment		3,500			29,382			21,869			62,836
Comprehensive loss	$	(2,501,005	)	$	(923,726	)	$	(4,798,211	)	$	(2,237,106	)

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

Value

Balance, March 31, 2020

925,000

925

–

Net loss

–

Change in foreign currency translation

–

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

–

250,000

250

–

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 notes

–

Conversion of convertible notes and accrued interest into common stock

–

Balance, June 30, 2020

925,000

925

250,000

250

–

Series A Preferred Stock

Series B Preferred Stock

Series C Preferred Stock

Value

Balance, March 31, 2021

–

9,215,059

9,215

–

Net loss

–

Change in foreign currency translation

–

Exchange of Series B preferred stock for Series C preferred stock

–

(9,215,059

)

(9,215

)

9,215,059

9,215

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 in exchange for consulting, professional and other services

–

Issuance of common stock warrants in connection with the issuance of convertible notes

–

Conversion of convertible notes and accrued interest into common stock

–

Recognition of beneficial conversion features related to convertible notes

–

Balance, June 30, 2021

–

9,315,059

9,315

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

Value

Balance, December 31, 2019

925,000

925

–

Net loss

–

Change in foreign currency translation

–

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

–

250,000

250

–

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 notes

–

Conversion of convertible notes and accrued interest into common stock

–

Recognition of beneficial conversion features related to convertible notes

–

Balance, June 30, 2020

925,000

925

250,000

250

–

Series A Preferred Stock

Series B Preferred Stock

Series C Preferred Stock

Value

Balance, December 31, 2020

–

5,625,884

5,626

–

Net 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

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 in exchange for consulting, professional and other services

–

Issuance of common stock in connection with the issuance of convertible notes

–

Issuance of common stock warrants in connection with the issuance of convertible notes

–

Conversion of convertible notes and accrued interest into common stock

–

Recognition of beneficial conversion features related to convertible notes

–

Balance, June 30, 2021

–

9,315,059

9,315

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		Accumulated			Comprehensive			Stockholders'
	Shares		Value		Capital		Deficit			Income			Equity

Balance, March 31, 2020		5,583,321	$	5,583	$	59,234,564	$	(51,395,315	)	$	(64,106	)	$	7,781,651

Net loss		–		–		–		(953,108	)		–			(953,108	)
Change in foreign currency translation		–		–		–		–			29,382			29,382
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings		–		–		249,750		–			–			250,000
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		62,482		63		141,637		–			–			141,700
Issuance of common stock in connection with the issuance of convertible notes		85,928		86		167,528		–			–			167,614
Conversion of convertible notes and accrued interest into common stock		7,791		8		14,992		–			–			15,000

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

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-in			Accumulated			Comprehensive			Stockholders'
	Shares		Value		Capital			Deficit			Income			Equity

Balance, March 31, 2021		5,916,134	$	5,916	$	68,851,062		$	(58,107,489	)	$	(20,965	)	$	10,737,739

Net loss		–		–		–			(2,504,505	)		–			(2,504,505	)
Change in foreign currency translation		–		–		–			–			3,500			3,500
Exchange of Series B preferred stock for Series C preferred stock		–		–		–			–			–			–
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		2,409,639		2,410		8,951,206			–			–			8,953,616
Issuance of common stock in connection with the exercise of common stock purchase warrants		105,648		106		(106	)		–			–			–
Issuance of common stock in exchange for consulting, professional and other services		47,089		47		176,184			–			–			176,231
Issuance of common stock warrants in connection with the issuance of convertible notes		–		–		205,331			–			–			205,331
Conversion of convertible notes and accrued interest into common stock		1,081,561		1,081		1,101,824			–			–			1,102,905
Recognition of beneficial conversion features related to convertible notes		–		–		69,521			–			–			69,521

Balance, June 30, 2021		9,560,071	$	9,560	$	79,454,922		$	(60,611,994	)	$	(17,465	)	$	18,844,338

GROM SOCIAL ENTERPRISES INC.

