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 March 31, 2023

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

For the transition period from ________ to _________

Commission File Number: 001-40409

Grom Social Enterprises, Inc.

(Exact name of registrant as specified in its charter)

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

2060 NW Boca Raton Blvd., Suite #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	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 May 12, 2023, 8,497,302 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	33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	39

Part II – OTHER INFORMATION

Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

When used in this Quarterly Report, including the documents that we have incorporated by reference, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Discussions containing forward-looking statements may be found in the material set forth under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Quarterly Report.

Forward-looking statements are necessarily subjective, are based upon our current plans, intentions, objectives, goals, strategies, beliefs, projections and expectations, and involve known and unknown risks, uncertainties and other important factors.

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Any or all of our forward-looking statements in this report may turn out to be inaccurate. Important factors that may cause actual results, our performance or achievements, or industry results to differ materially from those contemplated by such forward-looking statements include, without limitation, those discussed under the caption “Risk Factors” in this Quarterly Report. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GROM SOCIAL ENTERPRISES INC.

Condensed Consolidated Balance Sheets


	March 31,			December 31,
	2023			2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,136,755		$	3,871,176
Accounts receivable, net		826,394			1,162,230
Inventory, net		99,070			92,303
Prepaid expenses and other current assets		620,937			605,497
Total current assets		5,683,156			5,731,206
Operating lease right of use assets		1,019,237			1,069,222
Property and equipment, net		183,546			285,676
Goodwill		10,567,484			10,567,484
Intangible assets, net		5,321,725			5,364,231
Other assets		1,640,603			1,627,078
Total assets	$	24,415,751		$	24,644,897

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	419,028		$	839,679
Accrued liabilities		302,863			378,954
Dividends payable		557,435			371,799
Advanced payments and deferred revenues		445,477			576,338
Convertible notes payable, net – current		536,780			503,465
Related party payables		50,000			50,000
Lease liabilities – current		254,577			269,681
Total current liabilities		2,566,160			2,989,916
Convertible notes payable, net of loan discounts		–			68,199
Lease liabilities		773,970			803,958
Other noncurrent liabilities		226,602			434,976
Total liabilities		3,566,732			4,297,049

Commitments and contingencies (Note 17)		–			–

Stockholders' Equity:
Series A preferred stock, $0.001 par value. 10,000,000 shares authorized; zero 0 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively		–			–
Series B preferred stock, $0.001 par value. 10,000,000 shares authorized; zero 0 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively		–			–
Series C preferred stock, $0.001 par value. 10,000,000 shares authorized; 9,281,809 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively		9,282			9,282
Common stock, $0.001 par value. 500,000,000 shares authorized; 7,339,677 and 2,514,858 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively		7,340			2,515
Additional paid-in capital		104,609,026			101,726,355
Accumulated deficit		(85,802,343	)		(83,472,412	)
Accumulated other comprehensive loss		(136,493	)		(166,129	)
Total Grom Social Enterprises, Inc. stockholders' equity		18,686,812			18,099,611
Noncontrolling interests		2,162,207			2,248,237
Total stockholders' equity		20,849,019			20,347,848
Total liabilities and equity	$	24,415,751		$	24,644,897

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 March 31,			Three Months Ended March 31,
	2023			2022

Sales	$	1,199,643		$	1,231,125
Cost of goods sold		659,506			916,949
Gross profit		540,137			314,176
Operating expenses:
Depreciation and amortization		153,190			64,450
Selling, general and administrative		1,875,360			1,694,819
Professional fees		276,920			404,066
Total operating expenses		2,305,470			2,163,335
Loss from operations		(1,765,333	)		(1,849,159	)
Other income (expense)
Interest income (expense), net		(480,778	)		(1,631,022	)
Other gains (losses)		15,786			23,736
Total other income (expense)		(464,992	)		(1,607,286	)
Loss before income taxes		(2,230,325	)		(3,456,445	)
Provision for income taxes (benefit)		–			–
Net loss		(2,230,325	)		(3,456,445	)
Loss attributable to noncontrolling interests		(86,030	)		(79,838	)
Net loss attributable to Grom Social Enterprises, Inc. stockholders		(2,144,295	)		(3,376,607	)
Dividends to Series C preferred stockholders		185,636			176,844
Net loss attributable to Grom Social Enterprises, Inc. common stockholders		(2,329,931	)		(3,553,451	)

