UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September~~June 30, ~~2021~~2022

☐ 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~~000-55585

Grom Social Enterprises, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

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

As of ~~November 19, 2021,~~August 15, 2022, ~~12,601,687~~21,347,117 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	3633
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42

Part II – OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults upon Senior Securities	4544
Item 4.	Mine Safety Disclosures	4544
Item 5.	Other Information	4544
Item 6.	Exhibits	4544

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.

Condensed Consolidated Balance Sheets


	September 30,			December 31,			June 30,			December 31,
	2021			2020			2022			2021
							(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	9,102,728		$	120,300		$	4,174,763		$	6,530,161
Accounts receivable, net		472,059			587,932			672,971			968,579
Inventory, net		127,626			48,198			155,188			91,361
Prepaid expenses and other current assets		714,284			386,165			604,922			457,578
Total current assets		10,416,697			1,142,595			5,607,844			8,047,679
Operating lease right of use assets		379,493			602,775			483,766			593,405
Property and equipment, net		628,773			965,109			409,945			577,988
Goodwill		12,758,924			8,380,504			21,907,599			22,376,025
Intangible assets, net		6,433,865			5,566,339			5,449,241			5,073,074
Deferred tax assets, net -- noncurrent		502,145			531,557			435,938			465,632
Other assets		73,738			76,175			1,011,831			721,160
Total assets	$	31,193,635		$	17,265,054		$	35,306,164		$	37,854,963

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	639,472		$	1,126,114		$	314,541		$	467,711
Accrued liabilities		408,338			1,794,232			514,730			400,329
Dividend payable								187,216			459,068
Advanced payments and deferred revenues		557,528			967,053			580,841			404,428
Convertible notes, net -- current		1,879,853			2,349,677			1,462,046			2,604,346
Loans payable -- current		0			189,963			1,989			36,834
Related party payables		50,000			143,741			50,000			50,000
Income taxes payable		0			102,870
Derivative liabilities								739,311			0
Lease liabilities -- current		303,554			304,326			263,657			333,020
Total current liabilities		3,838,745			6,977,976			4,114,331			4,755,736
Convertible notes, net of loan discounts		1,312,335			897,349			144,416			716,252
Lease liabilities		101,299			328,772			212,370			284,848
Loans payable		0			95,931
Contingent purchase consideration								5,586,493			5,586,493
Other noncurrent liabilities		458,926			367,544			386,942			390,833
Total liabilities		5,711,305			8,667,572			10,444,552			11,734,162

Commitments and contingencies		–			–
Commitments and contingencies (Note 17)								–			–

Stockholders' Equity:
Series A preferred stock, $0.001 par value. 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		0			0
Series B preferred stock, $0.001 par value. 10,000,000 shares authorized; 0 and 5,625,884 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		0			5,626
Series C preferred stock, $0.001 par value. 10,000,000 shares authorized; 9,400,259 and 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		9,400			0
Common stock, $0.001 par value. 500,000,000 shares authorized; 12,325,736 and 5,886,073 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		12,326			5,886
Series A preferred stock, $0.001 par value. 2,000,000 shares authorized; zero 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively								0			0
Series B preferred stock, $0.001 par value. 10,000,000 shares authorized; zero 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively								0			0
Series C preferred stock, $0.001 par value. 10,000,000 shares authorized; 9,360,759 and 9,400,259 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively								9,361			9,400
Common stock, $0.001 par value. 500,000,000 shares authorized; 19,780,053 and 12,698,192 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively								19,780			12,698
Additional paid-in capital		88,490,096			64,417,218			95,661,982			89,851,309
Accumulated deficit		(62,920,855	)		(55,791,914	)		(73,253,212	)		(66,404,190	)
Accumulated other comprehensive loss		(85,061	)		(39,334	)		(87,776	)		(30,755	)
Total Grom Social Enterprises Inc. stockholders' equity		25,505,906			8,597,482
Total Grom Social Enterprises, Inc. stockholders' equity								22,350,135			23,438,462
Noncontrolling interests		(23,576	)		0			2,511,477			2,682,339
Total stockholders' equity		25,482,330			8,597,482			24,861,612			26,120,801
Total liabilities and equity	$	31,193,635		$	17,265,054		$	35,306,164		$	37,854,963

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

GROM SOCIAL ENTERPRISES INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)


	Three Months Ended September 30,			Three Months Ended September 30,			Nine Months Ended September 30,			Nine Months Ended September 30,			Three Months Ended June 30,			Three Months Ended June 30,			Six Months Ended June 30			Six Months Ended June 30
	2021			2020			2021			2020			2022			2021			2022			2021

Sales	$	1,514,692		$	1,439,155		$	4,778,527		$	4,478,373		$	1,139,582		$	1,388,551		$	2,370,707		$	3,263,835
Cost of goods sold		741,436			573,455			2,375,551			1,846,728			947,459			995,843			1,864,408			2,013,964
Gross profit		773,256			865,700			2,402,976			2,631,645			192,123			392,708			506,299			1,249,871
Operating expenses:
Depreciation and amortization		196,168			234,461			620,666			623,660			64,163			133,326			128,613			251,964
Selling and marketing		51,256			35,420			130,167			91,697
General and administrative		1,892,327			1,009,162			4,683,481			3,552,390
Selling, general and administrative														1,778,696			1,400,485			3,473,515			2,662,750
Professional fees		326,800			311,813			839,831			419,291			299,941			325,922			704,007			513,031
Stock based compensation		460,146			0			460,146			62,600
Total operating expenses		2,926,697			1,590,856			6,734,291			4,749,638			2,142,800			1,859,733			4,306,135			3,427,745
Loss from operations		(2,153,441	)		(725,156	)		(4,331,315	)		(2,117,993	)		(1,950,677	)		(1,467,025	)		(3,799,836	)		(2,177,874	)
Other income (expense)
Interest expense, net		(492,783	)		(330,006	)		(2,236,545	)		(1,220,148	)
Interest income (expense), net														(1,314,508	)		(1,094,916	)		(2,945,530	)		(1,743,762	)
Loss on settlement of debt		0			(1,191,089	)		(947,179	)		(1,191,089	)		0			0			0			(947,179	)
Loss on settlement of derivative transaction														(39,624	)		0			(39,624	)		0
Unrealized gain on change in fair value of derivative liabilities		0			22,764			0			8,831			57,124			0			57,124			0
Other gains (losses)		313,787			2,467			362,522			(563	)		48,305			57,436			72,041			48,735
Total other income (expense)		(178,996	)		(1,495,864	)		(2,821,202	)		(2,402,969	)		(1,248,703	)		(1,037,480	)		(2,855,989	)		(2,642,206	)
Loss before income taxes		(2,332,437	)		(2,221,020	)		(7,152,517	)		(4,520,962	)		(3,199,380	)		(2,504,505	)		(6,655,825	)		(4,820,080	)
Provision for income taxes (benefit)		0			0			0			0			0			0			0			0
Net loss		(2,332,437	)		(2,221,020	)		(7,152,517	)		(4,520,962	)		(3,199,380	)		(2,504,505	)		(6,655,825	)		(4,820,080	)
Loss attributable to noncontrolling interest		(23,576	)		0			(23,576	)		0			(91,025	)		0			(170,863	)		0
Net loss attributable to Grom Social Enterprises Inc. stockholders		(2,308,861	)		(2,221,020	)		(7,128,941	)		(4,520,962	)

Convertible preferred stock beneficial conversion feature and other discounts accreted as a deemed dividend		0			(277,500	)		0			(277,500	)

Net loss attributable to Grom Social Enterprises Inc. common stockholders	$	(2,308,861	)	$	(2,498,520	)	$	(7,128,941	)	$	(4,798,462	)
Net loss attributable to Grom Social Enterprises, Inc. stockholders														(3,108,355	)		(2,504,505	)		(6,484,962	)		(4,820,080	)
Preferred stock dividend payable on Series C convertible preferred stock														(187,216	)		0			(364,060	)		0
Net loss attributable to Grom Social Enterprises, Inc. common stockholders													$	(3,295,571	)	$	(2,504,505	)	$	(6,849,022	)	$	(4,820,080	)

Basic and diluted loss per common share	$	(0.21	)	$	(0.45	)	$	(0.91	)	$	(0.87	)	$	(0.17	)	$	(0.42	)	$	(0.42	)	$	(0.79	)

Weighted-average number of common shares outstanding:
Basic and diluted		11,118,290			5,540,233			7,808,344			5,528,061			18,832,087			5,936,750			16,430,415			6,125,941

Comprehensive loss:
Net loss	$	(2,332,437	)	$	(2,221,020	)	$	(7,152,517	)	$	(4,520,962	)	$	(3,199,380	)	$	(2,504,505	)	$	(6,655,825	)	$	(4,820,080	)
Foreign currency translation adjustment		(67,596	)		60,721			(45,727	)		123,557			(53,303	)		3,500			(57,021	)		21,869
Comprehensive loss		(2,400,033	)		(2,160,299	)		(7,198,244	)		(4,397,405	)	$	(3,252,683	)	$	(2,501,005	)	$	(6,712,846	)	$	(4,798,211	)
Comprehensive loss attributable to noncontrolling interests		(23,576	)		0			(23,576	)		0			(91,025	)	$	0		$	(170,863	)	$	0
Comprehensive loss attributable to Grom Social Enterprises Inc. stockholders	$	(2,376,457	)	$	(2,160,299	)	$	(7,174,668	)	$	(4,397,405	)
Comprehensive loss attributable to Grom Social Enterprises, Inc. common stockholders													$	(3,161,658	)	$	(2,501,005	)	$	(6,541,983	)	$	(4,798,211	)

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

GROM SOCIAL ENTERPRISES INC.

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

Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
Shares Value Shares Value Shares Value

Balance, June 30, 2020 925,000 $ 925 250,000 $ 250 – $ –

Net income (loss) – – – – – –
Change in foreign currency translation – – – – – –
Exchange of Series A preferred stock for Series B preferred stock (925,000 ) (925 ) 1,202,500 1,202 – –
Accretion of Series B preferred stock – – – – – –
Deemed dividend on accretion of Series B preferred stock – – – – – –
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings – – 233,500 234 – –
Exchange of convertible notes and accrued interest for Series B preferred stock – – 3,623,884 3,624 – –
Issuance of common stock in exchange for consulting, professional and other services – – – – – –
Conversion of convertible notes and accrued interest into common stock – – – – – –

Balance, September 30, 2020 – $ – 5,309,884 $ 5,310 – $ –

Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
Shares Value Shares Value Shares Value

Balance, March 31, 2021 – $ 0 9,215,059 $ 9,215 – $ 0

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 of 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 – $ 0 – $ 0 9,315,059 $ 9,315

Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
Shares Value Shares Value Shares Value

Balance, June 30, 2021 – $ – – $ – 9,315,059 $ 9,315
Net income (loss) – – – – – –
Change in foreign currency translation – – – – – –
Exchange of convertible notes and accrued interest for Series C preferred stock – – – – 85,200 85
Issuance of common stock in connection with sales made under public offerings – – – – – –
Issuance of common stock as compensation to employees, officers and/or directors – – – – – –
Issuance of common stock in exchange for consulting, professional and other services – – – – – –
Issuance of common stock in connection with the issuance of convertible note(s) – – – – – –
Issuance of common stock warrants in connection with the issuance of convertible note(s) – – – – – –
Issuance of common stock in connection with the acquisition of a business – – – – – –
Conversion of convertible notes and accrued interest into common stock – – – – – –
Stock based compensation expense related to stock options – – – – – –

Balance, September 30, 2021 – $ – – $ – 9,400,259 $ 9,400
Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
Shares Value Shares Value Shares Value

Balance, March 31, 2022 – $ 0 – $ 0 9,360,759 $ 9,361
.
Net income (loss) – – – – – –
Change in foreign currency translation – – – – – –
Preferred stock dividend payable on Series C preferred stock – – – – – –
Issuance of common stock in connection with Series C preferred stock dividend – – – – – –
Issuance of common stock in exchange of consulting, professional and other services – – – – – –
Conversion of convertible notes and accrued interest into common stock – – – – – –
Stock based compensation expense related to stock options – – – – – –
Balance, June 30, 2022 – $ 0 – $ 0 9,360,759 $ 9,361

6

GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)(Continued)

Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
Shares Value Shares Value Shares Value

Balance, December 31, 2019 925,000 $ 925 – $ – – $ –

Net income (loss) – – – – – –
Change in foreign currency translation – – – – – –
Exchange of Series A preferred stock for Series B preferred stock (925,000 ) (925 ) 1,202,500 1,202 – –
Accretion of Series B preferred stock – – – – – –
Deemed dividend on accretion of Series B preferred stock – – – – – –
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings – – 483,500 484 – –
Exchange of convertible notes and accrued interest for Series B preferred stock – – 3,623,884 3,624 – –
Issuance of common stock as compensation to employees, officers and/or directors – – – – – –
Issuance of common stock in exchange for consulting, professional and other services – – – – – –
Issuance of common stock in lieu of cash for accounts payable, loans payable and other accrued obligations – – – – – –
Issuance of common stock in connection with the issuance of convertible note(s) – – – – – –
Conversion of convertible notes and accrued interest into
Conversion of convertible notes and accrued interest into common stock – – – – – –
Recognition of beneficial conversion features related to convertible notes – – – – – –

Balance, September 30, 2020 – $ – 5,309,884 $ 5,310 – $ –
Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
Shares Value Shares Value Shares Value

Balance, December 31, 2020 – $ 0 5,625,884 $ 5,626 – $ 0

Net income (loss) – – – – – –
Change in foreign currency translation – – – – – –
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings – – 950,000 950 – –
Issuance of Series B preferred stock in exchange for consulting, professional and other services – – 75,000 75 – –
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 – $ 0 – $ 0 9,315,059 $ 9,315

Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
Shares Value Shares Value Shares Value

Balance, December 31, 2020 – $ – 5,625,884 $ 5,626 – $ –

Net income (loss) – – – – – –
Change in foreign currency translation – – – – – –
Issuance of Series B preferred stock with common stock in connection with sales made under private offerings – – 950,000 950 – –
Issuance of Series B preferred stock in exchange for consulting, professional and other services – – 75,000 75 – –
Exchange of convertible notes and accrued interest for Series B preferred stock – – 2,564,175 2,564 – –
Exchange of Series B preferred stock for Series C preferred stock – – (9,215,059 ) (9,215 ) 9,215,059 9,215
Exchange of convertible notes and accrued interest for Series C preferred stock – – – – 85,200 85
Issuance of Series C preferred stock with common stock in connection with sales made under private offerings – – – – 100,000 100
Issuance of common stock in connection with sales made under public offerings – – – – – –
Issuance of common stock in connection with the exercise of common stock purchase warrants – – – – – –
Issuance of common stock as compensation to employees, officers and/or directors – – – – – –
Issuance of common stock in exchange for consulting, professional and other services – – – – – –
Issuance of common stock in connection with the issuance of convertible note(s) – – – – – –
Issuance of common stock warrants in connection with the issuance of convertible note(s) – – – – – –
Issuance of common stock in connection with the acquisition of a business – – – – – –
Conversion of convertible notes and accrued interest into common stock – – – – – –
Recognition of beneficial conversion features related to convertible notes – – – – – –
Stock based compensation expense related to stock options – – – – – –

Balance, September 30, 2021 – $ – – $ – 9,400,259 $ 9,400

Preferred Stock Preferred Stock Series C Preferred Stock
Shares Value Shares Value Shares Value

Balance, December 31, 2021 – $ 0 – $ 0 9,400,259 $ 9,400

Net income (loss) – – – – – –
Change in foreign currency translation – – – – – –
Preferred stock dividend payable on Series C preferred stock – – – – – –
Issuance of common stock in connection with Series C preferred stock dividend – – – – – –
Conversion of Series C preferred stock into common stock – – – – (39,500 ) (39 )
Issuance of common stock in exchange for consulting, professional and other services – – – – – –
Conversion of convertible notes and accrued interest into common stock – – – – – –
Conversion of convertible notes and accrued interest into common notes – – – – – –
Stock based compensation expense related to stock options – – – – – –

Balance, June 30, 2022 – $ 0 – $ 0 9,360,759 $ 9,361

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

7

GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)(Continued)

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

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

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

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

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

Balance, March 31, 2021 5,916,137 $ 5,916 $ 68,851,062 $ (58,107,489 ) $ (20,965 ) $ 0 $ 10,737,739

Net income (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 of 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 9,560,074 $ 9,560 $ 79,454,922 $ (60,611,994 ) $ (17,465 ) $ – $ 18,844,338

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

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

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

Balance, September 30, 2021 12,325,736 $ 12,326 $ 88,490,096 $ (62,920,855 ) $ (85,061 ) $ (23,576 ) $ 25,482,330
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Noncontrolling Stockholders'
Shares Value Capital Deficit Loss Interest Equity

Balance, March 31, 2022 18,725,967 $ 18,726 $ 94,917,681 $ (69,957,641 ) $ (34,473 ) $ 2,602,501 $ 27,556,155
.
Net income (loss) – – – (3,108,355 ) – (91,024 ) (3,199,380 )
Change in foreign currency translation – – – – (53,303 ) – (53,303 )
Preferred stock dividend payable on Series C preferred stock – – – (187,216 ) – – (187,216 )
Issuance of common stock in connection with Series C preferred stock dividend 176,847 177 187,278 – – – 187,455
Issuance of common stock in exchange of consulting, professional and other services 43,906 44 18,616 – – – 18,660
Conversion of convertible notes and accrued interest into common stock 833,333 833 449,166 – – – 450,000
Stock based compensation expense related to stock options – – 89,241 – – – 89,241
Balance, June 30, 2022 19,780,053 $ 19,780 $ 95,661,982 $ (73,253,212 ) $ (87,776 ) $ 2,511,477 $ 24,861,612

8

GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)(Continued)

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

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

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

Balance, September 30, 2020 5,826,381 $ 5,826 $ 63,896,518 $ (54,569,443 ) $ 25,997 $ – $ 9,364,208
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Noncontrolling Stockholders'
Shares Value Capital Deficit Loss Interest Equity

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

Net income (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 9,560,074 $ 9,560 $ 79,454,922 $ (60,611,994 ) $ (17,465 ) $ – $ 18,844,338

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

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

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

Balance, September 30, 2021 12,325,736 $ 12,326 $ 88,490,096 $ (62,920,855 ) $ (85,061 ) $ (23,576 ) $ 25,482,330
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Noncontrolling Stockholders'
Shares Value Capital Deficit Loss Interest Equity

Balance, December 31, 2021 12,698,192 $ 12,698 $ 89,851,309 $ (66,404,190 ) $ (30,755 ) $ 2,682,339 $ 26,120,801

Net income (loss) – – – (6,484,962 ) – (170,862 ) (6,655,825 )
Change in foreign currency translation – – – – (57,021 ) – (57,021 )
Preferred stock dividend payable on Series C preferred stock – – – (364,060 ) – – (364,060 )
Issuance of common stock in connection with Series C preferred stock dividend 352,100 352 646,171 – – – 646,523
Conversion of Series C preferred stock into common stock 20,573 21 18 – – – –
Issuance of common stock in exchange for consulting, professional and other services 118,490 119 95,363 – – – 95,482
Conversion of convertible notes and accrued interest into common stock 6,590,698 6,590 4,568,409 – – – 4,574,999
Recognition of beneficial conversion features related to convertible notes – – 363,329 – – – 363,329
Stock based compensation expense related to stock options – – 137,383 – – – 137,383

Balance, June 30, 2022 19,780,053 $ 19,780 $ 95,661,982 $ (73,253,212 ) $ (87,776 ) $ 2,511,477 $ 24,861,612

The accompanying notes are an integral part of the condensed consolidated financial statements.
9