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

										Accumulated
					Additional					Other			Total
	Common Stock				Paid-in		Accumulated			Comprehensive			Stockholders'
	Shares		Value		Capital		Deficit			Income			Equity

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

Net loss		–		–		–		(2,299,942	)		–			(2,299,942	)
Change in foreign currency translation		–		–		–		–			62,836			62,836
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings		–		–		249,750		–			–			250,000
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		137,612		138		382,067		–			–			382,205
Issuance of common stock in lieu of cash for accounts payable, loans payable and other accrued obligations		15,625		16		49,984		–			–			50,000
Issuance of common stock in connection with the issuance of convertible notes		339,678		340		735,674		–			–			736,014
Conversion of convertible notes and accrued interest into common stock		15,894		16		29,984		–			–			30,000
Recognition of beneficial conversion features related to convertible notes		–		–		44,129		–			–			44,129

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

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-in			Accumulated			Comprehensive			Stockholders'
	Shares		Value		Capital			Deficit			Income			Equity

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

Net loss		–		–		–			(4,820,080	)		–			(4,820,080	)
Change in foreign currency translation		–		–		–			–			21,869			21,869
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		–		–		–			–			–			–
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		2,409,639		2,410		8,951,206			–			–			8,953,616
Issuance of common stock in connection with the exercise of common stock purchase warrants		105,648		106		(106	)		–			–			–
Issuance of common stock in exchange for consulting, professional and other services		63,871		64		256,297			–			–			256,361
Issuance of common stock in connection with the issuance of convertible notes		13,282		13		29,737			–			–			29,750
Issuance of common stock warrants in connection with the issuance of convertible notes		–		–		694,644			–			–			694,644
Conversion of convertible notes and accrued interest into common stock		1,081,561		1,081		1,101,824			–			–			1,102,905
Recognition of beneficial conversion features related to convertible notes		–		–		318,616			–			–			318,616

Balance, June 30, 2021		9,560,071	$	9,560	$	79,454,922		$	(60,611,994	)	$	(17,465	)	$	18,844,338

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

GROM SOCIAL ENTERPRISES INC.

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,			Six Months Ended June 30,
	2021			2020
Cash flows from operating activities:
Net loss	$	(4,820,080	)	$	(2,299,942	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		424,498			389,199
Amortization of debt discount		1,239,740			221,306
Common stock issued for financing costs		–			167,614
Common stock issued in exchange for fees and services		331,361			382,205
Convertible notes issued for financing costs		61,633			–
Deferred taxes		–			(10,684	)
Stock based compensation		–			62,600
Loss on extinguishment of debt		947,179			–
Unrealized loss on change in fair value of derivative liabilities		–			13,933
Changes in operating assets and liabilities:
Accounts receivable		(117,389	)		5,340
Inventory		21,409			(814	)
Prepaid expenses and other current assets		61,418			42,553
Operating lease right of use assets		(3,325	)		26,219
Other assets		11,204			4,756
Accounts payable		(628,233	)		(34,226	)
Accrued liabilities		225,822			237,116
Advanced payments and deferred revenues		(329,875	)		195,959
Income taxes payable and other noncurrent liabilities		3,061			(19,505	)
Related party payables		(51,247	)		(151,555	)
Net cash used in operating activities		(2,622,824	)		(767,926	)

Cash flows from investing activities:
Purchase of fixed assets		(2,790	)		(38,025	)
Net cash used in investing activities		(2,790	)		(38,025	)

Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs		1,050,000			250,000
Proceeds from issuance of common stock, net of issuance costs		8,953,616			–
Proceeds from issuance of convertible notes		908,500			3,655,000
Proceeds from loans payable		–			253,912
Repayments of convertible notes		(225,946	)		(3,143,145	)
Repayments of loans payable		(41,625	)		–
Net cash provided by financing activities		10,644,545			1,015,767

Effect of exchange rates on cash and cash equivalents		22,677			40,754
Net increase in cash and cash equivalents		8,041,608			250,570
Cash and cash equivalents at beginning of period		120,300			506,219
Cash and cash equivalents at end of period	$	8,161,908		$	756,789

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 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	$	694,644		$	–
Conversion of convertible notes and accrued interest into common stock	$	1,102,905		$	30,000
Conversion of convertible notes and accrued interest into preferred stock	$	1,616,996		$	–
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 operates its business through the following four wholly-owned 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.