Basic and diluted loss per common share	$	(0.43	)	$	(7.59	)

Weighted-average number of common shares outstanding:
Basic and diluted		5,448,105			468,458

Comprehensive loss:
Net loss	$	(2,230,325	)	$	(3,456,445	)
Foreign currency translation adjustment		29,636			(3,718	)
Comprehensive loss		(2,200,689	)		(3,460,163	)
Comprehensive loss attributable to noncontrolling interests		(86,030	)		(79,838	)
Comprehensive loss attributable to Grom Social Enterprises, Inc. common stockholders	$	(2,114,659	)	$	(3,380,325	)

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

Common Stock

Additional Paid-in

Accumulated

Accumulated Other Comprehensive

Noncontrolling

Total Stockholders'

Value

Capital

Deficit

Loss

Interests

Equity

Balance, January 1, 2022

–

9,400,309

9,400

433,631

434

89,863,573

(66,404,190

)

(30,755

)

2,682,339

26,120,801

Net loss

–

(3,376,607

)

–

(79,838

)

(3,456,445

)

Change in foreign currency translation

–

(3,718

)

–

(3,718

)

Conversion of Series C preferred stock into common stock

–

(39,500

)

(39

)

686

–

Dividends declared for Series C preferred stock

–

(176,844

)

–

(176,844

)

Issuance of common stock as payment for Series C preferred stock dividends payable

–

5,842

459,062

–

459,068

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

–

2,486

76,820

–

76,822

Conversion of note principal and accrued interest into common stock

–

191,912

192

4,124,808

–

4,125,000

Recognition of beneficial conversion features related to notes payable

–

363,329

–

363,329

Stock based compensation expense related to stock options

–

48,142

–

48,142

Balance, March 31, 2022

–

9,360,809

9,361

634,557

635

94,935,772

(69,957,641

)

(34,473

)

2,602,501

27,556,155

Series A Preferred Stock

Series B Preferred Stock

Series C Preferred Stock

Common Stock

Additional Paid-in

Accumulated

Accumulated Other Comprehensive

Noncontrolling

Total Stockholders'

Value

Capital

Deficit

Loss

Interests

Equity

Balance, January 1, 2023

–

9,281,809

9,282

2,514,858

2,515

101,726,355

(83,472,412

)

(166,129

)

2,248,237

20,347,848

Net loss

–

(2,144,295

)

–

(86,030

)

(2,230,325

)

Change in foreign currency translation

–

29,636

–

29,636

Conversion of Series C preferred stock into common stock

–

Dividends declared for Series C preferred stock

–

(185,636

)

–

(185,636

)

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

–

100,000

100

2,448,259

–

2,448,359

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

–

4,701,485

4,702

7,607

–

12,309

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

–

23,334

31,945

–

31,968

Issuance of common stock purchase warrants as consideration for waiver of a financing covenant

–

350,038

–

350,038

Stock based compensation expense related to stock options

–

44,822

–

44,822

Balance, March 31, 2023

–

9,281,809

9,282

7,339,677

7,340

104,609,026

(85,802,343

)

(136,493

)

2,162,207

20,849,019

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

GROM SOCIAL ENTERPRISES INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended March 31,			Three Months Ended March 31,
	2023			2022
Cash flows from operating activities:
Net loss	$	(2,230,325	)	$	(3,456,445	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		206,834			130,830
Amortization of debt discount		5,206			1,621,313
Amortization of right-of-use assets		72,869			82,644
Provision for doubtful accounts		7,149			–
Common stock purchase warrants issued for financing costs		350,039			–
Common stock issued in exchange for fees and services		31,968			76,822
Retirement benefit cost		46,363			–
Stock based compensation		44,822			48,142
Loss on disposal of property and equipment		559			–
Changes in operating assets and liabilities:
Accounts receivable		328,687			201,832
Inventory		(6,768	)		(4,172	)
Prepaid expenses and other current assets		(15,441	)		(46,245	)
Other assets		(107,977	)		(118,594	)
Accounts payable		(469,751	)		(70,542	)
Accrued liabilities		(29,489	)		39,250
Advanced payments and deferred revenues		(130,862	)		(8,273	)
Income taxes payable and other noncurrent liabilities		(208,373	)		(3,091	)
Operating lease liabilities		(68,066	)		(94,167	)
Net cash used in operating activities		(2,172,556	)		(1,600,696	)