GROM SOCIAL ENTERPRISES INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, Nine Months Ended September 30,
2021 2020
Cash flows from operating activities:
Net loss $ (7,152,517 ) $ (4,520,962 )
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 620,666 623,660
Amortization of debt discount 1,623,921 510,252
Common stock issued for financing costs 10,000 167,614
Common stock issued in exchange for fees and services 586,457 555,440
Convertible notes issued for financing costs 59,633 –
Deferred taxes 29,412 (27,472 )
Stock based compensation 460,146 62,600
Loss on extinguishment of debt 718,267 1,191,089
Unrealized gain on change in fair value of derivative liabilities 0 (8,831 )
Changes in operating assets and liabilities:
Accounts receivable 115,873 99,185
Inventory 33,979 (778 )
Prepaid expenses and other current assets (326,067 ) (12,717 )
Operating lease right of use assets (5,014 ) 28,233
Other assets 2,437 5,899
Accounts payable (485,433 ) 542,321
Accrued liabilities (1,148,692 ) 288,891
Advanced payments and deferred revenues (409,525 ) 115,176
Income taxes payable and other noncurrent liabilities (11,489 ) (37,471 )
Related party payables (95,741 ) (248,904 )
Net cash used in operating activities (5,373,687 ) (666,775 )

Cash flows from investing activities:
Cash consideration for acquisition of business (400,000 ) 0
Purchase of fixed assets (25,789 ) (571,563 )
Net cash used in investing activities (425,789 ) (571,563 )

Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs 1,050,000 483,500
Proceeds from issuance of common stock, net of issuance costs 10,317,324 0
Proceeds from issuance of convertible notes 4,516,700 3,655,000
Proceeds from loans payable 0 253,912
Repayments of convertible notes (1,058,307 ) (3,368,812 )
Repayments of loans payable (56,982 ) 0
Net cash provided by financing activities 14,768,735 1,023,600

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

Supplemental disclosure of cash flow information:
Cash paid for interest $ 74,299 $ 0
Cash paid for income taxes $ 0 $ 0

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued related to acquisition of business $ 5,000,000 $ 0
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 $ 0 $ 50,000
Common stock warrants issued in connection with convertible promissory notes $ 1,895,078 $ 0
Conversion of convertible notes and accrued interest into common stock $ 1,766,297 $ 30,000
Conversion of convertible notes and accrued interest into preferred stock $ 1,616,996 $ 0
Debt issued related to acquisition of a business $ 278,000 $ 0
Discount for beneficial conversion features on convertible notes $ 318,616 $ 44,129

Six Months Ended
June 30 Six Months Ended
June 30
2022 2021
Cash flows from operating activities of continuing operations:
Net loss $ (6,655,825 ) $ (4,820,080 )
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 265,804 424,498
Amortization of debt discount 1,852,816 1,239,740
Common stock issued in exchange for fees and services 95,482 331,361
Convertible notes issued for financing costs 0 61,633
Derivative expense
1,052,350
0
Stock based compensation 137,383 0
Amortization of rights-of-use assets 190,117 148,839
Loss on disposal of property and equipment 2,296 0
Loss on extinguishment of debt 0 947,179
Loss on settlement of derivative transaction
39,624
0
Unrealized gain on change in fair value of derivative liabilities
(57,124
) 0
Changes in operating assets and liabilities:
Accounts receivable 287,341 (117,389 )
Inventory (83,237 ) 21,409
Prepaid expenses and other current assets (174,109 ) 61,418
Other assets (291,170 ) 11,204
Accounts payable (180,381 ) (628,233 )
Accrued liabilities 127,903 225,822
Advanced payments and deferred revenues 208,716 (329,875 )
Income taxes payable and other noncurrent liabilities (3,974 ) 3,061
Operating lease liability (197,243 ) (152,163 )
Related party payables 0 (51,247 )
Net cash used in operating activities (3,383,231 ) (2,622,823 )

Cash flows from investing activities:
Purchase of fixed assets (47,377 ) (2,790 )
Proceeds from sale of property and equipment 14,069 0
Net cash used in financing activities (33,308 ) (2,790 )

Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs 0 1,050,000
Proceeds from issuance of common stock, net of issuance costs 0 8,953,616
Proceeds from issuance of convertible notes 1,444,000 908,500
Repayments of convertible notes (72,623 ) (225,946 )
Repayments of loans payable (34,846 ) (41,626 )
Payment of settlement of derivative liability upon note conversion
(295,539
) 0
Net cash provided by financing activities 1,040,992 10,644,544

Effect of exchange rates on cash and cash equivalents 20,149 22,677
Net increase (decrease) in cash and cash equivalents (2,355,398 ) 8,041,608
Cash and cash equivalents at beginning of period 6,530,161 120,300
Cash and cash equivalents at end of period $ 4,174,763 $ 8,161,908

Supplemental disclosure of cash flow information:
Cash paid for interest $ 21,780 $ 74,299

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued for financing costs incurred in connection with convertible and promissory notes $ 0 $ 29,750
Common stock issued related to Series C preferred stock dividend
646,523
0
Common stock warrants issued in connection with convertible promissory notes 363,329 694,644
Conversion of convertible notes and accrued interest into common stock 4,574,999 1,102,905
Conversion of convertible notes and accrued interest into preferred stock 0 1,616,996
Discount for beneficial conversion features on convertible notes 0 318,616
Operating leases rights-of-sue assets obtained in exchange for lease liabilities 80,478 0
Preferred stock dividend payable on convertible preferred stock
187,216
0

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

10

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~~company. The Company is focused on (i) 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.~~guardians, (ii) creating, acquiring, and developing the commercial potential of kids & family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content.

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

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

· TD Holdings Limited (“TD Holdings”) was incorporated in Hong Kong on September 15, 2005. TD Holdings operates through its two subsidiary companies: (i) Top Draw Animation Hong Kong Limited (“TDAHK”), a Hong Kong corporation, and (ii) Top Draw Animation, Inc. (“Top Draw” or “TDA”), a Philippines corporation. The group’s principal service-based 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~~been nonoperational since its inception.

· Curiosity Ink Media, LLC (“Curiosity”)~~, organized~~ was incorporated in the State of Delaware on January ~~5, 2017,~~9, 2017. Curiosity creates, acquires and develops the commercial potential of kids ~~and~~& family entertainment properties and associated business opportunities.

The Company owns 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity. The Company is headquartered in Boca Raton, Florida with offices in Los Angeles, California; Salt Lake City, Utah; Norcross, Georgia; and Manila, Philippines.

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%~~85.3% of the Company’s total revenues on a consolidated basis, ~~has been mostly closed.~~was forced to close its offices for significant periods of time from March 2020 through December 2021.
11

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. In January 2022, the Company started to recall artist and employees to return to the studio which is currently operating at 50% seat capacity.

11
~~The outbreak has and may continue to spread, which could materially impact~~While restrictions have eased, the ~~Company’s business.~~risk continues as new variants are being discovered. 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~~Basis of ~~Interim Financial Statements~~Presentation
The accompanying ~~unaudited~~ condensed consolidated financial statements are unaudited and have been prepared byin conformity with accounting principles generally accepted in the ~~Company without audit pursuant~~United States of America (“GAAP”) for interim financial information and in conjunction with the instructions to ~~the rules and regulations~~Form 10-Q of the Securities and Exchange Commission (“SEC”). ~~The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain~~Accordingly, certain information and footnote disclosures ~~normally included in~~required by GAAP for complete financial statements ~~prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)~~ have been condensed or ~~omitted~~omitted. For the three and six months ended June 30, 2022, the condensed consolidated financial statements include the accounts of the Company and its operating subsidiaries Grom Social, TD Holdings, GES, GNS, and Curiosity. The Company recognizes noncontrolling interest related to its less-than-wholly-owned subsidiary, Curiosity, as ~~allowed by such rules~~equity in the consolidated financial statements separate from the parent entity’s equity. The net income (loss) attributable to noncontrolling interest is included in net income (loss) in the condensed consolidated statements of operations and ~~regulations, and management believes that the disclosures are adequate to make the information presented not misleading.~~ comprehensive loss.
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, which includes intercompany balances and transactions 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,~~2021, as presented in the Company’s Annual Report on Form 10-K filed on April ~~13, 2021~~15, 2022 with the SEC.

~~Basis~~Certain prior period statement of ~~Presentation~~
~~The condensed consolidated financial statements~~operations and statement of ~~the Company~~cash flows captions and balances have been ~~prepared~~reclassified to conform with the current year presentation, including the allocation of $73,657 and $172,534, respectively from depreciation and amortization and $88,505 and $207,315, respectively in ~~accordance with GAAP~~certain fixed overhead costs from selling, general, and ~~are expressed in United States dollars. For~~administrative expenses previously presented under operating expenses to cost of goods sold during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2021. In the ~~condensed consolidated~~statement of cash flow, the amortization of rights-of-use assets is presented as an adjustment to reconcile net loss to cash used in operating activities and changes to operating lease liabilities are presented as a change in operating assets and liabilities. These two reclassifications were previously presented as a net movement titled operating lease right-of-use assets under changes in operating assets and liabilities. The changes do not have any financial ~~statements include~~impact on 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.~~Company’s reported revenue, reported net loss, or cash flows from operations.

Use of Estimates

The ~~preparation of consolidated financial statements in conformity with GAAP requires management to make~~Company makes estimates and assumptions that affect the reported amounts of assets and liabilities, ~~and disclosure~~disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of ~~revenues~~revenue 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 materially from ~~these~~those estimates. The results of operations for the three months and six months ended June 30, 2022, are not necessarily indicative of the operating results for the full year.

~~Revenue Recognition~~Update to Significant Accounting Policies

The ~~Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09,~~Company has changed its accounting policy related to Publishing Revenue, refer to Revenues – Publishing Revenue ~~from Contracts with Customers (Topic 606)~~ ~~("ASU 2014-09"). ASU 2014-09 outlines~~note (Note 3) for the new significant accounting policy. This change did not have a ~~single comprehensive model~~significant impact on our operations 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,three and ~~uncertainty of revenue~~six months ended June 30, 2022 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.~~2021.

Other than noted above, there have been no other new or material changes to the significant accounting policies discussed in the Company’s audited financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC on April 15, 2022, that are of significance, or potential significance, to the Company.

12

~~Animation Revenue~~Recent Accounting Pronouncements – Issued, not yet Adopted
There were no new accounting pronouncements issued in the three and six months ended June 30, 2022, which could impact the Company.
Recently Issued Accounting Pronouncements Adopted

~~For~~In May 2021, the ~~nine months ended September 30,~~FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. ASU 2021-04 provides guidance on modifications or exchanges of freestanding equity-classified written call options that are not within the scope of another Topic. Entities should treat a modification of the terms or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after modification or exchange, as an exchange of the original instrument for a new instrument. ASU 2021-04 provides further guidance on measuring the effect of such modifications or exchanges, and also provides guidance on the recognition of such modifications or exchanges on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, and ~~2020,~~early adoption is permitted. The Company adopted this ASU on January 1, 2022, which did not result in a material impact to the ~~Company recorded a total~~condensed consolidated financial statements and disclosures.
3. REVENUES
The Company’s main types of $~~4,373,409~~ ~~and $4,015,061, respectively,~~revenue contracts consists of ~~animation revenue~~the following, which are disaggregated from ~~contracts with customers.~~the condensed consolidated statements of operations.
Animation Revenue

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

The Company identifies a contract under ASC 606 once (i) it is approved by all parties, (ii) the rights of the parties are identified, (iii) the payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable.
The Company evaluates the services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The services in the Company’s contracts are distinct from one another as the referring parties typically can direct all, limited, or single portions of the various preproduction and production activities required to create and design and entire episode to us and we therefore have a history of developing standalone selling prices for all of these distinct components. Accordingly, our contracts are typically accounted for as containing multiple performance obligations.
~~The Company determines the transaction price for each contract based on the consideration it expects to receive for the distinct services being provided under the contract.~~
The Company recognizes revenue as performance obligations are satisfied and the customer obtains control of the services. In determining when performance obligations are satisfied, the Company considers factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of the Company’s revenue is recognized over time as it performs under the contract due to the contractual terms present in each contract which irrevocably transfer control of the work product to the customer as the services are performed.
For performance obligations recognized over time, revenue is recognized based on the extent of progress made towards completion of the performance obligation. The Company uses the percentage-of-completion cost-to-cost measure of progress because it best depicts the transfer of control to the customer as the Company incurs costs against its contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. The percentage-of-completion cost-to-cost method requires management to make estimates and assumptions that affect the reported amounts of contract assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the total estimated amount of costs that will be incurred for a project or job.
Web Filtering Revenue
~~For the nine months ended September 30, 2021 and 2020, the Company recorded a total of $403,676~~ ~~and $460,984, respectively, of web filtering revenue from contracts with customers.~~

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

Produced and licensed content revenues are generated from the licensing of internally-produced films and television programs.
Licensed internally-produced films and television programming, each individual film or episode delivered represents a separate performance obligation and revenues are recognized when the episode is made available to the licensee for exhibition. For license agreements containing multiple deliverables, revenues are allocated based on the relative standalone selling price of each film or episode of a television series, which is based on licenses for comparable films or series within the marketplace. Agreements to license programming are often long term, with collection terms ranging from one to five years.
The advanced billing component for licensed content is initially recorded as deferred revenue and subsequently recognized as revenue upon completion of the performance obligation in accordance with the terms of licensing agreement.
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~~Contract Assets~~Publishing Revenue
The Company has engaged the services of a third-party entity to manage the printing, publishing and ~~Liabilities~~distribution of the Company’s publishing content. In accordance with the terms agreed with the third party, the Company’s revenue is recognized as 50% of revenue from sales per title after the third-party vendor earns back the costs to develop, author, publish, market, promote and distribute each title, inclusive of any royalties owed to rights holders, following a six months period in market to allow for returns.
Publishing revenues are eligible for recognition upon the completion of a six-month sales period to provide for any potential returns and notification from the third-party entity that it has earned back all of its related publishing costs.
Other Revenue
Other revenue corresponds to subscription and advertising revenue from the Grom Social website and mobile application.
All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregated revenue listed above within the Sales caption in the condensed consolidated statements of operations:
Schedule of disaggregated revenue

Three Months Ended
June 30, 2022

Three Months Ended
June 30, 2021

Six Months Ended
June 30, 2022

Six Months Ended
June 30, 2021

Animation $ 1,025,966 $ 1,276,555 $ 2,074,579 $ 2,990,213
Web Filtering 113,472 111,507 295,716 272,748
Produced and Licensed Content 0 0 0 0
Publishing 0 0 0 0
Other 144 489 412 874
Total Sales $ 1,139,582 $ 1,388,551 $ 2,370,707 $ 3,263,835
The following table sets forth the components of the Company’s accounts receivable and advanced payments and deferred revenues at June 30, 2022, and December 31, 2021:
Schedule of accounts receivable

June 30,
2022

December 31,
2021

Billed accounts receivable $ 426,649 $ 822,536
Unbilled accounts receivable 285,067 187,751
Allowance for doubtful accounts (38,745 ) (41,708 )
Total accounts receivable, net $ 672,971 $ 968,579
Total advanced payments and deferred revenues $ 580,841 $ 404,428
During the three and six months ended June 30, 2022, the Company had three customers that accounted for 57.3% and 60.8%, respectively, of total revenues. During the three and six months ended June 30, 2021, the Company had four customers that account for 81.7% and 76.5%, respectively, of total revenues.
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As of June 30, 2022 and December 31, 2021, the Company had three and two customers, respectively that accounted for 47.5% and 61.3% of accounts receivable.

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.

4. INVENTORY
Inventory consists of costs incurred to produce animated content for third party customers. Costs incurred to produce the animated content to customers, which include direct production costs, production overhead and supplies are recognized as work-in-progress inventory. As animated content is completed in accordance with the terms stated by the customer, inventory is classified as finished products and subsequently recognized as cost of services as animated content is accepted by and available to the customer. Carrying amounts of animated content are recorded at the lower of cost or net realizable value. Cost is determined using a weighted average cost method for direct production costs, productions overhead and supplies used for completing animation projects.
As of June 30, 2022 and December 31, 2021, the Company’s inventory totaled $155,188 and $91,361, respectively, and was comprised of work-in-progress of $141,328 and $77,501, respectively, and finished goods of $13,860 for both periods.
5. PROPERTY AND EQUIPMENT
The following table ~~depicts~~sets forth the ~~composition~~components of the Company’s ~~contract assets~~property and ~~liabilities as of September~~equipment at June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:
Schedule of contract assets and liabilities

September 30, 2021 December 31, 2020

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

Animation contract liabilities $ 96,697 $ 410,709
Web filtering contract liabilities 449,331 544,844
Other contract liabilities 11,500 11,500
Total contract liabilities $ 557,528 $ 967,053
Schedule of property and equipment
June 30, 2022 December 31, 2021
Cost Accumulated Depreciation Net Book Value Cost Accumulated Depreciation Net Book Value
Capital assets subject to depreciation:
Computers, software and office equipment $ 2,516,560 $ (2,321,180 ) $ 195,380 $ 2,698,172 $ (2,399,978 ) $ 298,194
Machinery and equipment 175,721 (159,823 ) 15,898 183,618 (162,647 ) 20,971
Vehicles 37,802 (32,614 ) 5,188 101,674 (76,497 ) 25,177
Furniture and fixtures 383,202 (355,620 ) 27,582 401,862 (365,075 ) 36,787
Leasehold improvements 1,078,442 (936,015 ) 142,427 1,086,518 (955,547 ) 130,971
Total fixed assets 4,191,727 (3,805,252 ) 386,475 4,471,844 (3,959,744 ) 512,100
Capital assets not subject to depreciation:
Construction in progress 23,470 0 23,470 65,888 0 65,888
Total fixed assets $ 4,215,197 $ (3,805,252 ) $ 409,945 $ 4,537,732 $ (3,959,744 ) $ 577,988

~~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,~~For 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,three months ended June 30, 2022 and ~~interim periods therein.~~2021, the Company recorded depreciation expense of $80,373 and $230,040, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded depreciation expense of $173,047 and $422,493, respectively.

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.