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 six months ended June 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 six months ended June 30, 2021 and 2020, the Company recorded a total of $2,990,213 and $2,687,614, 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 six months ended June 30, 2021 and 2020, the Company recorded a total of $272,748 and $349,998, 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 our contract assets and liabilities as of June 30, 2021 and December 31, 2020:


	June 30, 2021		December 31, 2020

Animation contract assets	$	694,596	$	525,709
Web filtering contract assets		3,388		54,886
Other contract assets		7,337		7,337
Total contract assets	$	705,321	$	587,932

Animation contract liabilities	$	153,662	$	410,709
Web filtering contract liabilities		472,016		544,844
Other contract liabilities		11,500		11,500
Total contract liabilities	$	637,178	$	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.	ACCOUNTS RECEIVABLE, NET

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

Schedule of accounts receivable
	June 30, 2021			December 31, 2020

Billed accounts receivable	$	553,265		$	443,806
Unbilled accounts receivable		195,959			188,029
Allowance for doubtful accounts		(43,903	)		(43,903	)
Total accounts receivable, net	$	705,321		$	587,932

During the six months ended June 30, 2021, the Company had four customers that accounted for 76.5% of revenues and four customers that accounted for 82.5% 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.

4.	PROPERTY AND EQUIPMENT

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

Schedule of property and equipment
	June 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	$	2,796,301	$	(2,393,694	)	$	402,607	$	2,800,872	$	(2,257,797	)	$	543,075
Machinery and equipment		192,812		(161,430	)		31,382		192,988		(152,149	)		40,839
Vehicles		163,266		(120,839	)		42,427		163,525		(106,826	)		56,699
Furniture and fixtures		422,522		(376,188	)		46,334		422,234		(364,655	)		57,579
Leasehold improvements		1,140,927		(953,349	)		187,578		1,143,704		(903,381	)		240,323
Total fixed assets		4,715,828		(4,005,500	)		710,328		4,723,323		(3,784,808	)		938,515
Capital assets not subject to depreciation:
Construction in progress		26,530		–			26,530		26,594		–			26,594
Total fixed assets	$	4,742,358	$	(4,005,500	)	$	736,858	$	4,749,917	$	(3,784,808	)	$	965,109

For the three months ended June 30, 2021 and 2020, the Company recorded depreciation expense of $230,040 and $195,741, respectively.

5.	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 $453,920 in assets, $303,554 in current liabilities and $177,380 in noncurrent liabilities as of June 30, 2021. For the three months ended June 30, 2021, the Company recognized approximately $181,987 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	$	152,163
2022		302,781
2023		25,990
Total	$	480,934

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:


	Three Months Ended June 30, 2021
Cash paid for operating lease liabilities	$	185,329
Weighted-average remaining lease term		2.0
Weighted-average discount rate		10%
Minimum future lease payments	$	546,544

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


2021	$	182,307
2022	$	335,659
2023	$	28,588

6.	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. At June 30, 2021 and December 31, 2020, the carrying amount of the Company’s goodwill was $8,380,504.

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

Schedule of intangible assets
	June 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	$	(796,443	)	$	803,843	$	1,600,286	$	(716,429	)	$	883,857

Web filtering software		5.00		1,134,435		(1,020,992	)		113,444		1,134,435		(907,548	)		226,887
Subtotal		–		2,734,721		(1,817,434	)		917,287		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		–	$	7,190,316	$	(1,817,434	)	$	5,372,882	$	7,190,316	$	(1,623,977	)	$	5,566,339

For the six months ended June 30, 2021 and 2020, the Company recorded amortization expense of $193,458 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	$	193,458
2022		160,029
2023		160,029
2024		160,029
2025		160,029
Thereafter		83,712
Future amortization total	$	917,287

7.	ACCRUED LIABILITIES

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

Accrued Liabilities
	June 30, 2021		December 31, 2020

Executive and employee compensation	$	1,695,020	$	1,642,959
Interest on convertible notes and promissory notes		107,391		135,980
Other accrued expenses and liabilities		37,633		15,293
Total accrued liabilities	$	1,840,043	$	1,794,232