Cash flows from investing activities:
Purchase of property and equipment		(15,193	)		(25,825	)
Proceeds from the sale of property and equipment		4,688			–
Net cash used in investing activities		(10,505	)		(25,825	)

Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs		2,448,359			–
Proceeds from exercise of common stock purchase warrants, net of issuance costs		12,309			–
Proceeds from issuance of convertible notes		–			1,444,000
Repayments of convertible notes		(40,089	)		(35,968	)
Repayments of loans payable		–			(31,510	)
Net cash provided by financing activities		2,420,579			1,376,522

Effect of exchange rates on cash and cash equivalents		28,061			(8,834	)
Net increase (decrease) in cash and cash equivalents		265,579			(258,833	)
Cash and cash equivalents at beginning of period		3,871,176			6,530,161
Cash and cash equivalents at end of period	$	4,136,755		$	6,271,328

Supplemental disclosure of cash flow information:
Cash paid for interest	$	6,917		$	11,796
Cash paid for income taxes	$	–		$	–

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued to reduce dividends payable to Series C preferred stockholders	$	–		$	459,068
Common stock warrants issued in connection with convertible promissory notes	$	–		$	363,329
Conversion of note principal and accrued interest into common stock	$	–		$	4,125,000
Dividends payable to Series C preferred stockholders	$	185,636		$	176,844

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

GROM SOCIAL ENTERPRISES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited)

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. 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, (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 operates its business through the following five operating subsidiaries:

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

	·	TD Holdings Limited (“TD Holdings”), incorporated in Hong Kong on September 15, 2005, operates through its two wholly-owned subsidiaries: (i) Top Draw Animation Hong Kong Limited, 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”), incorporated in the State of Florida on January 17, 2017, operates the Company’s web filtering services provided to schools and government agencies.

	·	Grom Nutritional Services, Inc. (“GNS”), incorporated in the State of Florida on April 19, 2017, intends to market and distribute nutritional supplements to children. It has been nonoperational since its inception.

	·	Curiosity Ink Media, LLC (“Curiosity”), organized in the State of Delaware on January 9, 2017, develops, acquires, builds, grows and maximizes the short, mid and long-term 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.	GOING CONCERN

The condensed consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Based on current operating levels, the Company will need to raise additional funds by selling additional equity or incurring debt.

On a consolidated basis, the Company has incurred significant operating losses since its inception. As of March 31, 2023, The Company has an accumulated deficit of $85.8 million. During the three months ended March 31, 2023, it used approximately $2.2 million in cash for operating activities.

The Company has funded its operations primarily through sales of its common stock in public markets, proceeds from the exercise of warrants to purchase common stock, and the sale of convertible notes. Future capital requirements will depend on many factors, including the (i) rate of revenue growth, (ii) expansion of sales and marketing activities, (iii) timing and extent of spending on content development efforts, and (iv) market acceptance of the Company’s content, products and services.

The Company’s management intends to raise additional funds through the issuance of equity securities or debt to enable the Company to meet its obligations for the twelve-month period. However, there can be no assurance that, in the event the Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations and/or raise additional capital could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months from the date of this report.

The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

3.	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 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 affected 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 88% of the Company’s total revenues on a consolidated basis, 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 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 also implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In January 2022, the Company started to recall artists and employees to return to the studio. It is currently operating at 50% seat capacity.

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

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conjunction with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted. For the three months ended March 31, 2023, 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 equity in the consolidated financial statements separate from the parent entity’s equity. The net loss attributable to noncontrolling interest is included in net loss in the condensed consolidated statements of operations and comprehensive loss.

These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary for a fair presentation of financial position and results of operations. All such adjustments, which include 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, 2022, as presented in the Company’s Annual Report on Form 10-K filed on April 17, 2023 with the SEC.

Certain amounts for the prior year period have been reclassified to conform to current year’s presentation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The most significant estimates relate to revenue recognition, valuation of accounts receivable, goodwill and other long-lived assets, and contingencies. The Company bases its estimates on historical experience, known or expected trends and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

Update to Significant Accounting Policies

There have been no 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, 2022 as filed with the SEC on April 17, 2023, that are of significance, or potential significance, to the Company.