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6. OTHER ASSETS
The following table sets forth the components of the Company’s other assets at June 30, 2022 and December 31, 2021:
Schedule Of Other Assets
June 30, 2022 December 31, 2021

Capitalized website development costs 575,908 411,800
Prepublication costs 158,788 152,286
Produced and licensed content costs 207,202 76,701
Deposits 69,933 76,052
Other noncurrent assets 0 4,321
Total other assets 1,011,831 721,160
For the three and six months ended June 30, 2022, the Company’s recognized $499 of amortization expense of prepublication costs. Amortization costs related to the publication of an individual property during the three and six months ended June 30, 2022. Amortization expense has yet to be recognized for capitalized website development costs and produced and licensed content costs as these properties were still in development as of June 30, 2022.
7. LEASES
The Company has entered into operating leases primarily for office space. These leases have terms which range from two years to six years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment.
In January 2022, the Company signed a new lease agreement to extend the term until March 2024 of the Company’s office space in Boca Raton, Florida. The total legally binding minimum lease payments for this agreement is approximately $94,898.
Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized $483,766 in noncurrent right of use (“ROU”) assets, $263,657 in current lease liabilities and $212,370 in noncurrent lease liabilities from operating leases as of June 30, 2022.
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:
Schedule of operating right-of-use assets
Six Months Ended
June 30, 2022
Cash paid for operating lease liabilities $ 230,389
Weighted-average remaining lease term 1.2
Weighted-average discount rate 10%
For the three months ended June 30, 2022 and 2021, the Company recorded rent expenses related to lease obligations of $115,292 and $90,994, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded rent expenses related to lease obligations of $220,632 and $181,987, respectively. Rent expenses related to lease obligations are allocated between cost of goods sold and selling, general and administrative expenses in the Company’s condensed consolidated statement of operations.
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~~In February 2020,~~The following table presents the ~~FASB issued ASU 2020-02,~~ ~~Financial Instruments-Credit Losses (Topic 326)~~future minimum payment obligations 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~~aggregate present value of ~~the original pronouncement~~lease liabilities 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 resultsoperating leases as of ~~operations. The Company is in the process of determining the effects adoption will have on its consolidated financial statements.~~June 30, 2022:
Schedule of amortization of lease liabilities
Remainder of 2022 $ 203,980
2023 114,411
2024 50,235
2025 40,291
2026 42,305
Thereafter 44,421
Total future lease payments 495,643
Less: Imputed interest (19,616 )
Present value of lease liabilities $ 476,027

~~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.
3.8. BUSINESS COMBINATIONS

Acquisition of Curiosity Ink Media, LLC

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

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

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

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

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

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed
Consideration Paid:
Cash and cash equivalents $ 400,000
Common stock 5,000,000
Convertible notes 278,000
Fair value of total consideration $ 5,678,000
Recognized amount of identifiable assets acquired, and liabilities assumed:
Financial assets:
Cash and cash equivalents $ 26,408
Inventory 113,408
Prepaids and other assets 2,052
Intangible assets 1,157,712
Goodwill 4,378,420
Total identifiable assets acquired, and liabilities assumed $ 5,678,000
~~The Company expects~~In addition to ~~perform a valuation study on this acquisition by December 31, 2021 to determine~~ the ~~level of intangible assets.~~
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4. ~~ACCOUNTS RECEIVABLE, NET~~
~~The following table sets forth~~tangible assets, goodwill totaling $14,271,969 was recorded in connection with the ~~components~~acquisition. Goodwill was calculated as the excess of the ~~Company’s accounts receivable at September 30, 2021,~~consideration transferred over the net assets recognized and ~~December 31, 2020:~~
Schedule of accounts receivable

September 30, 2021 December 31, 2020

Billed accounts receivable $ 376,529 $ 443,806
Unbilled accounts receivable 137,408 188,029
Allowance for doubtful accounts (41,878 ) (43,903 )
Total accounts receivable, net $ 472,059 $ 587,932
~~During the nine months ended September 30, 2021, the Company had four customers~~represents potential future economic benefits arising from other assets acquired that ~~accounted~~could not be individually identified and separately recognized. Goodwill is not expected to be deductible for ~~81.0% of revenues and four customers that accounted for~~ ~~82.4% of accounts receivable. During the year ended December 31, 2020, the Company had three customers that accounted for~~ ~~68.5% of revenues and one customer that accounted for~~ ~~29.9% of accounts receivable.~~tax purposes.
5. ~~PROPERTY AND EQUIPMENT~~
~~The following table sets forth the components of the Company’s property and equipment at September 30, 2021 and December 31, 2020:~~
Schedule of property and equipment

September 30, 2021 December 31, 2020
Cost Accumulated Depreciation Net Book Value Cost Accumulated Depreciation Net Book Value
Capital assets subject to depreciation:
Computers, software and office equipment $ 2,696,708 $ (2,347,083 ) $ 349,625 $ 2,800,872 $ (2,257,797 ) $ 543,075
Machinery and equipment 184,368 (158,822 ) 25,546 192,988 (152,149 ) 40,839
Vehicles 158,590 (124,667 ) 33,923 163,525 (106,826 ) 56,699
Furniture and fixtures 405,192 (366,052 ) 39,140 422,234 (364,655 ) 57,579
Leasehold improvements 1,090,960 (935,789 ) 155,171 1,143,704 (903,381 ) 240,323
Total fixed assets 4,535,818 (3,932,413 ) 603,405 4,723,323 (3,784,808 ) 938,515
Capital assets not subject to depreciation:
Construction in progress 25,368 0 25,368 26,594 0 26,594
Total fixed assets $ 4,561,186 $ (3,932,413 ) $ 628,773 $ 4,749,917 $ (3,784,808 ) $ 965,109
~~For the three months ended September 30, 2021 and 2020, the Company recorded depreciation expense of $330,479~~ ~~and $333,473, respectively.~~
6. ~~LEASES~~
The Company has entered into operating leases primarily for real estate. These leases have terms which range from three years to five years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment.
In the United States, the Company leases approximately 2,100 square feet of office space in Boca Raton, Florida at the rate of $4,000 per month pursuant to a three-year lease which expires in October 2021. The Florida office space is the location of the Company’s corporate headquarters and administrative staff.
The Company’s animation operations leases portions of three floors aggregating approximately 28,800 square feet in the West Tower of the Philippine Stock Exchange Centre in Pasig City, Manila. The space is used for administration and production purposes. The Company pays approximately $24,000 per month in the aggregate for such space (which increases by approximately 5% annually). These leases expire in December 2022.
Schedule Of Components Of Income Tax Expense Benefit
Consideration Paid:
Cash consideration $ 400,000
Common stock issued 5,421,962
Convertible notes 278,000
Contingent purchase consideration 5,586,493
Total consideration $ 11,686,455

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The ~~Company’s web filtering~~amounts in the table below represent the allocation of the purchase price. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
Schedule of Recognized Identified Assets Acquired and Liabilities Assumed
Cash and cash equivalents $ 26,408
Inventory 65,734
Produced and licensed content cost 187,920
Goodwill and intangible assets 14,271,969
Accounts payable (113,462 )
Noncontrolling interest (2,752,114 )
Total identifiable assets acquired, and liabilities assumed $ 11,686,455
During the second quarter of 2022, the Company finalized the purchase price allocation during the measurement period and obtained new fair value information related to certain identifiable intangible assets of Curiosity. As a result, in the second quarter of 2022 we adjusted the purchase price allocation by decreasing Goodwill by $468,426 and increasing Intangible Assets by $468,426. Amortization expense for $15,944 was recognized during the second quarter of 2022 to account for the amortization of intangible assets subject to amortization. From the total amortization recognized, $7,247 corresponds to the year ended 2021 and recognized during the second quarter of 2022. See Goodwill and Intangible Assets note (Note 9) for detail. These adjustments did not have a significant impact on our operations ~~lease approximately 1,400 square feet of office space in Norcross, Georgia.~~for the three and six months ended June 30, 2022. 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.~~following table summarizes the individually identifiable intangible assets recognized:

Schedule of identifiable intangible assets
Licensing agreements $ 341,728
Books and stories content 126,698
Total identifiable intangible assets $ 468,426
~~These operating leases~~
The Company’s results of operations for the three and six months ended June 30, 2022 include results of operations for Curiosity. No pro forma information is presented for the Company’s results of operations as if the acquisition of Curiosity had occurred on January 1, 2021 as results of its operations are ~~listed as separate line items on~~not considered material to the ~~Company's~~ condensed consolidated financial statements as of 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~~three and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized ROU assets and lease liabilities for operating leases of approximately $~~379,493~~ ~~in assets, $303,168303,554~~ ~~in current liabilities and $101,685101,299~~ ~~in noncurrent liabilities as of September 30, 2021. For the nine~~six months ended ~~September~~June 30, ~~2021, the Company recognized approximately $272,980~~ ~~in total lease costs.~~
~~The following table presents the remaining amortization of the Company’s lease liabilities under ASC 842 for each of the following years ending December 31:~~
Schedule of Future Minimum Rental Payments for Operating Leases

2021 $ 76,082
2022 302,781
2023 25,990
Total $ 404,853
~~Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.~~
~~Information related to the Company's operating ROU assets and related lease liabilities are as follows:~~
Schedule of operating right-of-use assets

Nine Months Ended
September 30, 2021
Cash paid for operating lease liabilities $ 277,994
Weighted-average remaining lease term 1.7
Weighted-average discount rate 10%
Minimum future lease payments $ 453,889
~~The remaining future minimum payment obligations at September 30, 2021 for operating leases are as follows:~~
Schedule of amortization of lease liabilities

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

7.9. GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
~~The following table sets forth the changes in~~ At June 30, 2022 and December 31, 2021, the carrying amount of the Company’s goodwill ~~at September 30, 2021:~~was $21,907,599 and $22,376,025, respectively.

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

~~See Note 3 – Business Combinations for more information.~~

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The following table sets forth the components of the Company’s intangible assets at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~ 2021:
Schedule of intangible assets

September 30, 2021 December 31, 2020
Amortization Period (Years) Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value
Intangible assets subject to amortization:
Customer relationships 10.00 $ 1,600,286 $ (836,450 ) $ 763,836 $ 1,600,286 $ (716,429 ) $ 883,857
Licensed and produced content 5.00 1,157,712 0 1,157,712 0 0 0
Web filtering software 5.00  1,134,435 (1,077,713 ) 56,722 1,134,435 (907,548 ) 226,887
Subtotal – 3,892,443 (1,914,163 ) 1,978,270 2,734,721 (1,623,977 ) 1,110,744
Intangible assets not subject to amortization:
Trade names – 4,455,595 – 4,455,595 4,455,595 – 4,455,595
Total intangible assets – $ 8,251,299 $ (1,914,163 ) $ 6,433,865 $ 7,190,316 $ (1,623,977 ) $ 5,566,339

Schedule of intangible assets
Current Year Period Prior Year End
Amortization Period (Years) Gross Carrying Amount Accumulated Amortization Accumulated Impairment Net Book Value Gross Carrying Amount Accumulated Amortization Accumulated Impairment Net Book Value
Intangible assets subject to amortization:
Customer relationships 10.00 $ 1,600,286 $ (952,772 ) $ (37,002 ) $ 610,513 $ 1,600,286 $ (876,457 ) $ (37,002 ) $ 686,827
Mobile software applications 2.00 282,500 (282,500 ) 0 0 282,500 (282,500 ) 0 0
NetSpective webfiltering software 2.00 1,134,435 (1,134,435 ) 0 0 1,134,435 (1,134,435 ) 0 0
Noncompete agreements 1.50 846,638 (846,638 ) 0 0 846,638 (846,638 ) 0 –
Licensing agreement 19.60 341,728 (15,944 ) 0 325,784 0 0 0 0
Subtotal 4,205,587 (3,232,289 ) (37,002 ) 936,297 3,863,859 (3,140,030 ) (37,002 ) 686,827
Intangible assets not subject to amortization:
Trade names – 4,455,595 – (69,348 ) 4,386,247 4,455,595 – (69,348 ) 4,386,247
Books and stories content – 126,698 – –
126,698
– – – –
Total intangible assets $ 8,787,880 $ (3,232,289 ) $ (106,350 ) $ 5,449,241 $ 8,319,454 $ (3,140,030 ) $ (106,350 ) $ 5,073,074
For the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recorded amortization expense of $~~290,187~~54,101 ~~for intangible assets subject to amortization.~~and $92,258, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded amortization expense of $92,258 and $193,458, respectively.

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

2021 $ 150,162
2022 391,571
Remainder of 2022 $ 85,011
2023 391,571 170,022
2024 391,571 170,022
2025 391,571 170,022
2026 93,708
Thereafter 261,824 247,512
Future amortization total $ 1,978,270
Total remaining intangible assets subject to amortization $ 936,297

8.10. ACCRUED LIABILITIES

The following table sets forth the components of the Company’s accrued liabilities at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~ 2021:
Accrued Liabilities

September 30,
2021

December 31,
2020

June 30,
2022

December 31,
2021

Executive and employee compensation $ 380,158 $ 1,642,959 $ 269,698 $ 238,669
Interest on convertible notes and promissory notes 27,562 135,980 50,184 31,997
Other accrued expenses and liabilities 618 15,293 194,848 129,663
Total accrued liabilities $ 408,338 $ 1,794,232 $ 514,730 $ 400,329

1819

9.11. RELATED PARTY TRANSACTIONS AND PAYABLES

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~~create and produce original short form ~~content.~~content focusing on social responsibility, anti-bullying, digital citizenship, unique blogs, and special events. 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.

For the three months ended June 30, 2022 and 2021, the Marks family was paid a total of $7,500, respectively. For the six months ended June 30, 2022 and 2021, the Marks family was paid a total of $15,000, respectively.
Effective January 1, 2021, the Company entered into a marketing agreement with Caroline Marks, daughter of Mr. Marks, for a period of 60 months in exchange for 52,084 shares of the Company’s common stock. On March 2, 2022, the Board of Directors of the Company approved the issuance the shares of common stock at a fair market value of $53,647. Caroline serves as an ambassador for the Grom Social mobile app with her own profile and Grom TV channel.
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 Officers and ~~Other Officers~~Directors
Pursuant to verbal agreements, Messrs. Marks and Leiner have made loans to the Company to help fund operations. These loans are non-interest bearing and callable on demand. No such loans were made to the Company during the three months ended September 30, 2021.

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

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the aggregate related party payables ~~were~~balance was $50,000 ~~and $143,741~~, respectively.

~~10.~~12. CONVERTIBLE NOTES

The following tables set forth the components of the Company’s convertible notes as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~ 2021:
Schedule of convertible debt

June 30,
2022
December 31,
2021

September 30,
2021
December 31,
2020
8% Unsecured Convertible Notes (Curiosity) $ 278,000 $ 0
8% - 12% Convertible Promissory Notes (Bridge Notes) 0 373,587
10% Unsecured Convertible Redeemable Notes – Variable Conversion Price 0 265,000
8% Unsecured Convertible Note (Curiosity) $ 278,000 $ 278,000
10% Senior Secured Convertible Note with Original Issuance Discount (L1 Capital Global Master Fund or “L1”) 4,400,000 0 0 4,125,000
10% Secured Convertible Notes with Original Issuance Discounts (OID Notes) 75,000 153,250
12% Senior Secured Convertible Notes (Newbridge) 0 52,572
12% Senior Secured Convertible Notes (Original TDH Notes) 0 882,175
10% Senior Secured Convertible Note with Original Issuance Discount (L1 – Second Tranche) 1,300,000 0
12% Senior Convertible Notes with Original Issuance Discounts (OID Notes) 75,000 75,000
12% Senior Secured Convertible Notes (TDH Secured Notes) 359,056 1,645,393 269,340 330,039
12% Senior Secured Convertible Notes (Additional Secured Notes) 68,221 260,315 51,175 63,099
Loan discounts (1,988,089 ) (385,266 ) (367,053 ) (1,550,540 )
Total convertible notes, net 3,192,188 3,247,026 1,606,462 3,320,598
Less: current portion of convertible notes, net (1,879,853 ) (2,349,677 ) (1,462,046 ) (2,604,346 )
Convertible notes, net $ 1,312,335 $ 897,349 $ 144,416 $ 716,252

1920

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

~~At September~~As of June 30, ~~2021,~~2022, the principal balance of the Curiosity ~~notes~~note was $278,000.
~~8% - 12% Convertible Promissory Notes (Bridge Notes)~~
On November 30, 2020, the Company entered into a securities purchase agreement with EMA Financial, LLC (“EMA”) pursuant to which the Company issued to EMA a nine-month 8% convertible promissory note in the principal amount of $~~260,000~~ ~~(the “EMA Note”) for a $234,000~~ investment. The term of the EMA Note may be extended by EMA up to an additional year. The EMA Note is convertible into common stock of the Company at any time after 180 days from issuance. The conversion price of the EMA Note is equal to the lower of: (i) $~~1.92~~ ~~per share, or (ii) 70% of the lowest trading price of the common stock during the ten consecutive trading days including and immediately preceding the conversion date.~~
~~On February 17, 2021, the terms of the EMA financing were amended to (i) reduce the conversion rate to $1.28, and (ii) add a three-year~~3 ~~warrant to purchase up to~~ ~~81,250~~ ~~shares of the Company’s common stock, at an exercise price of $1.60~~ ~~per share. On May 19, 2021, the terms of the EMA financing were further amended to (i) increase the interest rate to~~ 12~~%, and (ii) add a three-year warrant (the “EMA Warrant”) to purchase up to~~ ~~38,855~~ ~~shares of the Company’s common stock, at an exercise price of $1.92~~ ~~per share.~~
ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. In connection with the EMA warrant issuance, the Company allocated an aggregate fair value of $104,760 to the stock warrants and recorded a debt discount which will be amortized to interest expense over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of the warrants at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant ranging between $1.60 and $4.48, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate of 0.19% and (iv) an expected volatility of the price of the underlying common stock ranging between 224.9% and 258.6%.
~~On May 24, 2021, EMA Warrant was amended to delete the full-ratchet anti-dilution provision and the EMA Note was amended to delete the variable conversion price feature.~~
~~On June 2, 2021, the Company issued~~ ~~10,000~~ ~~shares of common stock to EMA upon the conversion of $11,800~~ ~~in note principal and $1,000~~ ~~in conversion fees. On June 17, 2021, the Company issued~~ ~~100,000~~ ~~shares of common stock to EMA upon the conversion of $127,000~~ ~~in note principal and $1,000~~ ~~in conversion fees. On August 20, 2021, the Company issued~~ ~~108,978~~ ~~shares of common stock to EMA upon the conversion of $121,200~~ ~~in note principal and $17,292~~ ~~in accrued interest and conversion fees.~~
~~At September 30, 2021, the principal balance of the EMA Note was $~~0 ~~and all associated loan discounts were fully amortized.~~
On December 17, 2020, the Company entered into a note purchase agreement with Quick Capital, LLC (“Quick Capital”) pursuant to which the Company issued Quick Capital a nine-month convertible promissory note in the principal amount of $~~113,587~~ ~~(the “Quick Note”) for a $100,000~~ investment, which included an original issuance discount of 8% and a $4,500 credit for Quick Capital’s transaction expenses. The Quick Note may be converted into shares of common stock at (i) a 30% discount to the lowest price per share of any debt or securities offering by the Company if the Company’s common stock is listed on NASDAQ or NYSE within 90 days of the Quick Note issuance; (ii) the lesser of (A) $1.28 or (B) a 30% discount to the average of the two lowest closing prices during the ten trading days prior to the conversion date; (iii) $1.28 per share, upon an event of default as described in the Note.
20
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~~ 3~~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 September 30, 2021, the principal balance of the Quick Note was $~~0 ~~and all associated loan discounts were fully amortized.~~
On February 9, 2021, the Company entered into a securities purchase agreement with Auctus Fund, LLC (“Auctus”) pursuant to which the Company issued to Auctus a twelve-month 12% convertible promissory note in the principal amount of $~~500,000~~ ~~(the “Auctus Note”). The note is convertible into shares common stock at a conversion price of $1.92~~ ~~per share. The Company received net proceeds of $428,000 after deducting fees and expenses related to the transaction.~~
The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $~~155,875. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.~~
~~In connection with the note issuance, Auctus was also issued a~~ 5~~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.~~
~~On July 14, 2021, the Company issued~~ ~~274,427~~ ~~shares of common stock to Auctus upon the conversion of $500,000~~ ~~in note principal and $26,900~~ ~~in accrued interest and conversion fees.~~
~~At September 30, 2021, the principal balance of the Auctus Note was $~~0 ~~and all associated loan discounts were fully amortized.~~
On March 11, 2021, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”) pursuant to which the Company issued to FirstFire a twelve-month 12% convertible promissory note in the principal amount of $~~300,000~~ (the “FirstFire Note”). The first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. At any time after 180 days from the date of issuance, FirstFire may convert any amount due under the note into shares of the Company’s common stock at a conversion price of $~~1.92~~ ~~per share. The Company received net proceeds of $238,500~~ ~~after deducting fees and expenses related to the transaction.~~
21
The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $~~93,220. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.~~
~~In connection with the issuance of the note, FirstFire was also issued a~~ ~~five-year warrant (the “FirstFire Warrant”) to purchase up to an aggregate of~~ ~~117,188~~ ~~shares of the Company’s common stock, at an exercise price of $1.92~~ per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $4.16, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.78% and (iv) an expected volatility of the price of the underlying common stock of 258.6%. As a result, the Company allocated a fair value of $145,280 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.
On May 20, 2021, the FirstFire Note was amended to replace the variable conversion feature price with a fixed conversion price of $1.92 and the FirstFire Warrant was amended to delete the full ratchet anti-dilution provision.
~~On June 17, 2021, the Company issued~~ ~~175,000~~ ~~shares of common stock to FirstFire upon the conversion of $300,000~~ ~~in note principal and $36,000~~ ~~in accrued interest.~~
~~At September 30, 2021, the principal balance of the FirstFire Note was $~~0 ~~and all associated loan discounts were fully amortized.~~
On April 16, 2021, the Company entered into a securities purchase agreement with Labrys Fund, LP (“Labrys”), pursuant to which the Company issued to Labrys a one-year convertible promissory note in the principal amount of $~~300,000~~ (the “Labrys Note”). The Labrys Note bears interest at a rate of 12% per annum. The first twelve months of interest ($36,000) is guaranteed and deemed to be earned in full as of the date of issuance. Labrys may convert any amount due under the Labrys Note into shares of the Company’s common stock at a conversion price of $~~1.92~~ ~~per share. The Company received net proceeds of $266,000, after deducting fees and expenses related to the transaction.~~
~~In connection with the issuance of the note, Labrys was also issued a~~ ~~five-year warrant to purchase up to an aggregate of~~ ~~117,118~~ ~~shares of the Company’s common stock (the “Labrys Warrant”), at an exercise price of $1.92~~ per share. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $6.37, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.84% and (iv) an expected volatility of the price of the underlying common stock of 251.2%. As a result, the Company allocated a fair value of $172,479 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.
~~On May 22, 2021, the Labrys Warrant was amended to delete the full-ratchet anti-dilution provision.~~
~~On June 17, 2021, the Company issued~~ ~~175,000~~ ~~shares of common stock to Labrys upon the conversion of $300,000~~ ~~in note principal and $36,000~~ ~~in accrued interest.~~
~~At September 30, 2021, the principal balance of the Labrys Note was $~~0 ~~and all associated loan discounts were fully amortized.~~
~~10% Unsecured Convertible Redeemable Note – Variable Conversion Price~~
~~On March 1, 2020, the Company issued a convertible redeemable note to an unrelated party in the principal amount of $100,000. The note accrues interest at a rate of~~ 10~~% per annum, was due on~~ ~~August 31, 2020~~ and is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.
22
The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $~~44,129. This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.~~
~~In connection with the note issuance, the Company also issued a five-year warrant to purchase up to an aggregate of~~ ~~15,625~~ ~~shares of the Company’s common stock at an exercise price of $3.20~~ per share. ASC 470-20 requires proceeds from the sale of a debt instrument with stock purchase warrants be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. This resulted in the debt being recorded at a discount which will be amortized to interest expense over the term of the loan using the effective interest method so the debt, at its term, is recorded at its face value. The Company estimated the fair value of this warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $3.20, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.89% and (iv) an expected volatility of the price of the underlying common stock of 144.4%. As a result, the Company allocated a fair value of $30,935 to the stock warrants.
~~On April 14, 2021, the Company issued~~ ~~62,500~~ ~~shares of common stock to the noteholder upon the conversion of $100,000~~ ~~in note principal and $11,205~~ ~~of accrued interest.~~
~~At September 30, 2021, the principal balance of this note was $~~0 ~~and all associated loan discounts were fully amortized.~~
~~On November 20, 2020, the Company issued a convertible redeemable note to an unrelated party in the principal amount of $165,000~~ ~~less a $15,000~~ ~~original issuance discount resulting in net cash proceeds to the Company of $150,000~~. The note accrues interest at a rate of 10% per annum, was due on February 15, 2021 and is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 30% discount from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.
The Company analyzed the conversion feature of the note for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its allocable fair value was determined to be $~~50,871. This amount is recorded as a debt discount and is amortized as interest expense over the term of the note.~~
~~On February 17, 2021, the Company entered into a debt exchange agreement with the holder of the convertible promissory note, in the aggregate amount of $169,000~~ of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreement, the holder exchanged the outstanding note, and all amounts owed by the Company thereunder, for ~~169,000~~ ~~shares of the Company’s 8% Series B convertible preferred stock. At the time of the exchange, all amounts due under the note was deemed to be paid in full and the note was cancelled.~~
~~At September 30, 2021, the principal balance of this note was $~~0 ~~and all associated loan discounts were fully amortized.~~