8.	RELATED PARTY TRANSACTIONS AND PAYABLES

Acquisition of TD Holdings

Wayne Dearing, the Managing Director of TD Holdings, was issued a promissory note in the principal amount of $2,000,000 on July 1, 2016 in connection with the Company’s acquisition of TD Holdings. The note, as amended, was due to mature on April 1, 2020. On March 16, 2020, the Company paid Mr. Dearing $1,500,000 against the principal amount of the note and restructured the remaining $500,000 in unpaid principal. Under the new terms, the note accrued interest at a rate of 12% per annum and was due on June 30, 2021. Principal and interest were payable monthly in arrears, amortized over a four-year period. At June 30, 2021, the principal balance remaining on this note totaled $396,423 and is classified under Convertible Notes – Current in the Company’s consolidated financial statements.

Mr. Dearing’s wife, Stella Dearing, is the Director of Operations of Top Draw and receives an annual salary of $83,000.

Darren 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 June 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 formal notice of default or demand for payment has been received by the Company.

As of June 30, 2021 and December 31, 2020, the aggregate related party payables were $92,494 and $143,741, respectively.

9.	CONVERTIBLE NOTES

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

Schedule of convertible debt
	June 30, 2021			December 31, 2020
8% - 12% Convertible Promissory Notes (Bridge Notes)	$	621,200		$	373,587
10% Unsecured Convertible Redeemable Notes – Variable Conversion Price		–			265,000
10% Secured Convertible Notes with Original Issuance Discounts (OID Notes)		153,250			153,250
12% Senior Secured Convertible Notes (Newbridge)		–			52,572
12% Senior Secured Convertible Notes (Original TDH Notes)		792,846			882,175
12% Senior Secured Convertible Notes (TDH Secured Notes)		387,220			1,645,393
12% Senior Secured Convertible Notes (Additional Secured Notes)		73,572			260,315
Loan discounts		(380,035	)		(385,266	)
Total convertible notes, net		1,648,053			3,247,026
Less: current portion of convertible notes, net		(1,396,379	)		(2,349,677	)
Convertible notes, net	$	251,674		$	897,349

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-year 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 additional finance charges. 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 additional finance charges.

At June 30, 2021, the principal balance of the EMA Note was $121,200 and the remaining balance on the associated loan discounts was $31,968.

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 three-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 June 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 five-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.

At June 30, 2021, the principal balance of the Auctus Note was $500,000 and the remaining balance on the associated loan discounts was $291,666.

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

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 June 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.

As of June 30, 2021, the principal balance of these notes was $97,250 and all associated loan discounts were fully amortized. No formal 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.

As of June 30, 2021, the principal balance of these notes was $56,000 and all associated loan discounts were fully amortized. No formal 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 June 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 balance due to the TDH Sellers of $1,000,000 in principal (plus accrued interest and costs). In addition, the accrued interest of $361,767 due to the TDH Sellers pursuant to the Original TDH Notes will be paid by 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.

As of June 30, 2021, the principal balance of the Original TDH Notes was $792,846.

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 June 30, 2021, the principal balance of these notes was $387,220 and the remaining balance on the associated loan discounts was $47,396.

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 June 30, 2021, the principal balance of these notes was $73,572 and the remaining balance on the associated loan discounts was $9,005.

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	$	1,635,342
2022	$	148,907
2023	$	167,792
2024	$	76,047
2025 and thereafter	$	–

10.

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 June 30, 2021 and December 31, 2020, the Company had zero 0 shares of Series A Stock issued and outstanding, respectively.

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 June 30, 2021 and December 31, 2020, the Company had 0 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.

As of June 30, 2021 and December 31, 2020, the Company had 9,315,059 and 0 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 9,560,074 and 5,886,073 shares of common stock issued and outstanding as of June 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 (the “Shares”) 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 of Shares and Warrants, 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 on the Closing Date. The Company received gross proceeds of approximately $10,000,000, before deducting underwriting discounts and commissions and other offering expenses.