4.	REVENUES

The Company recognizes revenue from contracts with customers in accordance with FASB ASC 606. The Company’s main types of revenue contracts consists of the following:

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.

Web Filtering Revenue

Web filtering revenue from subscription sales is recognized on a pro-rata basis over the subscription period. Typically, a subscriber purchases a computer appliance 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 appliance 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 episodic television programs.

Each individual film or television series 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.

Publishing Revenue

The Company has engaged the services of a third-party entity to manage the printing, publishing and 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 month 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 ecommerce sales, commercial services, and subscription and advertising revenue from the Grom Social mobile application.

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 March 31, 2023		Three Months Ended March 31, 2022
Animation	$	1,057,669	$	1,048,613
Web Filtering		90,810		182,244
Publishing		10,101		–
Other		41,063		268
Total Sales	$	1,199,643	$	1,231,125

The following table sets forth the components of the Company’s accounts receivable and advanced payments and deferred revenues at March 31, 2023, and December 31, 2022:

Schedule of accounts receivable
	March 31, 2023			December 31, 2022

Billed accounts receivable	$	317,619		$	607,524
Unbilled accounts receivable		553,900			592,932
Allowance for doubtful accounts		(45,125	)		(38,226	)
Total accounts receivable, net	$	826,394		$	1,162,230
Total advanced payments and deferred revenues	$	445,477		$	576,338

During the three months ended March 31, 2023, the Company had three customers that accounted for 76.3% of revenues. During the three months ended March 31, 2022, the Company had three customers that accounted for 65.9% of revenues.

At March 31, 2023, the Company had three customers that accounted for 78.9% of accounts receivable. At December 31, 2022, the Company had two customers that accounted for 73.6% 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.

5.	INVENTORY

Inventory consists of costs incurred to produce animated content for third party customers. Costs incurred to produce the animated content for 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 March 31, 2023 and December 31, 2022, the Company’s inventory totaled $99,070 and $92,303, respectively, and was comprised of work-in-progress of $85,830 and $85,324, and finished goods of $13,240 and $6,979, respectively.

6.	PROPERTY AND EQUIPMENT

The following table sets forth the components of the Company’s property and equipment at March 31, 2023 and December 31, 2022:

Schedule of property and equipment
	March 31, 2023							December 31, 2022
	Cost		Accumulated Depreciation			Net Book Value		Cost		Accumulated Depreciation			Net Book Value
Capital assets subject to depreciation:
Computers, software and office equipment	$	2,554,434	$	(2,470,748	)	$	83,686	$	2,774,308	$	(2,651,872	)	$	122,436
Machinery and equipment		177,916		(173,642	)		4,274		189,641		(182,180	)		7,461
Vehicles		11,995		(11,995	)		–		41,112		(35,504	)		5,608
Furniture and fixtures		383,379		(369,159	)		14,220		409,996		(391,783	)		18,213
Leasehold improvements		1,100,013		(1,018,647	)		81,366		1,172,501		(1,065,148	)		107,353
Total fixed assets		4,227,737		(4,044,191	)		183,546		4,587,558		(4,326,487	)		261,071
Capital assets not subject to depreciation:
Construction in progress		–		–			–		24,605		–			24,605
Total fixed assets	$	4,227,737	$	(4,044,191	)	$	183,546	$	4,612,163	$	(4,326,487	)	$	285,676

For the three months ended March 31, 2023 and 2022, the Company recorded depreciation expense of $69,876 and $92,674, respectively.

7.	OTHER ASSETS

The following table sets forth the components of the Company’s other assets at March 31, 2023 and December 31, 2022:

Schedule Of Other Assets
	March 31, 2023		December 31, 2022

Capitalized website development costs	$	963,664	$	1,057,312
Prepublication costs		166,112		164,042
Produced and licensed content costs		436,549		325,966
Deposits		74,278		72,027
Other noncurrent assets		–		7,731
Total other assets	$	1,640,603	$	1,627,078

Capitalized Website Development Costs

The Company capitalizes certain costs associated with the development of its Santa.com website after the preliminary project stage is complete and until the website is ready for its intended use. Planning and operating costs are expensed as incurred. Capitalization begins when the preliminary project stage is complete, project plan is defined, functionalities are determined and internal and external resources are identified. Qualified costs incurred during the operating stage of our software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs that cannot be separated between maintenance of, and minor upgrades and enhancements to the websites are expensed as incurred.