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

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

The L1 Note is convertible by L1 into common stock of the Company at a price of $4.20 per share, or approximately 1,047,619 shares. It is repayable in 18~~eighteen~~ equal monthly installments of $275,000 with certain deferments or an acceleration of up to three months' payments. The Company may repay the L1 Note in cash or shares of common stock at a price equal to the lesser of the then conversion price or 95% of the lowest daily VWAP during the ten consecutive trading days immediately preceding the monthly payment date, but in no event less than $1.92. In the event that VWAP drops below $1.92, the Company will have the right to pay at such VWAP with any shortfall paid in cash. The L1 Note is senior to all other Company indebtedness and the Company’s obligations under the note are secured by all of the assets of the Company’s subsidiaries.

23
The Company estimated the fair value of the warrant at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $2.70, (ii) the contractual term of the warrant of 5 years, (iii) a risk-free interest rate of 0.79% and (iv) an expected volatility of the price of the underlying common stock of 299.8%. As a result, the Company allocated a fair value of $1,200,434 to the stock warrants and recorded debt discount to be amortized as interest expense over the term of the related convertible note.

On October 20, 2021, the Company and L1 entered into an amended and restated purchase agreement which increased the amount of the Second Tranche Financing from $1,500,000 to $6,000,000 and provides (i) for an amended and restated 10% original issue discount senior secured convertible note to be issued in exchange for the L1 Note pursuant to the Purchase Agreement and (ii) for the issuance of a five-year warrant to purchase 1,041,194 shares of the Company’s common stock at an exercise price of $4.20 per share.
In the event the principal amount of the L1 Note issued in the First Tranche Financing, when aggregated with the L1 Note to be issued in the Second Tranche Financing, exceeds 25% of the market capitalization of the Company’s common stock as reported by Bloomberg L.P, then the principal amount to be issued in the Second Tranche Financing will be limited to 25%, in the aggregate of both L1 Notes, unless waived in the sole discretion of the Purchaser.
21
During the three months ended March 31, 2022, the Company issued an aggregate 5,757,365 shares of common stock to L1 upon the conversion of $4,125,000 of outstanding principal. As of June 30, 2022, the principal balance was $0 and all associated loan discounts were fully amortized.
10% Senior Secured Convertible Note with Original Issuance Discount (L1– Second Tranche)
On January 20, 2022 (the “Second Tranche Closing”), the Company and LI Capital closed on the Second Tranche of the offering, resulting in the issuance of (i) a $1,750,00010% Original Issue Discount Senior Secured Convertible Note, due July 20, 2023, (the “Second Tranche Note”); and (ii) a 5 five year warrant to purchase 303,682 shares of Common Stock of the Company at an exercise price of $4.20 per share (the “Second Tranche Warrants”), in exchange for consideration of $1,575,000 (i.e. the face amount less the 10% Original Issue Discount of $175,000).
In connection with the Second Tranche Closing, the Company paid to EF Hutton a fee of $126,000.
The Second Tranche Note is convertible into common stock of the Company at a rate of $4.20 per share (the “Conversion Price”) into 416,667 shares of common stock (the “Second Tranche Conversion Shares”) and, is repayable in equal monthly installments of $111,563 commencing on the date that the SEC declares a registration statement with respect to the resale of such shares effective, with all remaining amounts due on July 20, 2023. The Second Tranche Note is repayable by payment of cash, or, at the discretion of the Company and if the below listed “Equity Conditions” are met, by issuance of shares of the common stock at a price of 95% of the lowest daily VWAP during the ten-trading day period prior to the respective monthly redemption dates (with a floor of $1.92) multiplied by 102% of the amount due on such date. In the event that the ten-trading day VWAP drops below $1.92 the Company will have the right to pay in stock at such ten-trading day VWAP with any shortfall paid in cash. The Conversion Price may be adjusted in the event of dilutive issuances but in no event to less than $0.54 (the “Monthly Conversion Price”).
The Company’s right to make monthly payments in stock in lieu of cash for the Second Tranche Note is conditioned on certain conditions (the “Equity Conditions”). The Equity Conditions required to be met each month in order to redeem the Second Tranche Note with stock in lieu of a monthly cash payment, among other conditions set forth therein, include without limitation, that a registration statement be in effect with respect to the resale of the shares issuable upon conversion or redemption of the Second Tranche Note (or, that an exemption under Rule 144 is available), that no default be in effect, that the average daily trading volume of the Company’s common stock would have to be at least $550,000 during the five trading days prior to the respective monthly redemption and that the outstanding principal amounts of the First Tranche Note and Second Tranche Note combined, shall not exceed 30% of the market capitalization of the Company’s common stock as reported on Bloomberg L.P., which percentage is subject to increase by LI Capital at its sole discretion.
Other provisions of the Second Tranche Note, which is similar in terms to the First Tranche Note, include that the Second Tranche Note Conversion Price is subject to full anti-dilution price protections in the event of financings that are below the Conversion Price with a floor of $0.54.
In the event of an Event of Default as defined in the notes, if the stock price is below the Conversion Price at the time of default and only for so long as a default is continuing, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the default is cured the default conversion rate elevates back to the normal Conversion Price
As part of the Second Tranche Closing, the Company issued Second Tranche Warrants exercisable for five years from the date of issuance, at $4.20 per share which carry the same anti-dilution protection as the Second Tranche Notes, subject to the same adjustment floor. The Second Tranche Warrants are exercisable via cashless exercise only for so long as no registration statement covering resale of the shares is in effect.
22
The Second Tranche Note continues to be subject to (i) the repayment and performance guarantees by the subsidiaries of the Company pursuant to a subsidiary guaranty and, (ii) the Security Agreement pursuant to which the LI Capital was granted a security interest in all of the assets of the Company and certain of its subsidiaries, each as entered into in connection with the First Tranche closing on September 14, 2021.
As of June 30, ~~2021,~~2022, the principal balance of these notes was $~~4,400,000~~1,300,000 and ~~the~~ remaining balance on the associated loan discounts was $~~1,936,894~~331,477.

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~~647,954 shares of the Company’s Series B preferred stock (“Series B ~~Stock)~~Stock”) were issued to noteholders for an aggregate of $~~211,223~~411,223 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. The Company recognized an extinguishment loss of $46,750 as a result of the exchange.

~~At September~~On July 19, 2021, the Company repaid $6,329 of outstanding principal and accrued and unpaid interest to a 10% secured convertible noteholder.
As of June 30, ~~2021,~~2022, the principal balance of these notes was $0 ~~and all associated loan discounts were fully amortized.~~
~~During the year ended December 31, 2018, the Company issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $1,313,485~~ ~~in a private offering. The notes were issued with original issuance discounts of 10.0%, or $131,348, bear interest at a rate of~~ 10% per annum, are payable semiannually in cash, and carry a two-year term with a fixed conversion price of $24.96. In connection with the issuance of these notes, the Company issued to such investors an aggregate of ~~10,262~~ ~~shares of common stock as an inducement to lend. These shares were valued at $198,259~~ with share prices ranging between $9.60 and $25.92 per share. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.
~~On August 6, 2020, the Company entered into debt exchange agreements with certain holders of these 10% convertible notes pursuant to which an aggregate of~~ ~~316,000~~ ~~shares of the Company’s Series B Stock were issued to noteholders for an aggregate of $200,000~~ ~~of outstanding principal and accrued and unpaid interest. On September 10, 2021, the Company entered into a debt exchange agreement with a holder of a 10% convertible note pursuant to which~~ ~~85,250~~ ~~shares of the Company’s Series C Stock was issued for $85,250~~ ~~of outstanding principal and accrued and unpaid interest.~~
~~As of September 30, 2021, the principal balance of these notes was $25,000~~75,000 and all associated loan discounts were fully amortized. No notices of default or demands for payment have been received by the Company.
~~During the year ended December 31, 2018, the Company also issued secured, convertible notes with original issuance discounts to accredited investors for gross proceeds of $356,000~~ ~~in a private offering. The notes were issued with original issuance discounts of 20.0%, or $71,200, bear interest at a rate of~~ 10~~% per annum, are payable semiannually in cash, and carry a two-year term with a fixed conversion price of $16.00. In connection with the issuance of these notes, the Company issued to such investors an aggregate of~~ ~~6,344~~ ~~shares of common stock as an inducement to lend. These shares were valued at $62,269~~ with share prices ranging between $9.28 and $11.20 per share. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.
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~~On July 19, 2021, the Company repaid $6,329~~ ~~outstanding principal and accrued and unpaid interest to a 10% secured convertible noteholder.~~
~~As of September 30, 2021, the principal balance of these notes was $50,000~~ ~~and all associated loan discounts were fully amortized. No notices of default or demands for payment have been received by the Company.~~
~~12% Senior Secured Convertible Notes (Newbridge Offering)~~
~~On November 30, 2018, the Company closed a private offering in which it sold~~ 12~~% secured convertible promissory notes (“12% Notes”) in an aggregate principal amount of $552,000~~ and issued an aggregate of 22,843 shares of its common stock to nine accredited investors pursuant to a private placement memorandum and subscription agreement. The 12% Notes which are due and payable two years from issuance are secured by certain assets of the Company and rank senior to all other indebtedness of the Company except for the $4,000,000 promissory notes (the “TD Notes”) issued to the shareholders of TD Holdings in connection with a share sale agreement dated June 30, 2016, as amended. Messrs. Marks and Leiner pledged an aggregate of 312,500 shares of common stock of the Company pursuant to a pledge and security agreement to secure the timely payment of the 12% Notes. The 12% Notes are convertible, in whole or in part, by the noteholders at a conversion rate of $12.80 if the Company’s common stock trades or is quoted at more than $12.80 per share for 10 consecutive days. The conversion price is subject to adjustment resulting from certain corporate actions including the subdivision or combination of stock, payment of dividends, reorganization, reclassification, consolidations, merger or sale of the Company.
Interest on the 12% Notes is payable monthly in 21 equal installments commencing four months after the issuance of the 12% Notes. Upon the occurrence of an event of default, the interest rate will increase to 15% and the 12% Notes will become immediately due and payable. The Company may prepay the 12% Notes in full at any time by paying accrued interest and 110% of the outstanding principal balance. Newbridge Securities Corporation acted as exclusive placement agent for the offering and received (i) $55,200, (ii) 3,550 shares of common stock, and (iii) $11,040, representing a non-accountable expense allowance for its services.
~~As of September 30, 2021, the principal balance of these notes was $~~0 ~~and all associated loan discounts were fully amortized.~~
~~12% Senior Secured Convertible Notes (Original TDH Notes)~~
~~On June 20, 2016, the Company issued $4,000,000~~ of senior secured promissory notes to the shareholders of TD Holdings (the “TDH Sellers”) in connection with a share sale agreement pursuant to which the Company acquired 100% of the common stock of TD Holdings (“the TDH Share Sale Agreement”). The notes bear interest at ~~5.0~~% per annum and are due on the earlier of (i) June 20, 2018 or (ii) the date on which the Company successfully completes a qualified initial public offering as defined in the agreement. The notes are collateralized by all of the assets of TD Holdings.
~~First Amendment to the TDH Share Sale Agreement~~
~~On January 3, 2018, the Company entered into an amendment to the TDH Share Sale Agreement (the “First Amendment”). Under the terms of the First Amendment:~~
· ~~The maturity date of the notes was extended from July 1, 2018 until~~ ~~July 1, 2019~~.
· ~~The interest rate on the notes during for one-year extension period from July 2, 2018 to July 1, 2019 was increased to~~ 10%.
· ~~Interest is payable quarterly in arrears during the one-year extension period, instead of annually in arrears. The first such quarterly interest payment of $100,000 is due on September 30, 2018.~~
· Under the terms of the terms of TDH Share Sale Agreement, the TDH Sellers could earn up to an additional $5.0 million in contingent earnout payments. The original earnout period ended on December 31, 2018. The First Amendment extended the earnout period by one year to December 31, 2019.
~~As consideration to enter into the First Amendment, the Company issued~~ ~~25,000~~ ~~shares of its common stock valued at $480,000~~ ~~to the TDH Sellers.~~
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~~Second Amendment to the TDH Share Sale Agreement~~
~~On January 15, 2019, the Company entered into a second amendment to the TDH Share Sale Agreement (the “Second Amendment”). Under the terms of the Second Amendment:~~
· ~~The maturity date of the notes was extended from July 1, 2019 to~~ ~~April 2, 2020~~.
· The TDH Sellers shall have the right to convert the notes at a conversion price of $8.64 per share, either in whole or in part at any time prior to the maturity, subject to the terms and conditions set forth in the Second Amendment.
· ~~In the event that the notes are not repaid prior to July 2, 2019, no funds will be transferred by TDH to the Company.~~
· ~~The payment terms of the contingent earnout was modified from 50% payable in cash and 50% payable in stock to 75% payable in cash and 25% payable in stock.~~
~~As consideration to enter into the Second Amendment, the Company issued an additional~~ ~~25,000~~ ~~shares of its common stock valued at $220,000~~ ~~to the TDH Sellers.~~
Due to the inclusion of a conversion feature, the Second Amendment was considered an extinguishment and subsequent reissuance of the notes under the guidelines of ASC 470-20-40-7 through 40-9. As a result, the Company recorded a loss on the extinguishment of debt of $~~363,468~~ ~~related to the Second Amendment during the year ended December 31, 2019.~~
~~The principal value of the notes was reclassified to convertible notes, net – current on the Company’s condensed consolidated financial statements.~~
~~Third Amendment to the TDH Share Sale Agreement~~
On March 16, 2020, the Company entered into a third amendment (the “Third Amendment”) to the TDH Share Sale Agreement, pursuant to which the Company’s subsidiary, Grom Holdings, had acquired 100% of the common stock of TDH (representing ownership of the animation studio) from certain individuals (the “TDH Sellers”). The Company used the proceeds received from the TDH Secured Notes Offering to pay the TDH Sellers $~~3,000,000~~ ~~of the principal due under the Original TDH Notes, leaving a principal amount due to the TDH Sellers of $1,000,000~~ ~~(plus accrued interest and costs). In addition, the accrued interest of $361,767~~ ~~due to the TDH Sellers pursuant to the Original TDH Notes was paid in three monthly payments of $93,922, commencing April 16, 2020, and twelve-monthly installments of $6,667 commencing April 16, 2020.~~
~~Pursuant to the Third Amendment, the TDH Sellers and the Company agreed, among other things:~~
· ~~To extend the maturity date of the remaining Original TDH Notes by one year to~~ ~~June 30, 2021~~;
· ~~To increase the interest rate on the remaining Original TDH Notes to~~ 12%;
· ~~To grant a first priority security interest on the shares of TDH and TDAHK to the TDH Sellers, pari passu with the holders of the TDH Secured Notes; and~~
· ~~To pay the balance of the Original TDH Notes monthly in arrears, amortized over a four-year period.~~
~~On August 18, 2021, the Company paid the TDH Sellers an aggregate of $834,760~~, representing all remaining amounts due and payable under the TDH Secured Notes. As a result, the TDH Sellers released the pledged shares of TDH and its subsidiary, Top Draw Animation Hong Kong Limited from escrow. The TDH Sellers have no further security interest in the assets of the Company or its subsidiaries.
~~As of September 30, 2021, the principal balance of the Original TDH Notes was $~~0.
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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.

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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. The Company recognized an extinguishment loss of $598,042 as a result of the exchange.

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. The Company recognized an extinguishment loss of $58,367 as a result of the exchange.

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. The Company recognized an extinguishment loss of $850,103 as a result of the exchange.

As of ~~September~~June 30, ~~2021,~~2022, the principal balance of these notes was $~~359,056~~269,340 and the remaining balance on the associated loan discounts was $~~43,021~~29,896.

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.
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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~~$3.20 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.

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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. The Company recognized an extinguishment loss of $424,375 as a result of the exchange.

On February 17, 2021, the Company entered into a debt exchange ~~agreement~~agreements with ~~another holder~~certain holders 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~~noteholders for an aggregate of $~~191,273~~182,500 of outstanding principal and accrued and unpaid interest. The Company recognized an extinguishment loss of $97,077 as a result of the exchange.

As of ~~September~~June 30, ~~2021,~~2022, the principal balance of these notes was $~~68,221~~51,175 and the remaining balance on the associated loan discounts was $~~8,174~~5,680.