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

During the six months ended June 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 six months ended June 30, 2021, the Company issued 63,871 shares of common stock with a fair market value of $256,361 to contractors for services rendered.

During the six months ended June 30, 2020, the Company issued 137,612 shares of common stock with a fair market value of $382,205 to contractors for services rendered.

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

During the six months ended June 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 six months ended June 30 2020, the Company issued 1,081,561 shares of common stock upon the conversion of $1,102,905 in convertible note principal and accrued interest.

During the six months ended June 30 2020, the Company issued 15,894 shares of common stock upon the conversion of $30,000 in convertible note principal and accrued interest.

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

During the six months ended June 30, 2021, the Company issued 13,282 shares of common stock valued at $29,750 in connection with the issuance of convertible notes.

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

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 June 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		3,428,226		$	4.14
Warrants exercised		(117,188	)	$	–
Warrants forfeited		(4,307	)	$	–
Balance June 30, 2021		3,536,359		$	4.39		1.97

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.

Stock Options

The following table represents all outstanding and exercisable stock options as of June 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	)		217,542		217,542	$	7.68		2.22
2016		169,406		(169,406	)		–		–	$	–		–
2018		1,875		–			1,875		1,875	$	24.96		1.84
Total		413,011		(195,469	)		217,542		217,542	$	7.83		2.19

During the three months ended June 30, 2021 and 2020, the Company did not record any stock-based compensation expense related to stock options.

11.

COMMITMENTS AND CONTINGENCIES

None.

12.

SUBSEQUENT EVENTS

In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to June 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 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.

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

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.

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 (as defined in the Note).

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.

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 operate our business through the following four wholly-owned 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.

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

Reverse Stock Split

Exchange Agreements

On May 20, 2021, the Company entered into exchange agreements (each, an “Exchange Agreement”) with the holders of the Company’s Series B 8% Convertible Preferred Stock (“Series B Stock”), pursuant to which the holders agreed to exchange all of their shares of the Series B Stock for shares of the Company’s Series C 8% Convertible Preferred Stock (the “Series C Stock”), on a one for one basis (the “Exchange”). As a result of the Exchange, all 9,215,059 issued and outstanding shares of the Company’s Series B Stock were exchanged for 9,215,059 shares of the Company’s newly designated Series C Preferred Stock and all of the exchanged Series B Stock was cancelled.

In connection with their entry into the Exchange Agreements, the holders delivered proxies to Darren Marks and Melvin Leiner, who are both officers and directors of the Company, granting each of them the power to vote all the holder’s Series C shares, and all other securities they hold of the Company, for a period of two years. As a result, Mr. Marks and Mr. Leiner have 81.3% of the Company’s combined voting power.

Loan Agreement Amendments

In order to satisfy the Nasdaq Capital Market’s listing standards, the Company, amended certain of its loan agreements with certain of its lenders, as follows:

FirstFire Amendment

On May 20, 2021, the Company and FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (“FirstFire”), entered into Amendment No. 1 to Transaction Documents (the “FirstFire Amendment”), pursuant to which the parties amended certain terms of the convertible promissory note (the “FirstFire Note”) and warrant to purchase shares of the Company’s common stock (the “FirstFire Warrant”) the Company issued to FirstFire under the Securities Purchase Agreement between the parties, dated March 11, 2021 (the “FirstFire Purchase Agreement”). Pursuant to the FirstFire Amendment, the full-ratchet anti-dilution provision was deleted from the FirstFire Warrant, and the variable conversion feature was deleted from the FirstFire Note.

Quick Amendment

On May 21, 2021, the Company and Quick Capital, LLC, a Wyoming limited liability company (“Quick”), entered into Amendment No. 1 to Convertible Promissory Note (the “Quick Note Amendment”) and Amendment No. 1 to Common Stock Purchase Warrant (the “Quick Warrant Amendment” and, together with the Quick Note Amendment, the “Quick Amendments”), pursuant to which the parties amended certain terms of the convertible promissory note (the “Quick Note”) and warrant to purchase shares of the Company’s common stock (the “Quick Warrant”) the Company issued to Quick under the Note Purchase Agreement between the parties, dated December 17, 2020 (the “Quick Purchase Agreement”). Pursuant to the Quick Amendments, the full-ratchet anti-dilution provision was deleted from the Quick Warrant, and the variable conversion feature was deleted from the Quick Note.