Capitalized website costs are amortized on a straight-line basis over their estimated useful life of three years beginning with the time when it is ready for intended use. Amounts amortized are presented through cost of sales. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Prepublication Costs

Prepublication costs include costs incurred to create and develop the art, prepress, editorial, digital conversion and other content required for the creation of the master copy of a book or other media. Prepublication costs are amortized on a straight-line basis over a two- to five-year period based on expected future revenue. The Company regularly reviews the recoverability of the capitalized costs based on expected future revenues.

Produced and Licensed Content Costs

Produced and licensed content costs include capitalizable direct costs, production overhead, interest and development costs and are stated at the lower of cost, less accumulated amortization, or fair value. Marketing, distribution and general and administrative costs are expensed as incurred.

Film, television and direct to consumers through streaming services production and residual costs are expensed over the product life cycle based upon the ratio of the current period’s revenues to estimated remaining total revenues (Ultimate Revenues) for each production. For film productions and direct to consumer services, Ultimate Revenues include revenues from all sources that will be earned within ten years from the date of the initial release. For television series, Ultimate Revenues include revenues that will be earned within ten years from delivery of the first episode, or if still in production, five years from delivery of the most recent episode, if later. Costs of film, television and direct to consumer productions are subject to regular recoverability assessments, which compare the estimated fair values with the unamortized costs. The Company bases these fair value measurements on the Company’s assumptions about how market participants would price the assets at the balance sheet date, which may be different than the amounts ultimately realized in future periods. The amount by which the unamortized costs of film and television productions exceed their estimated fair values is written off. Costs for projects that have been abandoned are written off. Projects that have not been set for production within three years are also written off unless management has committed to a plan to proceed with the project and is actively working on and funding the project.

The following tables set forth the components of the Company’s capitalized costs at March 31, 2023 and December 31, 2022:

Schedule of capitalized cost
	March 31, 2023							December 31, 2022
	Gross Carrying Value		Accumulated Amortization			Net Book Value		Gross Carrying Value		Accumulated Depreciation			Net Book Value
Prepublication costs	$	168,398	$	(2,286	)	$	166,112	$	165,524	$	(1,482	)	$	164,042
Produced and licensed content costs		436,549		–			436,549		325,966		–			325,966
Capitalized website development costs		1,123,772		(160,108	)		963,664		1,123,772		(66,460	)		1,057,312
Total capitalized costs	$	1,728,720	$	(162,394	)	$	1,566,325	$	1,615,262	$	(67,942	)	$	1,547,320

For the three months ended March 31, 2023 and 2022, the Company recorded amortization expense of $94,452 and $0, respectively.

8.	LEASES

The Company has entered into operating leases primarily for office space. These leases have original 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. During the three months ended March 31, 2023, the Company did not record any additional right of use (“ROU”) assets or lease liabilities related to new operating leases.

The future minimum payment obligations at March 31, 2023 for operating leases are as follows:


Remainder of 2023	$	287,404
2024		280,112
2025		281,663
2026		228,798
2027		240,239
Thereafter		–
Total future minimum payment obligations		1,318,216
Less: Imputed interest		(289,669	)
Present value of lease liabilities	$	1,028,547

These operating leases are listed as separate line items on the Company's Consolidated Balance Sheets and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's Consolidated Balance Sheets.

Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.

Information related to the Company's operating right-of-use assets and related lease liabilities are as follows:


	Three Months Ended March 31, 2023
Cash paid for operating lease liabilities	$	95,300
Weighted-average remaining lease term in years		3.1
Weighted-average discount rate		10%

For the three months ended March 31, 2023 and 2022, the Company recorded rent expenses related to lease obligations of $100,102 and $105,340, 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.

9.	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 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 “Curiosity Note”) to pay-down and refinance certain outstanding loans and advances previously made to Curiosity by Russell Hicks and Brett Watts.

The Curiosity 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 Curiosity Note may be prepaid at any time, in whole or in part. The Curiosity 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.

In addition to the tangible assets, goodwill totaling $14,271,969 was recorded in connection with the acquisition. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents potential future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is not expected to be deductible for tax purposes.

Schedule of consideration paid
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

The 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:


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