Future Minimum Principal Payments

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

2021 $ 721,308
2022 $ 4,215,130
Remainder of 2022 $ 1,079,676
2023 $ 167,792 817,793
2024 $ 76,047 76,046
2025 and thereafter $ 0 0
$ 5,180,277
Total Convertible notes principal amount payable. $ 1,973,515

13.
DERIVATIVE LIABILITY
On January 20, 2022, the Company closed a Second Tranche transaction with L1 Capital, as described within Note 12 (“Convertible Notes”). Terms of the transaction included a provision that in the event the stock price is below $0.54 (the “Conversion Price”) at the time for so long as stock price continues below the Conversion Price, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the stock prices elevate back to the normal Conversion Price. On May 9, 2022, stock price felt below $0.54 and default provision was triggered.
As a result of the May 9, 2022 triggering event, the Company recorded a derivative liability for $1,052,350 which represents the fair value transferred to the note holder from the down round feature being triggered. The Company calculated the fair value of the derivative using a Monte Carlo simulation.
On June 28, 2022, L1 Capital converted $450,000 of the Second Tranche convertible note for 833,333 shares and a cash settlement of $295,539, resulting in a $39,624 loss on settlement of derivative. Fair value of the derivative was remeasured using the remaining maximum shares to be delivered as of June 30, 2022, resulting in an unrealized gain on change of derivative transaction of $57,124 and remaining derivative liability of $739,311.
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The fair value of derivative liability as of May 9, 2022 and June 30, 2022 was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

May 9,
2022
June 30,
2022
Stock price $0.57 $0.41
Strike price 0.54 0.54
Risk-free rate 2.12% 2.77%
Annualized volatility 150% 120%
Forecast horizon in years 1.20 1.05
Alternative Conversion Discount 20.0% 20.0%
Maximum Shares to be Delivered 3,240,741 2,407,407
Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood or in the volatility assumptions would result in a higher (lower) fair value measurement.
14. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, non on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, include the Company’s own credit risk.
The Company applied FASB Accounting Standards Codification (“ASC”) 820 – Fair Value Measurement, which provides guidance for using fair value to measure assets and liabilities by defining fair value and establishing the framework for measuring fair value. ASC 820 applies to financial and nonfinancial instruments that are measured and reported on a fair value basis. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair value hierarchy requires the use of observable market data when available and consists of the following levels:
· Level 1 – Unadjusted inputs based on quoted markets for identical assets or liabilities.
· Level 2 – Observable inputs, either direct or indirect, not including Level 1 measurements, corroborated by market data or based upon quoted prices in non-active markets
· Level 3 – Unobservable inputs that reflect management’s best assumptions of what market participants would use in valuing the asset or liability.
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Contingent Consideration
The fair value of the Company’s contingent consideration payable was based on the Company’s evaluation as to the probability and amount of any earn-out that could have ultimately been payable. The Company utilizes a third-party valuation firm to assist in the calculation of the contingent consideration at the acquisition date. The Company evaluates the forecast of the acquired entity and the probability of earn-out provisions being achieved when it evaluates the contingent consideration recorded at initial acquisition date and at each subsequent reporting period. The fair value of contingent consideration is measured at each reporting period and adjusted as necessary. The Company evaluates the terms in contingent consideration arrangements provided to former owners of acquired companies who become employees of the Company to determine if such amounts are part of the purchase price of the acquired entity or compensation. Because the fair value measurements relating to the contingent consideration liabilities are subject to management judgment, measurement uncertainty is inherent in the valuation of the contingent consideration liabilities as of the reporting date.
Derivative Liability
The fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer to Note 13 (“Derivative Liability”), for a further discussion of the measurement of fair value of the derivatives and their underlying assumptions.
The fair value of the Company’s financial instruments carried at fair value at June 30, 2022 and December 31, 2021 are as follows:
June 30, 2022 ��
Total Level 1 Level 2 Level 3
Liabilities:
Derivative Liabilities $ 739,311 $ 0 $ 0 $ 739,311
Contingent Purchase Consideration 5,586,493 0 0 5,586,493
Total Liabilities $ 6,325,804 $ 0 $ 0 $ 6,325,804
December 31, 2021
Total Level 1 Level 2 Level 3
Liabilities:
Derivative Liabilities $ 0 $ 0 $ 0 $ 0
Contingent Purchase Consideration 5,586,493 0 0 5,586,493
Total Liabilities $ 5,586,493 $ 0 $ 0 $ 5,586,493
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities during the three and six months ended June 30, 2022:
Level 3 Financial Liabilities for the Three Months Ended June 30, 2022
Balance as of March 31, 2022 Realized (Gains) Losses Additions Settlements Unrealized (Gains) Losses Balance as of June 30, 2022
Liabilities:
Derivative Liabilities $ 0 $ 39,624 $ 1,052,350 $ (295,539 ) $ (57,124 ) $ 739,311
Contingent Purchase Consideration 5,586,493 0 0 0 0 5,586,493
Total Liabilities $ 5,586,493 $ 39,624 $ 1,052,350 $ (295,539 ) $ (57,124 ) $ 6,325,804
Level 3 Financial Liabilities for the Six Months Ended June 30, 2022
Balance as of March 31, 2022 Realized (Gains) Losses Additions Settlements Unrealized (Gains) Losses Balance as of June 30, 2022
Liabilities:
Derivative Liabilities $ 0 $ 39,624 $ 1,052,350 $ (295,539 ) $ (57,124 ) $ 739,311
Contingent Purchase Consideration 5,586,493 0 0 0 0 5,586,493
Total Liabilities $ 5,586,493 $ 39,624 $ 1,052,350 $ (295,539 ) $ (57,124 ) $ 6,325,804
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15. INCOME TAXES
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon currently known facts and circumstances and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
The Company’s interim effective tax rate, inclusive of discrete items, for the three and six months ended June 30, 2022 and 2021 was 0%, respectively, due to recurrent net losses for the periods presented.

~~11.~~16. 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.~~
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~~On April 2, 2019, the Company received $125,000~~ ~~from the sale of~~ ~~125,000~~ shares of Series A Stock to an accredited investor in a private offering pursuant to Section 4(a)(2) and/or Rule 506(b) of Regulation D, as promulgated under the Securities Act. As an inducement to purchase the Series A Stock, the investor also received ~~19,532~~ ~~restricted shares of the Company’s common stock.~~
~~As a result of the issuance of the Series A Stock, the Company recorded a beneficial conversion feature and other discounts as a deemed dividend in its condensed consolidated financial statements of $740,899~~.
~~On August 6, 2020, the Company entered into exchange agreements with the holders of~~ ~~925,000~~ ~~issued and outstanding shares of the Company’s Series A Stock pursuant to which such shares of Series A Stock were exchanged for an aggregate of 1,202,500 shares of the Company’s Series B Stock.~~
As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had 0 shares of Series A Stock issued and outstanding.

Series B Preferred Stock
~~On August 4, 2020, the Company filed with the Secretary of State of the State of Florida a Certificate of Designation of Preferences, Rights and Limitations of Series B Stock designating~~ ~~10,000,000~~ ~~shares as Series B Preferred Stock (the “Series B Stock”). The Series B Stock ranks senior and prior to all other classes or series of the Company’s preferred stock and common stock.~~
The holder may at any time after the 12-month anniversary of the issuance of the shares of Series B Stock convert such shares into common stock at a conversion price equal to the 30-day volume weighted average price (“VWAP”) of a share of common stock for each share of Series B Stock to be converted. In addition, the Company at any time may require conversion of all or any of the Series B Stock then outstanding at a 50% discount to the 30-day VWAP.
Each share of Series B Stock entitles the holder to 1.5625 votes for each share of Series B Stock. The consent of the holders of at least two-thirds of the shares of Series B Stock is required for the amendment to any of the terms of the Series B Stock, to create any additional class of stock unless the stock ranks junior to the Series B Stock, to make any distribution or dividend on any securities ranking junior to the Series B Stock, to merge or sell all or substantially all of the assets of the Company or acquire another business or effectuate any liquidation of the Company.
Cumulative dividends accrue on each share of Series B Stock at the rate of 8% per annum of the stated value of $1.00 per share and are payable in common stock in arrears quarterly commencing 90 days from issuance.
Upon a liquidation, dissolution or winding up of the Company, the holders of the Series B Stock are entitled to $1.00 per share plus all accrued and unpaid dividends. No distribution may be made to holders of shares of capital stock ranking junior to the Series B Stock upon a liquidation until Series B stockholders receive their liquidation preference. The holders of 66 2/3% of the then outstanding shares of Series B Stock, may elect to deem a merger, reorganization or consolidation of the Company into or with another corporation, not affiliated with said majority, or other similar transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of in exchange for property, rights or securities distributed to holders thereof by the acquiring person, firm or other entity, or the sale of all or substantially all of the assets of the Company.
~~On June 19, 2020, the Company received gross cash proceeds of $250,000~~ ~~from one accredited investor, pursuant to the terms of a subscription agreement, and subsequently issued an aggregate of~~ ~~250,000~~ ~~shares of Series B Stock on August 6, 2020.~~
~~On August 6, 2020, the Company, entered into debt exchange agreements with holders of the Company’s (i) OID Notes in the aggregate amount of $411,223~~ ~~of outstanding principal and accrued and unpaid interest; (ii) TDH Secured Notes, in the aggregate amount of $1,101,000~~ ~~of outstanding principal and accrued and unpaid interest; and (iii) Additional Secured Notes, which were secured by all of the other assets of the Company in the aggregate amount of $782,500~~ of outstanding principal and accrued and unpaid interest. Pursuant to the terms of the debt exchange agreements, the holders of the notes exchanged outstanding and all amounts owed by the Company thereunder, for an aggregate of ~~3,623,884~~ ~~shares of the Company’s Series B Stock. At the time of the exchange, all amounts due under the notes were deemed to be paid-in-full and the notes were cancelled.~~
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~~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~~newly designated Series C Stock, on a one for one basis. As a result of the exchange, all 9,215,059 issued and outstanding shares of Series B Stock was exchanged for 9,215,059 shares of Series C Stock, and all of the exchanged shares of Series B Stock were cancelled.

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had 0 ~~shares and~~ ~~5,625,884~~ shares of Series B Stock issued and outstanding, respectively.
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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~~share.
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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. The dividend shall be payable in shares of common stock (a “PIK Dividend”) and are be due and payable on the date on which such PIK Dividend was declared.

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

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

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

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

On January 24, 2022, the Company issued 20,573 shares of common stock to a stockholder upon the conversion of 39,500 shares of Series C preferred stock.
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As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had ~~9,400,259~~9,360,759 and 09,400,259 shares of Series C Stock issued and outstanding, respectively.

For the three months and six ended June 30, 2022, the Company declared cumulative dividends totaling $187,216 and $364,060, respectively, for amounts accrued on its Series C Stock.
Common Stock

The Company is authorized to issue 500,000,000 shares of common stock, par value of $0.001 per share and had ~~12,325,736~~19,780,053 and ~~5,886,073~~12,698,192 shares of common stock issued and outstanding as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Reverse Stock Split

On April 7, 2021, the board of directors of the Company approved, and on April 8, 2021, the Company’s shareholders approved, an increase to the range of the ratio for a reverse stock split to a ratio of no less than 1-for-2 and no more than 1-for-50. On May 6, 2021, the board fixed the ratio for a reverse stock split at 1-for-32 and, on May 7, 2021, the Company filed a certificate of amendment to its articles of incorporation with the Secretary of State of the State of Florida to effect the reverse stock split which became effective as of May 13, 2021. The Company’s common stock began being quoted on the OTCQB on a post-reverse split basis beginning on May 19, 2021.
~~Registered Offering~~
On June 21, 2021, the Company sold an aggregate of 2,409,639 units (“Units”), at a price to the public of $4.15 per Unit (the “Offering”), each Unit consisting of one share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price of $4.565 per share (the “Warrants”), pursuant to a underwriting agreement, dated as of June 16, 2021 (the “Underwriting Agreement”), between the Company and EF Hutton, division of Benchmark Investments, LLC, as representative (“EF Hutton”) of the several underwriters named in the Underwriting Agreement. In addition, pursuant to the Underwriting Agreement, the Company granted EF Hutton a 45-day option (the “Over-Allotment Option”) to purchase up to 361,445 additional Units, to cover over-allotments in connection with the Offering, which EF Hutton exercised with respect to Warrants exercisable for up to an additional 361,445 shares of common stock. The Company received gross proceeds of approximately $10,000,000 in the Offering, before deducting underwriting discounts and commissions and other offering expenses.
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~~On July 15, 2021, EF Hutton exercised in full the Over-Allotment Option with respect to all~~ ~~361,445~~ ~~additional shares of the Company’s common stock for total gross proceeds to the Company of approximately $1,500,000, before deducting underwriting discounts and commissions and other offering expenses.~~
~~Common Stock Issued as Compensation to Employees, Officers and/or Directors~~
~~During the nine months ended September 30, 2021, the Company issued~~ ~~157,943~~ ~~shares of common stock with a fair market value of $426,446~~ ~~to an officer as compensation.~~
~~During the nine months ended September 30, 2020, the Company issued~~ ~~13,125~~ ~~shares of common stock with a fair market value of $35,600~~ ~~to employees, officers and/or directors as compensation.~~
Common Stock Issued in Exchange for Consulting, Professional and Other Services

During the ~~nine~~three and six months ended ~~September~~June 30, ~~2021,~~2022, the Company issued ~~150,393~~43,906 and 118,490 shares of common stock, respectively, with a fair market value of $~~511,458~~18,660 and $95,482, respectively, to contractors for services rendered.

During the ~~nine~~three and six months ended ~~September~~June 30, ~~2020,~~2021, the Company issued ~~191,034~~47,089 and 63,871 shares of common stock, respectively, with a fair market value of $~~555,440~~176,231 and $256,361, respectively, to contractors for services rendered.
~~Common Stock Issued in lieu of Cash for Loans Payable and Other Accrued Obligations~~
~~During the nine months ended September 30, 2020, the Company issued~~ ~~15,625~~ ~~shares of common stock with a fair market value of $50,000~~ ~~to satisfy loans payable and other accrued obligations.~~

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

During the ~~nine~~three and six months ended ~~September~~June 30, ~~2021,~~2022, the Company issued ~~1,464,966~~833,333 and 6,590,698 shares of common stock, respectively, upon the conversion of $~~1,766,832~~450,000 and $4,575,000, respectively, in convertible note principal and accrued interest.

During the ~~nine~~three and six months ended ~~September~~June 30, ~~2020,~~2021, the Company issued ~~36,206~~1,081,561 shares of common stock, upon the conversion of $~~56,049~~1,102,905, in convertible note principal and accrued interest.

Common Stock Issued in Connection with ~~the Issuance of Convertible Promissory Notes~~Series C Stock Dividends

During the ~~nine~~three and six months ended ~~September~~June 30, ~~2021,~~2022, the Company issued ~~17,746~~176,847 and 352,100 shares of common stock, respectively, valued at $~~39,750~~187,455 ~~in connection with the issuance~~and $646,523, respectively, for cumulative dividends declared as of ~~convertible notes.~~
~~During the nine months ended September 30, 2020, the Company issued~~ ~~339,678~~ ~~shares of common stock valued at $736,014~~ ~~in connection with the issuance of convertible notes.~~
December 31, 2021 on its Series C Stock.
~~Common Stock Issued in the Acquisition of a Business~~
~~During the nine months ended September 30, 2021, the Company issued~~ ~~1,771,883~~ ~~shares of common stock valued at $5,000,000~~ ~~in connection with the acquisition of a business.~~
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Stock Purchase Warrants

Stock purchase warrants are accounted for as equity in accordance with ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.

The following table reflects all outstanding and exercisable warrants at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. 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 Remaining Contractual Life (Yrs.)
Number of Warrants Outstanding Weighted Average Exercise Price Weighted Average Contractual Life (Yrs.)

Balance January 1, 2020 177,028 $ 8.91 1.79
Balance January 1, 2021 229,628 $ 7.34 1.66
Warrants issued 52,600 $ 2.08 4,273,733 4.18
Warrants exercised 0 $ – (249,480 ) 0
Warrants forfeited 0 $ – (6,711 ) 0
December 31, 2020 229,628 $ 7.34 1.66
December 31, 2021 4,247,170 $ 4.40 1.75
Warrants issued 4,241,504 $ 4.15 303,682 $ 4.20
Warrants exercised (117,188 ) $ – 0 0
Warrants forfeited (4,307 ) $ – (57,813 ) –
Balance September 30, 2021 4,349,637 $ 4.36 1.82
Balance June 30, 2022 4,493,039 $ 4.34 1.36
~~On June 24, 2021, the Company issued~~ ~~105,648~~ ~~shares of common stock to Labrys upon the cashless exercise of a warrant to purchase~~ ~~117,188~~ ~~shares of common stock.~~
As of ~~September~~June 30, ~~2021,~~2022, the outstanding stock purchase warrants had an aggregate intrinsic value of $~~950,142~~0.

Stock Options

The following table represents all outstanding and exercisable stock options as of ~~September~~June 30, ~~2021.~~ 2022.
Schedule of options

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

2013 241,730 (26,063 ) 215,667 215,667 $ 7.68 1.97
2016 169,406 (169,406 ) 0 0 $ – –
2018 1,875 0 1,875 1,875 24.96 1.58
2021 208,500 0 208,500 0 $ 2.98 4.83
Total 621,511 (195,469 ) 426,042 217,542 $ 5.46 2.48
~~On July 29, 2021, the Company granted stock options to purchase an aggregate of~~ ~~208,500~~ ~~shares to new employees at an exercise price of $2.98. The options vest annually in equal installments over a three-year period and expire in~~ 5~~five years from the date of grant. Using the Black Sholes model with a volatility of~~ ~~326.5%, with no dividends paid since inception and a risk-free interest rate of~~ ~~0.37%; resulted in stock-based compensation expense of $585,728~~ ~~which will be amortized over a 36-month period, or $166,270 per month.~~
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Schedule of options
Year Issued Options
Issued Options
Forfeited Options
Outstanding Vested
Options Weighted Average Exercise Price Weighted Average Remaining Life (Yrs.)

2013 241,730 (26,063 ) 215,667 215,667 $ 7.68 1.22
2018 1,875 0 1,875 1,875 24.96 0.84
2021 208,500 0 208,500 208,500 $ 2.98 4.08
Total 452,105 (26,063 ) 426,042 426,042 $ 5.46 1.73

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company recorded $89,241 and $~~33,699~~137,383, respectively, in stock-based compensation ~~expense~~costs related to stock options. NaNstock-based compensation ~~expense~~costs related to stock options was recorded during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Stock-based compensation expense is reported in selling, general and administrative on the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss.
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As of June 30, 2022, there were $365,434 in total unrecognized stock-based compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.08 years.

As of ~~September~~June 30, ~~2021,~~2022, the outstanding ~~exercisable~~ stock options had an aggregate intrinsic value of $0.

~~12.~~17. COMMITMENTS AND CONTINGENCIES

~~None.~~In the ordinary course of business, the Company and its subsidiaries are subject to various pending and potential legal actions, arbitration proceedings, claims, investigations, examinations, regulatory proceedings, information gathering requests, subpoenas, inquiries and matters relating to compliance with laws and regulations (collectively, legal proceedings).
Based on the Company’s current knowledge, and taking into consideration its legal expenses, the Company does not believe it is a party to, nor are any of its subsidiaries the subject of, any legal proceeding that would have a material adverse effect on the Company’s consolidated financial condition or liquidity.
See also Note 7 (“Leases”).
See also Note 8 (“Business Combination”)
See also Note 15 (“Income Taxes”).