Labrys Amendment

On May 22, 2021, the Company and Labrys Fund, LP, a Delaware limited partnership (“Labrys”), entered into Amendment No. 1 to the Warrant (the “Labrys Amendment”), pursuant to which the parties amended certain terms of the warrant to purchase shares of the Company’s common stock (the “Labrys Warrant”) the Company issued to Labrys under the Securities Purchase Agreement by and between the parties, dated April 16, 2021 (the “Labrys Purchase Agreement”). Pursuant to the Labrys Amendment, the full-ratchet anti-dilution provision was deleted from the Labrys Warrant.

EMA Amendment

On May 24, 2021, the Company and EMA Financial, LLC, a Delaware limited liability company (“EMA”), entered into Amendment No. 1 to Transaction Documents (the “EMA Amendment”), pursuant to which the parties amended certain terms of the convertible promissory note (the “EMA Note”) and warrant to purchase shares of the Company’s common stock (the “EMA Warrant”) the Company issued to EMA under the Securities Purchase Agreement by and between the parties, dated November 30, 2020 (the “EMA Purchase Agreement”). Pursuant to the EMA Amendment, the full-ratchet anti-dilution provision was deleted from the EMA Warrant, and the variable conversion price was deleted from the EMA Note.

Auctus Amendment

On May 25, 2021, the Company and Auctus Fund, LLC, a Delaware limited liability company (“Auctus”), entered into Amendment No. 1 to the Warrant (the “Auctus Amendment”), pursuant to which the parties amended certain terms of the warrant to purchase shares of the Company’s common stock (the “Auctus Warrant”) the Company issued to Auctus under the Securities Purchase Agreement by and between the parties, dated February 9, 2021 (the “Auctus Purchase Agreement”). Pursuant to the Auctus Amendment, the full-ratchet anti-dilution provision was deleted from the Auctus Warrant. Except as specifically amended by the Auctus Amendment, the terms and conditions of the Auctus Purchase Agreement, Auctus Warrant, and other original transaction documents, remain in full force and effect.

Registered Offering

On June 21, 2021 (the “Closing Date”), the Company, sold an aggregate of 2,409,639 units (the “Units”), at a price to the public of $4.15 per Unit (the “Offering”), each Unit consisting of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $4.565 per share pursuant to an underwriting agreement, dated as of June 16, 2021 (the “Underwriting Agreement”), between the Company and EF Hutton, division of Benchmark Investments, LLC, as representative (the “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 to purchase up to 361,445 additional Units of common stock and warrants, 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 on the Closing Date.

The shares and the warrants were offered and sold to the public pursuant to the Company’s registration statement on Form S-1, as amended (File No. 333-253154), filed by the Company with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), which became effective on June 16, 2021.

On the Closing Date, the Company received gross proceeds of approximately $10,000,000, before deducting underwriting discounts and commissions of 8% of the gross proceeds and estimated Offering expenses. The Company intends to use the net proceeds from the Offering primarily for sales and marketing activities, product development, acquisition of, or investment in, technologies, solutions, or businesses that complement the Company’s business, and for working capital and general corporate purposes.

Pursuant to the Underwriting Agreement, the Company issued to EF Hutton five-year warrants to purchase up to 144,578 shares (6% of the shares sold in the Offering), on the Closing Date. EF Hutton’s Warrants are exercisable at $4.15 per share and are subject to a lock-up for 180 days from the commencement of sales in the Offering, including a mandatory lock-up period in accordance with FINRA Rule 5110(e).

The total expenses of the Offering are estimated to be approximately $1,162,738, which included the underwriting discounts and commissions and the Representative’s reimbursable expenses relating to the Offering.

On July 15, 2021, EF Hutton exercised in full the Over-Allotment Option with respect to all 361,445 additional Shares. After giving effect to the full exercise of the Over-Allotment Option, the total number of Units sold by the Company in the Offering was 2,771,084, for total gross proceeds to the Company of approximately $11,500,000, before deducting underwriting discounts and commissions and other offering expenses payable by the Company.

Curiosity Acquisition

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).

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.

Executive Officers

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

Results of Operations

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

Revenue

Revenue for the three months ended June 30, 2021 was $1,388,551, compared to revenue of $1,746,979 during the three months ended June 30, 2020, representing a decrease of $358,428 or 20.5%.

Animation revenue for the three months ended June 30, 2021 was $1,276,555, compared to animation revenue of $1,534,377 during the three months ended June 30, 2020, representing a decrease of $257,822 or 16.8%. The decrease in animation revenue is primarily attributable to a decrease in the overall number of contracts completed due to client delays caused by concerns related to the spread of COVID-19.

Web filtering revenue for the three months ended June 30, 2021 was $111,507, compared to web filtering revenue of $211,855 during the three months ended June 30, 2020, representing a decrease of $100,348 or 47.4%. 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 three months ended June 30, 2021 was $489 compared to subscription and advertising revenue of $747 during the three months ended June 30, 2020, representing a decrease of $258 or 34.5%, 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 June 30, 2021 and 2020 were $554,870, or 40.0%, and $1,085,799, or 62.2%, respectively. The decrease in gross profit is primarily attributable to the absorption of fixed overhead expenses against reduced revenue levels and certain projects trending over budget in our animation business.

Operating expenses

Operating expenses for the three months ended June 30, 2021 were $2,021,895, compared to operating expenses of $1,410,234 during the three months ended June 30, 2020, representing an increase of $611,661 or 43.4%. The increase is primarily attributable to an increase in general and administrative costs and fees for professional services rendered during the three months ended June 30, 2021 due to the Company’s recapitalization and Nasdaq stock exchange uplisting. General and administrative expenses were $1,440,355 for the three months ended June 30, 2021, compared to $1,093,880 for the three months ended June 30, 2020, representing an increase of $346,475 or 31.7%. Professional fees were $325,922 for the three months ended June 30, 2021, compared to $54,760 for the three months ended June 30, 2020, representing an increase of $271,162 or 495.2%.

Other Income (Expense)

Net other expense for the three months ended June 30, 2021 was $1,037,480, compared to a net other expense of $628,673 for the three months ended June 30, 2020, representing an increase of $408,807 or 65.0%. The increase in net other expense is primarily attributable to 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 $1,094,916 for the three months ended June 30, 2021, compared to $612,379 during the three months ended June 30, 2020, representing an increase of $482,537 or 78.8%. The increase is primarily attributable to an increase in amortization expense associated with debt discounts recorded during the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Net Loss Attributable to Common Stockholders

We realized a net loss attributable to common stockholders of $2,504,505, or $0.42 per share, for the three months ended June 30, 2021, compared to a net loss attributable to common stockholders of $953,108, or $0.18 per share, during the three months ended June 30, 2020, representing an increase in net loss attributable to common stockholders of $1,551,397 or 162.8%.

Comparison of Results of Operations for the Six Months Ended June 30, 2021 and 2020

Revenue

Revenue for the six months ended June 30, 2021 was $3,263,835, compared to revenue of $3,039,218 during the six months ended June 30, 2020, representing an increase of $224,617 or 7.4%.

Animation revenue for the six months ended June 30, 2021 was $2,990,213, compared to animation revenue of $2,687,613 during the six months ended June 30, 2020, representing an increase of $302,600 or 11.3%. 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 six months ended June 30, 2021 was $272,748, compared to web filtering revenue of $349,998 during the six months ended June 30, 2020, representing a decrease of $77,250 or 22.1%. 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 six months ended June 30, 2021 was $874 compared to subscription and advertising revenue of $1,607 during the six months ended June 30, 2020, representing a decrease of $733 or 45.6%, primarily attributable to a decrease in marketing and promotion activities.