~~13.~~18. SUBSEQUENT EVENTS

In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to ~~September~~June 30, ~~2021~~2022 to the date these condensed consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these condensed consolidated financial statements, except as follows:

On ~~September 14, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with~~July 11, 2022, L1 Capital ~~Global Master Fund (“L1”) pursuant to which it issued (i) a 10% original issue discount senior secured~~converted $400,000 from its Second Tranche convertible note ~~in the principal amount~~for 740,741 shares and a cash settlement of $4,400,000 to L1 (the “L1 Note”) and (ii) a five-year warrant to purchase 813,278 shares of the Company’s common stock at an exercise price of $4.20 per share (“Warrant Shares”) in exchange for $3,960,000 (the “First Tranche Financing”). The Purchase Agreement also provided, subject to shareholder approval, for the issuance, subject to certain conditions, of an additional $1,500,000 of notes and warrants to purchase 277,777 shares of common stock (the “Second Tranche Financing”) on the same terms.
Pursuant to the Purchase Agreement, the Company entered into a registration rights agreement which, among other things, requires the Company to file a registration statement with the SEC to register for resale the shares issuable upon the conversion of the note and the exercise of the warrant within 35 days of entering into the Purchase Agreement, and have such registration statement deemed effective within 60 days or, in the event of a “full review” by the SEC within 75 days. L1 also has certain rights with respect to certain future debt or equity financings.
Prior to maturity on March 13, 2023, the L1 Note is convertible by L1 into common stock of the Company at a price of $4.20 per share (based on 150% of the value weighted average price (“VWAP”) of the common stock for five consecutive trading days prior to September 14, 2021, or approximately 1,047,619 shares, subject to anti-dilution adjustments in the event of financings at less than $4.20 but in no effect less than $0.54. If the stock price is below $4.20 and an event of default (as described in the Purchase Agreement) occurs, the conversion price will equal 80% of the lowest VWAP in the ten prior trading days.
The L1 Note is repayable in eighteen equal monthly installments with certain deferments or an acceleration of up to three months' payments as described in the Note. The Company may repay the L1 Note in cash or shares of common stock at a price equal to the lesser of the then conversion price or 95% of the lowest daily VWAP during the ten consecutive trading days immediately preceding the monthly payment date, but in no event less than $1.92. In the event that VWAP drops below $1.92, the Company will have the right to pay at such VWAP with any shortfall paid in cash. If such monthly conversion price is less than $0.54, the Company is obligated to pay in cash. The L1 Note is senior to all other Company indebtedness and the Company’s obligations under the note are secured by all of the assets of the Company’s subsidiaries.
The L1 Note may not be converted and the warrant may not be exercised to the extent that after giving effect to the conversion or exercise, the noteholder or warrant holder, as the case may be, and its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock immediately after giving effect to such conversion or exercise provided such percentage may be increased to 9.99% upon 61 days prior notice to the Company of such proposed conversion or exercise. The warrant contains anti-dilution protection and provides for cashless exercise if no registration statement covering resale of the shares issuable upon the exercise of the warrant is effective.
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The Company’s obligations under the Purchase Agreement and related transaction documents are guaranteed by the Company’s subsidiaries and its obligations under the L1 Note are secured by all of the assets of the Company and its subsidiaries.
~~The Company paid $35,000 to L1 for its legal fees and expenses and $316,800 to EF Hutton, division of Benchmark Investment, LLC, as placement agent for the financing.~~$245,993.

On ~~October 20, 2021, the Company and~~July 25, 2022, L1 ~~entered into an amended and restated purchase agreement which increased the amount of the~~Capital converted $400,000 from its Second Tranche ~~Financing from $1,500,000 to $6,000,000 and provides (i) for an amended and restated 10% original issue discount senior secured~~ convertible note ~~to be issued in exchange~~ for ~~the L1 Note pursuant to the Purchase Agreement~~740,741 shares and ~~(ii) for the issuance~~a cash settlement of ~~a five-year warrant to purchase 1,041,194 shares of the Company’s common stock at an exercise price of $4.20 per share.~~$242,548.

~~In the event the principal amount of the~~On August 13, 2022, L1 ~~Note issued in the First Tranche Financing, when aggregated with the L1 Note to be issued in the~~Capital converted $400,000 from its Second Tranche ~~Financing, exceeds 25%~~convertible note for 740,741 shares and a cash settlement of the market capitalization of the Company’s common stock as reported by Bloomberg L.P, then the principal amount to be issued in the Second Tranche Financing will be limited to 25%, in the aggregate of both L1 Notes, unless waived in the sole discretion of the Purchaser.$2809,989.

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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,~~S-1/A which we filed with the Securities and Exchange Commission on ~~May 12, 2021,~~June 13, 2022, 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~~We are a media, technology and entertainment company that focuses on (i) 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.~~guardians, (ii) creating, acquiring, and developing the commercial potential of kids & family entertainment properties and associated business opportunities, (iii) providing world class animation services, and (iv) offering protective web filtering solutions to block unwanted or inappropriate content. We ~~conduct~~operate our business through the following ~~five operating~~ subsidiaries:

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

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

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

· 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~~been nonoperational since its inception.

· Curiosity Ink Media, LLC (“Curiosity”)~~, organized~~ was incorporated in the State of Delaware on January ~~5, 2017,~~9, 2017. Curiosity creates, acquires, and develops the commercial potential of kids ~~and~~& family entertainment properties and associated business opportunities.

We own 100% of each of Grom Social, TD Holdings, GES and GNS, and 80% of Curiosity. We are headquartered in Boca Raton, Florida with offices in Los Angeles, California; Salt Lake City, Utah; Norcross, Georgia; and Manila, Philippines.
Business Description
Grom Social
Grom Social is a growing social media platform and original content provider of entertainment for children under 13 years of age, which provides safe and secure digital environments for kids that can be monitored by their parents or guardians. We initially launched our mobile app in 2019. We continue to invest in research, development, and technology to enhance the user experience. We remain committed to increasing user growth and expanding our reach in an effort to monetize the app.
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Top Draw Animation
Top Draw Animation is an award-winning, full-service production and pre-production animation studio that specializes in providing two-dimensional digital production services for animated television series and movies on a contract basis or under co-production arrangements. Top Draw’s pre-production services include planning and creating storyboards, location design, model and props design, background color and color styling. Its production services focus on library creation, digital asset management, background layout scene assembly, posing, animation and after-effects.
As part of its COVID-19 protocols, Top Draw continues to operate at approximately 50% seat capacity at its studio. However, it supplements its reduced studio capacity through its work-from-home program. For the three and six months ended June 30, 2022, our animation services revenues trailed the levels that we recognized during the corresponding periods of 2021. This is largely attributable to changes in our production schedule resulting from customer delays in providing us with necessary materials and content, changes to project start dates, or cancellation of an anticipated project. As a byproduct, we realized higher production costs by deploying the resources necessary to service our customers’ needs efficiently and effectively prior to these changes to our schedule.
During the six months ended June 30, 2022, we announced approximately $3.9 million in new contracts for Top Draw. These projects are all expected to commence during the year and have service periods up to twelve months in length. Based upon our current production schedule, we believe that our efficiency and productivity will increase through December 31, 2022.
Grom Educational Services
Grom Educational Services provides scalable network monitoring and security solutions that are compliant with Children Internet Protection Act (CIPA) guidelines. Our goal is to enhance safety, good digital citizenship, education, and social responsibility by giving schools and parents the ability to monitor and filter their students’ and children’s access to technology while simultaneously educating them.
Our products include web filtering appliances and software, reporting and event management solutions, and our Digital Citizenship License (DCL) Program. The proprietary DCL program is a series of videos design to teach minors about appropriate online behavior.
On January 28, 2022, the Company announced the early release of enhancements to its DCL Program as part of strengthening the security features of its web filtering solutions.
Curiosity Ink Media
Curiosity Ink Media is a global media company that develops, acquires, builds, grows and maximizes the short, mid, and long-term commercial potential of kids & family entertainment properties and associated business opportunities. Driven by a best-in-class leadership team, Curiosity’s multi-faceted intellectual property library is designed to amass ongoing value through strategic stewardship, partnerships, and highly targeted market entry.
Depending upon the nature, Curiosity’s original properties can require a substantial amount of time to develop and produce. The Company continuously evaluates the viability of its entertainment properties, and works with its strategic partners and advisors to determine the appropriate form of media and channels of distribution for each property to ensure their greatest potential for success.
We are preparing to relaunch our Santa.com website in the fourth quarter of 2022. The enhanced digital holiday entertainment hub will include a bold new look, including a marketplace where consumers can fulfill all of their holiday needs, and an improved user experience featuring a virtual North Pole with curated gifting ideas, decor and entertainment tips, alongside other immersive content for kids and adults. Furthermore, we continue to develop Santa.com into an original animated musical holiday special for future release.
Curiosity has released two graphic novels, Thunderous and The Legion of Forgettable Supervillains, in 2022. It continues to develop concepts and seek partnerships for additional and subsequent series publications. On May 17, 2022, Curiosity and Dynamite Entertainment announced a project with the United States Postal Service to introduce a new children’s book series based on a modern-day adaptation of Mr. Zip, the iconic 1960’s cartoon figure initially used by the U.S. Post Office Department to help introduce and promote ZIP Code use.
In addition, Curiosity has started to broaden its business opportunities and relationships by offering licensing agent services. On May 23, 2022, Curiosity announced that it will partner with Cepia LLC to serve as a licensing agent for the Cats vs Pickles franchise.

Impact of COVID-19

~~The Company~~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.
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We have experienced significant disruptions to ~~its~~our business and operations due to circumstances related to COVID-19, and delays ~~as a result of~~caused government-imposed quarantines, office closings and travel restrictions, which affect both ~~the Company~~us and ~~its~~our service providers. ~~The Company has~~We have 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~~our Manila-based animation studio, ~~located in Manila, Philippines,~~ which accounts for approximately ~~92%~~85% of ~~the Company’s~~our total revenues on a consolidated basis, ~~has been mostly closed.~~was forced to close its offices for significant periods of time from March 2020 through December 2021.

In response to the outbreak and business disruption, ~~the Company has~~we have 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~~We have implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, we started to recall artist and employees to return to the studio which is currently operating at 50% seat capacity.

While restrictions have eased, the risk continues as new variants are being discovered. The full extent of potential impacts on our 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 our business, operations, financial condition and results of operations.
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Recent Events
~~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).
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).
~~The Sellers also have the ability to earn up to $17,500,000 (payable 50% in cash and 50% in stock) upon the achievement of certain performance milestones as of December 31, 2025.~~
~~Payoff of TDH Sellers Notes~~
On August 18, 2021, the Company paid the TDH Secured Note Lenders an aggregate of $834,759.77, representing all remaining amounts due and payable under the TDH Secured Notes. Upon receipt of such payment by the TDH Secured Note Lenders, the pledged shares of TDH and its subsidiary, Top Draw Animation Hong Kong Limited were released from escrow, and the TDH Secured Note Lenders had no further security interest in the assets of the Company or its subsidiaries.
~~Executive Officers~~
On July 26, 2021, Melvin Leiner resigned as Chief Financial Officer, Secretary and Treasurer of the Company. Mr. Leiner remains the Company’s Executive Vice President and Chief Operating Officer, and a director.
~~On July 26, 2021, upon Mr. Leiner’s resignation, Jason Williams was appointed the Company’s Chief Financial Officer, Secretary and Treasurer.~~

L1 Capital ~~Global Master Fund~~ Financing
~~On September 14, 2021, the Company entered into a Securities~~The Purchase Agreement, ~~(the “Purchase Agreement”)~~as amended on October 20, 2021, with L1 Capital ~~Global Opportunities Master Fund (“L1 Capital”~~contemplated a closing of a second tranche of the offering (the “Second Tranche”)~~, pursuant~~ of up to ~~which it sold L1 Capital (i) a 10% Original Issue Discount Senior Secured Convertible Note in the~~an additional $6,000,000 principal amount of ~~$4,400,000,~~Notes identical to the First Tranche Note, and warrants exercisable for five years to purchase up to 1,041,194 shares at an exercise price of $4.20 per share.
On January 20, 2022 (the “Second Tranche Closing”), we closed on the Second Tranche of the offering with L1 Capital, resulting in the issuance of (i) a $1,750,000 10% original issue discount senior secured convertible note, due ~~March 13,~~July 20, 2023, (the ~~“Original~~“Second Tranche Note”),; and (ii) a ~~five-year~~five year warrant to purchase ~~813,278~~303,682 shares of ~~the Company’s~~our common stock at an exercise price of $4.20 per share (the ~~“Original Warrant”~~“Second Tranche Warrants”), in exchange for consideration of ~~$3,960,000 (the “First Tranche”)~~$1,575,000 (i.e. the face amount less the 10% original issue discount of $175,000).

In connection with the Second Tranche Closing, we paid to EF Hutton ~~acted as exclusive placement agent for the offering and received~~ a fee of ~~$316,800.~~$126,000.
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The ~~Original~~Second Tranche Note is convertible into our common stock at a rate of $4.20 per share (the “Conversion Price”), into 416,667 shares of common stock (the “Second Tranche Conversion Shares”) and, is repayable in 18 equal monthly installments inof $111,563 commencing on the date that the SEC declares a registration statement with respect to the resale of such shares effective, with all remaining amounts due on July 20, 2023. The Second Tranche Note is repayable by payment of cash, or, at ~~the~~our discretion ~~of the Company,~~ and if the ~~Equity Conditions described~~ below listed “Equity Conditions” are met, by issuance of shares of our common stock at a price ~~equal to~~of 95% of the ~~volume weighted average price (“VWAP”)~~lowest daily VWAP during the ten-trading day period prior to the respective monthly redemption dates (with a floor of $1.92), multiplied by 102% of the amount due on such date. In the event that the ~~10-day~~ten-trading day VWAP drops below $1.92 ~~the Company~~we will have the right to pay in ~~shares of common~~ stock at ~~said~~such ten-trading day VWAP with any shortfall ~~to be~~ paid in cash. The Conversion Price may be adjusted in the event of dilutive issuances but in no event to less than ~~$0.54. In addition, under the terms of the Original Note, L1 Capital had the~~$0.54 (the “Monthly Conversion Price”).
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Our right to ~~accelerate up to three~~make monthly payments in stock in lieu of cash for the ~~monthly payments. Neither the Company, nor L1 Capital, may convert any portion of the Original~~Second Tranche Note ~~to the extent that, after giving effect to such conversion, L1 Capital (together with any affiliated parties) would beneficially own in excess of 4.99% of the Company’s outstanding common stock.~~
is conditioned on certain conditions (the “Equity Conditions”). The Equity Conditions required to be met each month in order ~~for the Company~~ to redeem the ~~Original~~Second Tranche Note with ~~shares of common~~ stock in lieu of a monthly cash payment, among other conditions set forth therein, include without limitation, that ~~(i)~~ a registration statement ~~must~~ be in effect with respect to the resale of the shares issuable upon conversion or redemption of the ~~Original~~Second Tranche Note (or, that an exemption under Rule 144 is available), ~~and (ii)~~that no default be in effect, that the average daily trading volume of ~~the Company’s~~our common stock ~~will~~would have to be at least ~~$250,000 immediately~~$550,000 during the five trading days prior to the ~~date~~respective monthly redemption and that the outstanding principal amounts of the ~~monthly redemption.~~First Tranche Note and Second Tranche Note combined, shall not exceed 30% of the market capitalization of our common stock as reported on Bloomberg L.P., which percentage is subject to increase by the investor at its sole discretion.

~~The Original Warrant has~~Other provisions of the Second Tranche Note, which is similar in terms to the First Tranche Note, include that the Second Tranche Note Conversion Price is subject to full anti-dilution price protections in the event of financings that are below the Conversion Price with a floor of $0.54.
In the event of an Event of Default as defined in the notes, if the stock price is below the Conversion Price at the time of default and only for so long as a default is continuing, the Second Tranche Notes would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the default is cured the default conversion rate elevates back to the normal Conversion Price.
As part of the Second Tranche Closing, we issued Second Tranche Warrants exercisable for five years from the date of issuance, at $4.20 per share which carry the same anti-dilution protection as the ~~Original Note and~~Second Tranche Notes, subject to the same adjustment floor. The ~~Original Warrant is~~Second Tranche Warrants are exercisable ~~for cash, or on a~~via cashless ~~basis~~exercise only for so long as no registration statement covering resale of the shares is in effect. L1 Capital shall not have the right to exercise any portion of the Original Warrant to the extent that, after giving effect to such exercise, L1 Capital (together with any affiliated parties), would beneficially own in excess of 4.99% of the Company’s outstanding common stock.

The ~~Company entered into~~Second Tranche Note continues to be subject to (i) the repayment and performance guarantees by our subsidiaries pursuant to a ~~Security Agreement with L1 Capital~~subsidiary guaranty and, (ii) the security agreement pursuant to which ~~L1Capital~~the LI Capital was granted a security interest in all of ~~the~~our assets ~~of the Company~~ and certain of ~~its subsidiaries. As further inducement for L1 Capital to enter~~our subsidiaries, each as entered into ~~the Security Agreement, certain of the Company’s pre-existing secured creditors agreed to give up their exclusive senior security interest~~ in ~~the assets of TD Holdings, in exchange for a shared senior secured interest~~connection with ~~L1 Capital on a~~ ~~pari pasu~~ ~~basis on all assets of the Company. Repayment of the Note is also guaranteed by certain subsidiaries of the Company pursuant to a subsidiary guaranty.~~
~~The Company agreed to file a registration statement with the SEC within 35 days of the closing of~~ the First Tranche ~~registering all Conversion Shares and Warrant Shares for resale, to go effective no later than 75 days after the~~ closing ~~of the First Tranche.~~
The Purchase Agreement also contemplated the purchase by L1 Capital (the “Second Tranche”) of an additional 10% Original Issue Discount Senior Secured Convertible Note in the principal amount of $1,500,000, and warrants to purchase approximately 277,000 shares (presuming current market prices) of common stock on identical terms to the Original Note and Warrant, subject to, and upon receipt of, shareholder approval under Nasdaq rules and effectiveness of a registration statement covering the resale of the shares issuable under the Original Note and Warrant issued in the First Tranche.September 14, 2021.

~~Amendment to L1 Capital Purchase~~Executive Separation Agreement and ~~Original Note~~Departure of Director
On ~~October 20, 2021, the Company and L1 Capital~~April 22, 2022, we entered into an ~~Amended and Restated Purchase~~Executive Separation Agreement with Melvin Leiner (the ~~“Amended Purchase~~“Separation Agreement”), pursuant to which Mr. Leiner retired from his positions as our Executive Vice President and Chief Operating Officer. Pursuant to the ~~amount~~Separation Agreement, Mr. Leiner’s employment with us ended on April 22, 2022 and he is to receive separation payments over a nine (9) month period equal to his base salary, as well as certain limited health benefits.
In accordance with the Separation Agreement, we will pay to Mr. Leiner the sum of $236,250 in biweekly installments over the nine (9) month period beginning on our first regular pay period after April 22, 2022 and ending on January 13, 2023. The Separation Agreement also contains non-disparagement covenants and a mutual release of claims by the parties thereto.
On the same day, Mr. Leiner resigned from our Board of Directors, effectively immediately. Mr. Leiner did not resign as a result of any disagreement with us on any matter relating to our operations, policies or practices.
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Notice of Delisting of Failure to Satisfy a Continue Listing Rule or Standard
On May 24, 2022, we received a deficiency letter (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, based upon the closing bid price of the ~~proposed Second Tranche investment was increased from $1,500,000 to $6,000,000. In~~Company’s common stock, par value $0.001 per share (“Common Stock”), for the ~~event that the conditions to closing the Second Tranche investment are satisfied,~~last 30 consecutive business days, the Company ~~intends on issuing (i)~~is not currently in compliance with the requirement to maintain a 10% Original Issue Discount Senior Secured Convertible Note in the principal amount of $6,000,000 (the “Additional Note”), identical to the Original Note, but due 18 months from the closing of the Second Tranche, and (ii) a five-year warrant to purchase 1,041,194 at an exerciseminimum bid price of ~~$4.20~~$1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the ~~“Additional Warrant”~~“Minimum Bid Requirement”)~~, for consideration of $5,400,000.~~.