Gross Profit

Gross profit for the six months ended June 30, 2021 and 2020 were $1,629,720, or 49.9%, and $1,765,945, or 58.1%, respectively. The decrease in gross profit is primarily attributable to the absorption of fixed overhead expenses, reduced revenue levels, and certain projects trending over budget in our animation business.

Operating expenses

Operating expenses for the six months ended June 30, 2021 were $3,807,594, compared to operating expenses of $3,158,78 during the six months ended June 30, 2020, representing an increase of $648,812 or 20.5%. The increase is primarily attributable to an increase in general and administrative costs and fees for professional services rendered during the six months ended June 30, 2021 due to the Company’s recapitalization and Nasdaq stock exchange uplisting. General and administrative expenses were $2,791,154 for the six months ended June 30, 2021, compared to $2,543,228 for the six months ended June 30, 2020, representing an increase of $247,926 or 9.8%. Professional fees were $513,031 for the six months ended June 30, 2021, compared to $107,478 for the six months ended June 30, 2020, representing an increase of $405,553 or 377.3%.

Other Income (Expense)

Net other expense for the six months ended June 30, 2021 was $2,642,206, compared to a net other expense of $907,105 for the six months ended June 30, 2020, representing an increase of $1,735,101 or 191.3%. 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 $1,743,762 for the six months ended June 30, 2021, compared to $890,142 during the six months ended June 30, 2020, representing a decrease of $853,620 or 95.9%. The increase is primarily attributable to an increase in amortization expense associated with debt discounts recorded during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Net Loss Attributable to Common Stockholders

We realized a net loss attributable to common stockholders of $4,820,080, or $0.79 per share, for the six months ended June 30, 2021, compared to a net loss attributable to common stockholders of $2,299,942, or $0.42 per share, during the six months ended June 30, 2020, representing an increase in net loss attributable to common stockholders of $2,520,138 or 109.6%.

Liquidity and Capital Resources

At June 30, 2021, we had cash and cash equivalents of $8,161,908.

Net cash used in operating activities for the six months ended June 30, 2021 was $2,622,824, compared to net cash used in operating activities of $767,926 during the six months ended June 30, 2020, representing an increase in cash used of $1,854,898, 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 six months ended June 30, 2020 was $2,790, compared to net cash used in investing activities of $38,025 during the six months ended June 30, 2020 representing a decrease in cash used of $35,235. 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 six months ended June 30, 2021.

Net cash provided by financing activities for the six months ended June 30, 2021 was $10,644,545, compared to net cash provided by financing activities of $1,015,767 for the six months ended June 30, 2020, representing an increase in cash provided of $9,628,778. Our primary sources of cash from financing activities were attributable to $8,953,616 in proceeds from the sale of our common stock, $908,500 in proceeds from the sale of 8% - 12% 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 six months ended June 30, 2021, as compared to $3,655,000 in proceeds from the sale of 12% senior secured convertible notes during the six months ended June 30, 2020. On March 16, 2020, the Company repaid $3,000,000 in principal due to the former shareholders of TD Holdings Limited on a convertible note originally dated September 20, 2016.

Based upon our current cash balances, we believe we have adequate working capital to meet our operational needs for at least 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 June 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 June 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 April 14, 2021, the Company issued 62,500 shares of common stock to a noteholder upon the conversion of $100,000 in convertible note principal and $11,205 of accrued interest.

On May 6, 2021, the Company issued 1,087 shares of common stock to a contractor for technology design services provided to the Company.

On May 6, 2021, the Company issued 26,410 shares of common stock to its counsel for legal services provided to the Company.

On June 4, 2021, the Company issued 1,603 shares of common stock to a contractor for technology design services provided to the Company.

On June 11, 2021, the Company issued 15,625 shares of common stock to a consultant for investor relations services provided to the Company.

On June 28, 2021, the Company issued 2,364 shares of common stock to a contractor for public relations services provided to the Company.

The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe is 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: August 23, 2021	By:	/s/ Darren Marks
		Darren Marks
		Chief Executive Officer and President (Principal Executive Officer)


Date: August 23, 2021	By:	/s/ Jason Williams
		Jason Williams
		Chief Financial Officer (Principal Financial and Accounting Officer)