The ~~closing~~Notice has no immediate effect on the continued listing status of the ~~Second Tranche~~Company's common stock on The Nasdaq Capital Market, and, therefore, the Company's listing remains fully effective.
The Company is provided a compliance period of 180 calendar days from the date of the Notice, or until November 21, 2022, to regain compliance with Nasdaq Listing Rule 5550(a)(2). If at any time before November 21, 2022, the closing bid price of the Company’s common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, subject to ~~a registration statement being declared effective by~~Nasdaq’s discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(G), Nasdaq will provide written notification that the ~~SEC covering~~Company has achieved compliance with the Minimum Bid Requirement, and the matter would be resolved.
If the Company does not regain compliance with the Minimum Bid Requirement during the initial 180 calendar day period, the Company may be eligible for an additional 180 calendar day compliance period. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares ~~issuable upon conversion or redemption~~and all other initial listing standards for The Nasdaq Capital Market, with the exception of the ~~Original Note~~Minimum Bid Requirement, and ~~Original Warrant, shareholder consent being obtained as required~~would need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary.
The Company will continue to monitor the closing bid price of its Common Stock and seek to regain compliance with all applicable Nasdaq ~~Rule 5635(d), and a limitation on~~requirements within the ~~principal amount of notes~~allotted compliance periods. If the Company does not regain compliance within the allotted compliance periods, including any extensions that may be ~~issued~~granted by Nasdaq, Nasdaq will provide notice that the Company's common stock will be subject to ~~no more than 30%~~delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel.
The Company intends to actively monitor the closing bid price of the ~~Company’s market capitalization as reported by Bloomberg L.P., which requirement may~~common stock and will evaluate available options to regain compliance with the Minimum Bid Requirement. However, there can be ~~waived by L1 Capital.~~no assurance that the Company will regain compliance with the Minimum Bid Requirement during the 180-day compliance period, secure a second period of 180 days to regain compliance or maintain compliance with the other Nasdaq listing requirements.
If the common stock ceases to be listed for trading on the Nasdaq Capital Market, the Company would expect that the common stock would be traded on one of the three tiered marketplaces of the OTC Markets Group.

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

Comparison of Results of Operations for the Three Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

Revenue

Revenue for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~$1,514,692,~~$1,139,582, compared to revenue of ~~$1,439,155~~$1,388,551 during the three months ended ~~September~~June 30, ~~2020,~~2021, representing ~~an increase~~a decrease of ~~$75,537~~$248,969 or ~~5.3%~~17.9%.

Animation revenue for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~$1,383,196,~~$1,025,966, compared to animation revenue of ~~$1,327,448~~$1,276,555 during the three months ended ~~September~~June 30, ~~2020,~~2021, representing ~~an increase~~a decrease of ~~$55,748~~$250,589 or ~~4.2%~~19.6%. The ~~increase~~decrease in animation revenue is primarily attributable to ~~an increase~~client delays in providing us with necessary productions materials and content and in the ~~overall number~~execution and commencement of ~~contracts completed offset, in part, by client delays caused by concerns related to the spread of COVID-19.~~previously negotiated contracts.

Web filtering revenue for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~$130,928,~~$113,472, compared to web filtering revenue of ~~$110,986~~$111,507 during the three months ended ~~September~~June 30, ~~2020,~~2021, representing an increase of ~~$19,942~~$1,965 or ~~18.0%~~1.8%. The increase is primarily due to ~~an increase in organic sales growth, and~~ the timing ~~or loss~~ of multi-year contract renewals.

Subscription and advertising revenue from our Grom Social ~~website, Grom Social~~ mobile ~~application and MamaBear safety mobile application have~~app has been nominal. Subscription and advertising revenue for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~$568~~$144 compared to subscription and advertising revenue of ~~$721~~$489 during the three months ended ~~September~~June 30, ~~2020,~~2021, representing a decrease of ~~$153~~$345 or ~~21.2%~~70.6%, primarily attributable to a decrease in marketing and promotion activities.

Gross Profit

Our gross profits vary significantly by subsidiary. ~~Historically,~~In recent years, our animation business has realized gross profits between ~~45%~~35% and ~~55%~~40%, while our web filtering business has realized gross profits between ~~75%~~91% and ~~90%~~94%. ~~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.
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Gross profit for the three months ended June 30, 2022 and 2021 were $192,123, or 16.9%, and $392,708, or 28.3%, respectively. The decrease in gross profit is primarily attributable to lower contract margins in our animation business due to the absorption of fixed overhead expenses against reduced revenue levels and certain projects exceeding budgeted costs.
Operating Expenses
Operating expenses for the three months ended June 30, 2022 were $2,142,800, compared to operating expenses of $1,859,733 during the three months ended June 30, 2021, representing an increase of $283,067 or 15.2%. The increase is primarily attributable to an increase in selling, general and administrative costs incurred during the three months ended June 30, 2022 due to an increase in research and development, employee headcount, compensation and benefits from the acquisition of Curiosity, and stock-based compensation from the grant of stock and stock option awards.
Selling, general and administrative (“SG&A”) are comprised of selling, marketing and promotional expenses, compensation and benefits, insurance, rent and related facility costs, research and development, and other general expenses. SG&A expenses were $1,778,696 for the three months ended June 30, 2022, compared to $1,400,485 for the three months ended June 30, 2021, representing an increase of $378,211 or 27.0%.
Professional fees are comprised of accounting and compliance services, legal services, investor relations and other advisory fees. Professional fees were $299,941 for the three months ended June 30, 2022, compared to $325,922 for the three months ended June 30, 2021, representing a decrease of $25,981 or 8.0%.
Depreciation and amortization included in operating expenses was $64,163 for the three months ended June 30, 2022, compared to $133,326 for the three months ended June 30, 2021, representing a decrease of $69,163 or 51.9%. The decrease is attributable to certain fixed assets that are fully depreciated having reached the end of their estimated useful lives and certain intangible assets that were impaired during the fourth quarter of 2021. These fixed and intangible assets were subject to depreciation and amortization during the three months ended June 30, 2021.
Other Income (Expense)
Net other expense for the three months ended June 30, 2022 was $1,248,703, compared to a net other expense of $1,037,480 for the three months ended June 30, 2021, representing an increase of $211,223 or 20.4%. The increase in other expense is primarily attributable to recognition of interest expense of $1,052,350 related to the derivative liability recognized during the three months ended June 30, 2022, offset by a decrease interest expense related to payment of principal balance and decrease in convertible notes outstanding balance due to conversions recorded during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.
Interest expense is comprised of interest accrued and paid on our convertible notes and recorded from the amortization of note discounts. Interest expense was $1,314,508 for the three months ended June 30, 2022, compared to $1,094,916 during the three months ended June 30, 2021, representing an increase of $219,592 or 20.1%.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $3,295,571, or $0.17 per share, for the three months ended June 30, 2022, compared to a net loss attributable to common stockholders of $2,504,505, or $0.42 per share, during the three months ended June 30, 2021, representing an increase in net loss attributable to common stockholders of $791,066 or 31.6%.
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Comparison of Results of Operations for the Six Months Ended June 30, 2022 and 2021
Revenue
Revenue for the six months ended June 30, 2022 was $2,370,707, compared to revenue of $3,263,835 during the six months ended June 30, 2021, representing a decrease of $893,128 or 27.4%.
Animation revenue for the six months ended June 30, 2022 was $2,074,579, compared to animation revenue of $2,990,213 during the six months ended June 30, 2021, representing a decrease of $915,634 or 30.6%. The decrease in animation revenue is primarily attributable to client delays in providing us with necessary productions materials and content and in the execution and commencement of previously negotiated contracts.
Web filtering revenue for the six months ended June 30, 2022 was $295,716, compared to web filtering revenue of $272,748 during the six months ended June 30, 2021, representing an increase of $22,968 or 8.4%. The increase is primarily due to the timing of multi-year contract renewals.
Subscription and advertising revenue from our Grom Social mobile app has been nominal. Subscription and advertising revenue for the six months ended June 30, 2022 was $412 compared to subscription and advertising revenue of $874 during the six months ended June 30, 2021, representing a decrease of $462 or 52.9%, primarily attributable to a decrease in marketing and promotion activities.
Gross Profit
Our gross profits vary significantly by subsidiary. In recent years, our animation business has realized gross profits between 35% and 40%, while our web filtering business has realized gross profits between 91% and 94%. 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~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020 was $773,256,~~were $506,299, or ~~51.1%~~21.4%, and ~~$865,700,~~$1,249,871, or ~~60.2%~~38.3%, respectively. The decrease in gross profit is primarily attributable to lower contract margins in our animation business due to the absorption of fixed overhead expenses against reduced revenue levels and certain projects exceeding budgeted ~~costs in our animation business.~~costs.
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Operating ~~expenses~~Expenses

Operating expenses for the ~~three~~six months ended ~~September~~June 30, ~~2021~~2022 were ~~$2,926,697,~~$4,306,135, compared to operating expenses of ~~$1,590,856~~$3,427,745 during the ~~three~~six months ended ~~September~~June 30, ~~2020,~~2021, representing an increase of ~~$1,335,841~~$878,390 or ~~84.0%~~25.6%. The increase is primarily attributable to an increase in selling, general and administrative costs ~~resulting~~and fees for professional services rendered during the six months ended June 30, 2022 due to an increase in research and development, employee headcount, compensation and benefits from the acquisition of Curiosity, and ~~stock based~~stock-based compensation from the grant of stock and stock option awards. ~~General~~
Selling, general and administrative (“SG&A”) are comprised of selling, marketing and promotional expenses, compensation and benefits, insurance, rent and related facility costs, research and development, and other general expenses. SG&A expenses were ~~$1,892,327~~$3,473,515 for the ~~three~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$1,009,162~~$2,662,750 for the ~~three~~six months ended ~~September~~June 30, ~~2020,~~2021, representing an increase of ~~$883,165~~$810,765 or ~~87.5%~~30.5%. ~~Stock based compensation was $460,146 for the three months ended September 30, 2021, compared to $0 for the three months ended September 30, 2020.~~
~~Other Income (Expense)~~
Net other expense for the three months ended September 30, 2021 was $178,996, compared to a net other expense of $1,495,864 for the three months ended September 30, 2020, representing a decrease of $1,316,868 or 88.0%. The decrease in net other expense is primarily attributable to an extinguishment loss of $1,191,089 related to the exchange of $2,294,723 in principal and interest accrued under certain convertible notes for 3,623,884 shares of our Series B Stock during the three months ended September 30, 2020 as compared to a gain from the forgiveness of PPP loans of $228,912 during the three months ended September 30, 2021.
Interest expense is comprised of interest incurred on our convertible notes and from the amortization of note discounts. Interest expense was $492,783 for the three months ended September 30, 2021, compared to $330,006 during the three months ended September 30, 2020, representing an increase of $162,777 or 49.3%. The increase is primarily attributable to an increase in amortization expense associated with debt discounts recorded during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
~~Net Loss Attributable to Grom Social Enterprises Inc. Common Stockholders~~
We realized a net loss attributable to common stockholders of $2,308,861, or $0.21 per share, for the three months ended September 30, 2021, compared to a net loss attributable to common stockholders of $2,498,520, or $0.45 per share, during the three months ended September 30, 2020, representing a decrease in net loss attributable to common stockholders of $189,659 or 7.6%.
~~Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020~~
~~Revenue~~
~~Revenue for the nine months ended September 30, 2021 was $4,778,527, compared to revenue of $4,478,373 during the nine months ended September 30, 2020, representing an increase of $300,154 or 6.7%.~~
Animation revenue for the nine months ended September 30, 2021 was $4,373,409, compared to animation revenue of $4,015,061 during the nine months ended September 30, 2020, representing an increase of $358,348 or 8.9%. The increase in animation revenue is primarily attributable an increase in the overall number of contracts completed offset, in part, by client delays caused by concerns related to the spread of COVID-19.
Web filtering revenue for the nine months ended September 30, 2021 was $403,676, compared to web filtering revenue of $460,984 during the nine months ended September 30, 2020, representing a decrease of $57,308 or 12.4%. The decrease is primarily due to the timing or loss of multi-year contract renewals.
Subscription and advertising revenue from our Grom Social website, Grom Social mobile application and MamaBear safety mobile application have been nominal. Subscription and advertising revenue for the nine months ended September 30, 2021 was $1,442 compared to subscription and advertising revenue of $2,327 during the nine months ended September 30, 2020, representing a decrease of $885 or 38.0%, primarily attributable to a decrease in marketing and promotion activities.

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~~Gross Profit~~
~~Our gross profits vary significantly by subsidiary. Historically, our animation business has realized gross profits between 45%~~Professional fees are comprised of accounting and ~~55%, while our web filtering business has realized gross profits between 75%~~compliance services, legal services, investor relations 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~~other advisory fees. Professional fees were $704,007 for the ~~nine~~six months ended ~~September~~June 30, ~~2021 and 2020 was $2,402,976, or 50.3%, and $2,631,645, or 58.8%, respectively. The decrease in gross profit is primarily attributable~~2022, compared to ~~the absorption of fixed overhead expenses and certain projects exceeding budgeted costs in our animation business.~~
~~Operating expenses~~
~~Operating expenses~~$513,031 for the ~~nine~~six months ended ~~September~~June 30, 2021, ~~were $6,734,291, compared to operating expenses of $4,749,638 during the nine months ended September 30, 2020,~~ representing an increase of ~~$1,984,653~~$190,976 or ~~41.8%~~37.2%.
Depreciation and amortization included in operating expenses was $128,613 for the six months ended June 30, 2022, compared to $251,964 for the six months ended June 30, 2021, representing a decrease of $123,351 or 49.0%. The ~~increase~~decrease is ~~primarily~~ attributable to ~~an increase in general~~certain fixed assets that are fully depreciated having reached the end of their estimated useful lives and ~~administrative costs and fees for professional services rendered~~certain intangible assets that were impaired during the ~~nine~~fourth quarter of 2021. These fixed and intangible assets were subject to depreciation and amortization during the six months ended ~~September~~June 30, 2021 due to the Company’s registered offering, Nasdaq stock exchange uplisting, the acquisition of Curiosity, and stock based compensation from the grant of stock and stock option awards. General and administrative expenses were $4,683,481 for the nine months ended September 30, 2021, compared to $3,552,390 for the nine months ended September 30, 2020, representing an increase of $1,131,091 or 31.8%. Professional fees were $839,831 for the nine months ended September 30, 2021, compared to $419,291 for the nine months ended September 30, 2020, representing an increase of $420,540 or 100.3%. Stock based compensation was $460,146 for the nine months ended September 30, 2021, compared to $0 for the nine months ended September 30, 2020.2021.

Other Income (Expense)

Net other expense for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$2,821,202,~~$2,855,989, compared to a net other expense of ~~$2,402,969~~$2,642,206 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, representing an increase of ~~$418,223~~$213,783 or ~~17.4%~~8.1%. The increase in net other expense is primarily attributable ~~to increased~~recognition of interest expense of $1,052,350 related to the ~~amortization of debt discounts, and a one-time~~derivative liability recognized during the six months ended June 30, 2022, offset by an 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.~~Stock during 2021.

Interest expense is comprised of interest incurred on our convertible notes and from the amortization of note discounts. Interest expense was ~~$2,236,545~~$2,945,530 for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$1,220,148~~$1,743,762 during the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, representing an increase of ~~$1,016,397~~$1,201,768 or ~~95.9%~~68.9%. The increase is primarily attributable to anrecognition of interest expense of $1,052,350 related to the derivative liability and increase in amortization expense associated with debt ~~discounts~~discount recorded during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Net Loss Attributable to ~~Grom Social Enterprises Inc.~~ Common Stockholders

We realized a net loss attributable to common stockholders of ~~$7,128,941,~~$6,849,022, or ~~$0.92~~$0.42 per share, for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to a net loss attributable to common stockholders of ~~$4,798,462,~~$4,820,080, or ~~$0.87~~$0.79 per share, during the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, representing an increase in net loss attributable to common stockholders of ~~$2,354,055~~$2,028,942 or ~~49.1%~~42.1%.

Liquidity and Capital Resources

At ~~September~~June 30, ~~2021,~~2022, we had cash and cash equivalents of ~~$9,102,728.~~$4,174,763.

Net cash used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$5,373,687,~~$3,383,231, compared to net cash used in operating activities of ~~$666,775~~$2,662,823 during the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, representing an increase in cash used of ~~$4,706,912,~~$760,408, primarily due to the increase in our net loss, ~~from operations and the~~recognition of a derivative liability, change in ~~working capital~~our operating assets and ~~liabilities.~~liabilities, stock-based compensation and amortization of debt discounts.
41

Net cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2022 was ~~$425,789,~~$33,308, compared to net cash used in investing activities of ~~$571,563~~$2,790 during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 representing ~~a decrease~~an increase in cash used of ~~$145,774.~~$30,518. This change is attributable to ~~a decrease~~an increase in the amount of fixed assets purchased and/or leasehold improvements made by our animation studio in Manilla, Philippines during the ~~nine~~six months ended ~~September~~June 30, ~~2021, offset by $400,000 in cash paid as consideration for the acquisition of Curiosity.~~2022.
41

Net cash provided by financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$14,768,735,~~$1,040,992, compared to net cash provided by financing activities of ~~$1,023,600~~$10,644,544 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, representing ~~an increase~~a decrease in cash provided of ~~$13,745,135.~~ $9,308,013. The primary reason for the decrease is attributable to our public equity offering completed in June 2021.
Our primary sources of cash from financing activities during the six months ended June 30, 2022 were attributable to ~~$10,317,324~~$1,444,000 in proceeds from second tranche of convertible notes issued to L1 Capital, as compared to $8,953,616 in proceeds from the sale of our common stock, ~~$4,516,700 in proceeds from the sale of convertible notes, and~~ $950,000 and $100,000 in proceeds from the sale of our Series B Stock and Series C Stock, respectively, ~~during the nine months ended September 30, 2021, as compared to $3,655,000~~and $908,500 in proceeds from the sale of 8% to 12% senior secured convertible notes during the six months ended June 30, 2021. These sources of cash were offset, in part, by the repayment of convertible notes and ~~$483,500~~loans payable of $107,469 and cash settlement of a derivative liability of $295,539 in ~~proceeds from the sale of our Series B Stock~~accordance with a note conversion during the ~~nine~~six months ended ~~September~~June 30, ~~2020. On August 19, 2021, the Company repaid $792,846 in principal due to the former shareholders of TD Holdings Limited on a convertible note originally dated September 20, 2016,~~2022, as compared to repayments of convertible notes and loans for $267,572 during the ~~repayment of $3,000,000 in principal on the same convertible note due to the former shareholders of TD Holdings Limited on March 16, 2020.~~six months ended June 30, 2021.

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 condensed consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these condensed consolidated 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 condensed consolidated 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~~
During the three and six months ended June 30, 2022, there were no significant changes to the critical accounting estimates ~~are more fully discussed~~disclosed under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in ~~Note 2 to~~ our ~~unaudited financial statements contained herein.~~2021 Annual Report on Form 10-K.

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~~Our management, with the participation of ~~our management, including~~ our principal executive officer and principal financial officer ~~as of September 30, 2021, we conducted an evaluation~~has evaluated the effectiveness of our disclosure controls and procedures as(as such term is defined ~~under Rule~~in Rules 13a-15(e) and ~~Rule~~ 15d-15(e) ~~promulgated~~ under the ~~Securities~~ Exchange Act ~~of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective~~ as of ~~September~~June 30, ~~2021 to ensure that information required to be disclosed~~2022, the end of the period covered 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.this Quarterly Report.

42

~~Our~~These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our ~~Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer, do not expect~~principal financial, as appropriate officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures ~~will prevent all error~~were not effective as of June 30, 2022.
The Company’s assessment identified certain material weaknesses which are set forth below:
Functional Controls and ~~all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives~~Segregation 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. Duties
Because of the ~~inherent~~Company’s limited resources, there are limited controls over information processing. Additionally, there is inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation, we will need to hire additional staff to provide greater segregation of duties.
Accordingly, as the result of identifying the above material weakness we have concluded that these control deficiencies resulted in ~~all control systems, no evaluation~~a reasonable possibility that a material misstatement of ~~controls can provide absolute assurance~~the annual or interim financial statements may not be prevented or detected on a timely basis by the Company’s internal controls.
Management believes that ~~all control issues and instances~~the material weaknesses set forth above were the result 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~~scale of our ~~current~~operations and are intrinsic to our small size. Management continues to take actions to remedy these weaknesses, including the process of hiring additional staff to create the necessary segregation of duties to improve controls over information processing. Additionally, management has initiated the process of building a risk management framework with plans to embed the principles of this framework across all aspects of the business.
Remediation Plan
Management has implemented remediation steps to address the material weakness and to improve our internal control over financial reporting. Specifically, we (i) expanded and improved our review process for complex transactions and related accounting standards, including the identification of third-party professionals with whom to consult regarding the application of complex accounting matters, (ii) hired qualified personnel to improve the oversight of our accounting operations, and (iii) established new processes ~~rely upon manual reviews~~ and ~~processes~~policies. While we believe that these remediation actions will improve the effectiveness of our internal control over financial reporting, the material weakness identified will not be considered remediated until the controls operate for a sufficient period of time, and we cannot assure you that the measures we have taken to ~~ensure that neither human error nor system~~date, or any measures we may take in the future will be sufficient to remediate the material weakness ~~has resulted in erroneous reporting of financial data.~~we have identified or avoid potential future material weaknesses.

Changes in Internal Control over Financial Reporting

~~During~~Other than the ~~period covered by this Report,~~remediation efforts described above, there were no changes in our internal controls over financial reporting during our first two fiscal quarters, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

43

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

There are no pending legal proceedings to which the Company or any of its subsidiaries 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 and its subsidiaries’ 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.~~Not applicable as we are a small reporting company.

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

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

On ~~July 2, 2021,~~June 17, 2022, the Company issued ~~4,464~~176,844 shares of common stock to ~~a noteholder~~the holders of its Series C Stock for ~~accrued interest.~~PIK dividends.

On ~~July 6, 2021,~~June 17, 2022, the Company issued ~~2,700 shares of common stock to a technology design firm for services provided to the Company.~~
~~On July 13, 2021, the Company issued 2,364 shares of common stock to a public relations firm for services provided to the Company.~~
~~On July 16, 2021, the Company issued 1,101 shares of common stock to a public relations firm for services provided to the Company.~~
~~On July 19, 2021, the Company issued 1,101 shares of common stock to a public relations firm for services provided to the Company.~~
~~On July 22, 2021, the Company issued 42,891 shares of common stock to an investment bank for financial advisory services provided to the Company.~~
~~On August 2, 2021, the Company issued 157,943 shares of common stock to an officer as bonus compensation.~~
~~On August 6, 2021, the Company issued 3,573 shares of common stock to a technology design firm for services provided to the Company.~~
~~On August 6, 2021, the Company issued 1,812 shares of common stock to a public relations firm for services provided to the Company.~~
~~On August 10, 2021, the Company issued 1,812 shares of common stock to a public relations firm for services provided to the Company.~~
~~On September 2, 2021, the Company issued 3,374 shares of common stock to a technology design firm for services provided to the Company.~~
~~On September 17, 2021, the Company issued 24,438~~43,909 shares of common stock to a consultant for ~~business advisory services provided to the Company.~~
~~On September 17, 2021, the Company issued 1,357 shares of common stock to a public~~investor relations ~~firm for~~ services provided to the Company.

The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe ~~are~~is exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof.
44

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~~31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
~~31.2~~31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
3232** Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

~~101.INS~~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~~101.SCH*** Inline XBRL Taxonomy Extension Schema Document
~~101.CAL~~101.CAL*** Inline XBRL Taxonomy Extension Calculation Linkbase Document
~~101.DEF~~101.DEF*** Inline XBRL Taxonomy Extension Definition Linkbase Document
~~101.LAB~~101.LAB*** Inline XBRL Taxonomy Extension Label Linkbase Document
~~101.PRE~~101.PRE*** Inline XBRL Taxonomy Extension Presentation Linkbase Document
~~104~~104*** Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).

*Filed herewith.
**Furnished herewith.
*** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

4544

SIGNATURES

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

Date: ~~November 22, 2021~~August 16, 2022 By: /s/ Darren Marks
Darren Marks

Chief Executive Officer and President
(Principal Executive Officer)

Date: ~~November 22, 2021~~August 16, 2022 By: /s/ Jason Williams
Jason Williams

Chief Financial Officer
(Principal Financial and Accounting Officer)

4645


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

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

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

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


	Nine Months Ended September 30,			Nine Months Ended September 30,
	2021			2020
Cash flows from operating activities:
Net loss	$	(7,152,517	)	$	(4,520,962	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		620,666			623,660
Amortization of debt discount		1,623,921			510,252
Common stock issued for financing costs		10,000			167,614
Common stock issued in exchange for fees and services		586,457			555,440
Convertible notes issued for financing costs		59,633			–
Deferred taxes		29,412			(27,472	)
Stock based compensation		460,146			62,600
Loss on extinguishment of debt		718,267			1,191,089
Unrealized gain on change in fair value of derivative liabilities		0			(8,831	)
Changes in operating assets and liabilities:
Accounts receivable		115,873			99,185
Inventory		33,979			(778	)
Prepaid expenses and other current assets		(326,067	)		(12,717	)
Operating lease right of use assets		(5,014	)		28,233
Other assets		2,437			5,899
Accounts payable		(485,433	)		542,321
Accrued liabilities		(1,148,692	)		288,891
Advanced payments and deferred revenues		(409,525	)		115,176
Income taxes payable and other noncurrent liabilities		(11,489	)		(37,471	)
Related party payables		(95,741	)		(248,904	)
Net cash used in operating activities		(5,373,687	)		(666,775	)

Cash flows from investing activities:
Cash consideration for acquisition of business		(400,000	)		0
Purchase of fixed assets		(25,789	)		(571,563	)
Net cash used in investing activities		(425,789	)		(571,563	)

Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs		1,050,000			483,500
Proceeds from issuance of common stock, net of issuance costs		10,317,324			0
Proceeds from issuance of convertible notes		4,516,700			3,655,000
Proceeds from loans payable		0			253,912
Repayments of convertible notes		(1,058,307	)		(3,368,812	)
Repayments of loans payable		(56,982	)		0
Net cash provided by financing activities		14,768,735			1,023,600

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

Supplemental disclosure of cash flow information:
Cash paid for interest	$	74,299		$	0
Cash paid for income taxes	$	0		$	0

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued related to acquisition of business	$	5,000,000		$	0
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	$	0		$	50,000
Common stock warrants issued in connection with convertible promissory notes	$	1,895,078		$	0
Conversion of convertible notes and accrued interest into common stock	$	1,766,297		$	30,000
Conversion of convertible notes and accrued interest into preferred stock	$	1,616,996		$	0
Debt issued related to acquisition of a business	$	278,000		$	0
Discount for beneficial conversion features on convertible notes	$	318,616		$	44,129


	Six Months Ended June 30			Six Months Ended June 30
	2022			2021
Cash flows from operating activities of continuing operations:
Net loss	$	(6,655,825	)	$	(4,820,080	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		265,804			424,498
Amortization of debt discount		1,852,816			1,239,740
Common stock issued in exchange for fees and services		95,482			331,361
Convertible notes issued for financing costs		0			61,633
Derivative expense		1,052,350			0
Stock based compensation		137,383			0
Amortization of rights-of-use assets		190,117			148,839
Loss on disposal of property and equipment		2,296			0
Loss on extinguishment of debt		0			947,179
Loss on settlement of derivative transaction		39,624			0
Unrealized gain on change in fair value of derivative liabilities		(57,124	)		0
Changes in operating assets and liabilities:
Accounts receivable		287,341			(117,389	)
Inventory		(83,237	)		21,409
Prepaid expenses and other current assets		(174,109	)		61,418
Other assets		(291,170	)		11,204
Accounts payable		(180,381	)		(628,233	)
Accrued liabilities		127,903			225,822
Advanced payments and deferred revenues		208,716			(329,875	)
Income taxes payable and other noncurrent liabilities		(3,974	)		3,061
Operating lease liability		(197,243	)		(152,163	)
Related party payables		0			(51,247	)
Net cash used in operating activities		(3,383,231	)		(2,622,823	)

Cash flows from investing activities:
Purchase of fixed assets		(47,377	)		(2,790	)
Proceeds from sale of property and equipment		14,069			0
Net cash used in financing activities		(33,308	)		(2,790	)

Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs		0			1,050,000
Proceeds from issuance of common stock, net of issuance costs		0			8,953,616
Proceeds from issuance of convertible notes		1,444,000			908,500
Repayments of convertible notes		(72,623	)		(225,946	)
Repayments of loans payable		(34,846	)		(41,626	)
Payment of settlement of derivative liability upon note conversion		(295,539	)		0
Net cash provided by financing activities		1,040,992			10,644,544

Effect of exchange rates on cash and cash equivalents		20,149			22,677
Net increase (decrease) in cash and cash equivalents		(2,355,398	)		8,041,608
Cash and cash equivalents at beginning of period		6,530,161			120,300
Cash and cash equivalents at end of period	$	4,174,763		$	8,161,908

Supplemental disclosure of cash flow information:
Cash paid for interest	$	21,780		$	74,299

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued for financing costs incurred in connection with convertible and promissory notes	$	0		$	29,750
Common stock issued related to Series C preferred stock dividend		646,523			0
Common stock warrants issued in connection with convertible promissory notes		363,329			694,644
Conversion of convertible notes and accrued interest into common stock		4,574,999			1,102,905
Conversion of convertible notes and accrued interest into preferred stock		0			1,616,996
Discount for beneficial conversion features on convertible notes		0			318,616
Operating leases rights-of-sue assets obtained in exchange for lease liabilities		80,478			0
Preferred stock dividend payable on convertible preferred stock		187,216			0

Schedule of disaggregated revenue
	Three Months Ended June 30, 2022		Three Months Ended June 30, 2021		Six Months Ended June 30, 2022		Six Months Ended June 30, 2021

Animation	$	1,025,966	$	1,276,555	$	2,074,579	$	2,990,213
Web Filtering		113,472		111,507		295,716		272,748
Produced and Licensed Content		0		0		0		0
Publishing		0		0		0		0
Other		144		489		412		874
Total Sales	$	1,139,582	$	1,388,551	$	2,370,707	$	3,263,835

Schedule of accounts receivable
	June 30, 2022			December 31, 2021

Billed accounts receivable	$	426,649		$	822,536
Unbilled accounts receivable		285,067			187,751
Allowance for doubtful accounts		(38,745	)		(41,708	)
Total accounts receivable, net	$	672,971		$	968,579
Total advanced payments and deferred revenues	$	580,841		$	404,428

Schedule of contract assets and liabilities

	September 30, 2021		December 31, 2020

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

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

Schedule of property and equipment
	June 30, 2022							December 31, 2021
	Cost		Accumulated Depreciation			Net Book Value		Cost		Accumulated Depreciation			Net Book Value
Capital assets subject to depreciation:
Computers, software and office equipment	$	2,516,560	$	(2,321,180	)	$	195,380	$	2,698,172	$	(2,399,978	)	$	298,194
Machinery and equipment		175,721		(159,823	)		15,898		183,618		(162,647	)		20,971
Vehicles		37,802		(32,614	)		5,188		101,674		(76,497	)		25,177
Furniture and fixtures		383,202		(355,620	)		27,582		401,862		(365,075	)		36,787
Leasehold improvements		1,078,442		(936,015	)		142,427		1,086,518		(955,547	)		130,971
Total fixed assets		4,191,727		(3,805,252	)		386,475		4,471,844		(3,959,744	)		512,100
Capital assets not subject to depreciation:
Construction in progress		23,470		0			23,470		65,888		0			65,888
Total fixed assets	$	4,215,197	$	(3,805,252	)	$	409,945	$	4,537,732	$	(3,959,744	)	$	577,988

Schedule Of Other Assets
	June 30, 2022		December 31, 2021

Capitalized website development costs		575,908		411,800
Prepublication costs		158,788		152,286
Produced and licensed content costs		207,202		76,701
Deposits		69,933		76,052
Other noncurrent assets		0		4,321
Total other assets		1,011,831		721,160

Schedule of operating right-of-use assets
	Six Months Ended June 30, 2022
Cash paid for operating lease liabilities	$	230,389
Weighted-average remaining lease term		1.2
Weighted-average discount rate		10%

Schedule of amortization of lease liabilities
Remainder of 2022	$	203,980
2023		114,411
2024		50,235
2025		40,291
2026		42,305
Thereafter		44,421
Total future lease payments		495,643
Less: Imputed interest		(19,616	)
Present value of lease liabilities	$	476,027

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed
Consideration Paid:
Cash and cash equivalents	$	400,000
Common stock		5,000,000
Convertible notes		278,000
Fair value of total consideration	$	5,678,000

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

Schedule Of Components Of Income Tax Expense Benefit
Consideration Paid:
Cash consideration	$	400,000
Common stock issued		5,421,962
Convertible notes		278,000
Contingent purchase consideration		5,586,493
Total consideration	$	11,686,455

Schedule of identifiable intangible assets
Licensing agreements	$	341,728
Books and stories content		126,698
Total identifiable intangible assets	$	468,426

Schedule of Future Minimum Rental Payments for Operating Leases

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

Schedule of operating right-of-use assets

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

Schedule of amortization of lease liabilities

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

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

Schedule of intangible assets

	September 30, 2021									December 31, 2020
	Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Intangible assets subject to amortization:
Customer relationships		10.00	$	1,600,286	$	(836,450	)	$	763,836	$	1,600,286	$	(716,429	)	$	883,857
Licensed and produced content		5.00		1,157,712		0			1,157,712		0		0			0
Web filtering software		5.00		1,134,435		(1,077,713	)		56,722		1,134,435		(907,548	)		226,887
Subtotal		–		3,892,443		(1,914,163	)		1,978,270		2,734,721		(1,623,977	)		1,110,744
Intangible assets not subject to amortization:
Trade names		–		4,455,595		–			4,455,595		4,455,595		–			4,455,595
Total intangible assets		–	$	8,251,299	$	(1,914,163	)	$	6,433,865	$	7,190,316	$	(1,623,977	)	$	5,566,339

Schedule of intangible assets
	Current Year Period												Prior Year End
	Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Book Value
Intangible assets subject to amortization:
Customer relationships		10.00	$	1,600,286	$	(952,772	)	$	(37,002	)	$	610,513	$	1,600,286	$	(876,457	)	$	(37,002	)	$	686,827
Mobile software applications		2.00		282,500		(282,500	)		0			0		282,500		(282,500	)		0			0
NetSpective webfiltering software		2.00		1,134,435		(1,134,435	)		0			0		1,134,435		(1,134,435	)		0			0
Noncompete agreements		1.50		846,638		(846,638	)		0			0		846,638		(846,638	)		0			–
Licensing agreement		19.60		341,728		(15,944	)		0			325,784		0		0			0			0
Subtotal				4,205,587		(3,232,289	)		(37,002	)		936,297		3,863,859		(3,140,030	)		(37,002	)		686,827
Intangible assets not subject to amortization:
Trade names		–		4,455,595		–			(69,348	)		4,386,247		4,455,595		–			(69,348	)		4,386,247
Books and stories content		–		126,698		–			–			126,698		–		–			–			–
Total intangible assets			$	8,787,880	$	(3,232,289	)	$	(106,350	)	$	5,449,241	$	8,319,454	$	(3,140,030	)	$	(106,350	)	$	5,073,074

Schedule of amortization


2021	$	150,162
2022		391,571
Remainder of 2022			$	85,011
2023		391,571		170,022
2024		391,571		170,022
2025		391,571		170,022
2026				93,708
Thereafter		261,824		247,512
Future amortization total	$	1,978,270
Total remaining intangible assets subject to amortization			$	936,297

Accrued Liabilities

	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021

Executive and employee compensation	$	380,158	$	1,642,959	$	269,698	$	238,669
Interest on convertible notes and promissory notes		27,562		135,980		50,184		31,997
Other accrued expenses and liabilities		618		15,293		194,848		129,663
Total accrued liabilities	$	408,338	$	1,794,232	$	514,730	$	400,329

Schedule of convertible debt
							June 30, 2022			December 31, 2021
	September 30, 2021			December 31, 2020
8% Unsecured Convertible Notes (Curiosity)	$	278,000		$	0
8% - 12% Convertible Promissory Notes (Bridge Notes)		0			373,587
10% Unsecured Convertible Redeemable Notes – Variable Conversion Price		0			265,000
8% Unsecured Convertible Note (Curiosity)							$	278,000		$	278,000
10% Senior Secured Convertible Note with Original Issuance Discount (L1 Capital Global Master Fund or “L1”)		4,400,000			0			0			4,125,000
10% Secured Convertible Notes with Original Issuance Discounts (OID Notes)		75,000			153,250
12% Senior Secured Convertible Notes (Newbridge)		0			52,572
12% Senior Secured Convertible Notes (Original TDH Notes)		0			882,175
10% Senior Secured Convertible Note with Original Issuance Discount (L1 – Second Tranche)								1,300,000			0
12% Senior Convertible Notes with Original Issuance Discounts (OID Notes)								75,000			75,000
12% Senior Secured Convertible Notes (TDH Secured Notes)		359,056			1,645,393			269,340			330,039
12% Senior Secured Convertible Notes (Additional Secured Notes)		68,221			260,315			51,175			63,099
Loan discounts		(1,988,089	)		(385,266	)		(367,053	)		(1,550,540	)
Total convertible notes, net		3,192,188			3,247,026			1,606,462			3,320,598
Less: current portion of convertible notes, net		(1,879,853	)		(2,349,677	)		(1,462,046	)		(2,604,346	)
Convertible notes, net	$	1,312,335		$	897,349		$	144,416		$	716,252

	·	~~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.~~

	·	~~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.~~

Schedule of future debt maturity payments

2021	$	721,308
2022	$	4,215,130
Remainder of 2022			$	1,079,676
2023	$	167,792		817,793
2024	$	76,047		76,046
2025 and thereafter	$	0		0
	$	5,180,277
Total Convertible notes principal amount payable.			$	1,973,515


	May 9, 2022		June 30, 2022
Stock price		$0.57		$0.41
Strike price		0.54		0.54
Risk-free rate		2.12%		2.77%
Annualized volatility		150%		120%
Forecast horizon in years		1.20		1.05
Alternative Conversion Discount		20.0%		20.0%
Maximum Shares to be Delivered		3,240,741		2,407,407

	June 30, 2022								��
	Total		Level 1		Level 2		Level 3
Liabilities:
Derivative Liabilities	$	739,311	$	0	$	0	$	739,311
Contingent Purchase Consideration		5,586,493		0		0		5,586,493
Total Liabilities	$	6,325,804	$	0	$	0	$	6,325,804

	Level 3 Financial Liabilities for the Three Months Ended June 30, 2022
	Balance as of March 31, 2022		Realized (Gains) Losses		Additions		Settlements			Unrealized (Gains) Losses			Balance as of June 30, 2022
Liabilities:
Derivative Liabilities	$	0	$	39,624	$	1,052,350	$	(295,539	)	$	(57,124	)	$	739,311
Contingent Purchase Consideration		5,586,493		0		0		0			0			5,586,493
Total Liabilities	$	5,586,493	$	39,624	$	1,052,350	$	(295,539	)	$	(57,124	)	$	6,325,804

	Level 3 Financial Liabilities for the Six Months Ended June 30, 2022
	Balance as of March 31, 2022		Realized (Gains) Losses		Additions		Settlements			Unrealized (Gains) Losses			Balance as of June 30, 2022
Liabilities:
Derivative Liabilities	$	0	$	39,624	$	1,052,350	$	(295,539	)	$	(57,124	)	$	739,311
Contingent Purchase Consideration		5,586,493		0		0		0			0			5,586,493
Total Liabilities	$	5,586,493	$	39,624	$	1,052,350	$	(295,539	)	$	(57,124	)	$	6,325,804