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 Form S-1/A which we filed with the Securities and Exchange Commission on
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
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, (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 operate our business
through the following subsidiaries:
· Grom Social, Inc. was incorporated in the State of Florida on March 5,
2012. Grom Social 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 been nonoperational since its
inception.
· Curiosity Ink Media, LLC ("Curiosity") was incorporated in the State of
Delaware on January 9, 2017. Curiosity creates, acquires, and develops the
commercial potential of kids & 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
nine months ended September 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 nine months ended September 30, 2022, we announced approximately $5.8
million in new contracts for Top Draw. These projects are all expected to
commence during the remaining 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, we announced the early release of enhancements to our DCL
Program as part of strengthening the security features of our web filtering
solutions.
On November 2, 2022, we announced that we expanded our educational services
product offering by teaming up with tech management company, Radix, to offer its
cloud-based classroom management solution, TeacherView. Radix's TeacherView is
equipped with a built-in video conference system to enable remote (at home),
local or hybrid learning. The program gives educators an "over the shoulder"
teaching experience to help oversee an enhanced learning experience.
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.
On October 27, 2022, we relaunched our Santa.com website. The enhanced digital
holiday entertainment hub includes a bold new look, featuring a marketplace
where consumers can fulfill all of their holiday needs, and an improved user
experience immersed in 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.
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Curiosity's publishing arm released two graphic novels, Thunderous and The
Legion of Forgettable Supervillains, in 2022. We continue 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. On August 19, 2022, we announced that that Baldwin's Big Adventure, the
debut book in one of our preschool intellectual property franchises, would
commence selling in October 2022. On August 25, 2022, we announced that Santa's
Secret Society, the first title of our book franchise The Adventures of Herbert
Henry, would also commence selling in October 2022.
In addition, Curiosity's animated series and feature films efforts continue to
advance. On June 30, 2022, we announced an expanded relationship with creator
Dustin Ellis (also working with us on Laugh on Lorp and Aloha Hoku) to develop
an original animated comedy feature, Heston of the Apes, that Curiosity is
preparing for theatrical distribution. On September 1, 2022, Curiosity announced
that celebrated kids' TV writer, McPaul Smith, was engaged to develop its
animated preschool series, Baldwin, based on its intellectual property of the
same name. On September 26, 2022, we announced that we secured the husband-wife
writing team and best-selling authors, Chelsea and Matt Giegerich, to script the
storyline for The Pirate Princess, an original, heartwarming coming-of-age tale
about a fearless teenager raised by a notorious, but loving band of pirates.
Furthermore, 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
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.
We have experienced significant disruptions to our business and operations due
to circumstances related to COVID-19, and delays caused government-imposed
quarantines, office closings and travel restrictions, which affect both us and
our service providers. 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, our Manila-based animation studio, which accounts for
approximately 88% of our 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, 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. 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.
Recent Events
L1 Capital Financing
The Purchase Agreement, as amended on October 20, 2021, with L1 Capital
contemplated a closing of a second tranche of the offering (the "Second
Tranche") of up to an additional $6,000,000 principal amount of 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 July
20, 2023, (the "Second Tranche Note"); and (ii) a five year warrant to purchase
303,682 shares of our common stock 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, we paid to EF Hutton a fee of
$126,000.
38
The 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 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 our discretion and if the below listed "Equity
Conditions" are met, by issuance of shares of our 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 we 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").
Our 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 our 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 our common stock
as reported on Bloomberg L.P., which percentage is subject to increase by the
investor 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, 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 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.
The Second Tranche Note continues to be subject to (i) the repayment and
performance guarantees by our subsidiaries pursuant to a subsidiary guaranty
and, (ii) the security agreement pursuant to which the LI Capital was granted a
security interest in all of our assets and certain of our subsidiaries, each as
entered into in connection with the First Tranche closing on September 14, 2021.
Executive Separation Agreement and Departure of Director
On April 22, 2022, we entered into an Executive Separation Agreement with Melvin
Leiner (the "Separation Agreement"), pursuant to which Mr. Leiner retired from
his positions as our Executive Vice President and Chief Operating Officer.
Pursuant to the 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.
39
Notice of Delisting of Failure to Satisfy a Continued 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 Company's common
stock, par value $0.001 per share ("Common Stock"), for the last 30 consecutive
business days, the Company is not currently in compliance with the requirement
to maintain a minimum bid price of $1.00 per share for continued listing on The
Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the
"Minimum Bid Requirement").
The Notice has no immediate effect on the continued listing status of the
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 Nasdaq's discretion to
extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(G), Nasdaq will
provide written notification that the 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 and all other initial listing standards for The Nasdaq Capital
Market, with the exception of the Minimum Bid Requirement, and 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 requirements within the
allotted compliance periods. If the Company does not regain compliance within
the allotted compliance periods, including any extensions that may be granted by
Nasdaq, Nasdaq will provide notice that the Company's common stock will be
subject to 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 common
stock and will evaluate available options to regain compliance with the Minimum
Bid Requirement. However, there can be 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.
Reverse Stock Split
On October 4, 2022, the Board of Directors ("Board") and majority shareholders
of the Company's approved a reverse stock split of the issued and outstanding
shares of Common Stock, by a ratio of no less than 1-for-2 and no more than
1-for-30, with the exact ratio to be determined by the Board in its sole
discretion (the "Reverse Split") and with such Reverse Split to be effective at
such time and date determined by the Board in its sole discretion.
40
Results of Operations
Comparison of Results of Operations for the Three Months Ended September 30,
2022 and 2021
Revenue
Revenue for the three months ended September 30, 2022 was $1,484,958, compared
to revenue of $1,514,692 during the three months ended September 30, 2021,
representing a decrease of $29,734 or 2.0%.
Animation revenue for the three months ended September 30, 2022 was $1,419,153,
compared to animation revenue of $1,383,196 during the three months ended
September 30, 2021, representing an increase of $35,957 or 2.6%. The increase in
animation revenue is primarily attributable to commencement of previously
negotiated contracts and clients providing necessary materials for projects
previously delayed.
Web filtering revenue for the three months ended September 30, 2022 was $63,234,
compared to web filtering revenue of $130,928 during the three months ended
September 30, 2021, representing a decrease of $67,694 or 51.7%. The decrease is
primarily due to a decline in organic sales growth, and the timing or loss of
multi-year contract renewals.
Publishing revenue and other revenue have been nominal. Publication revenue for
the three months ended September 30, 2022 was $2,321, compared to $0 for the
three months ended September 30, 2021. Publishing revenues were generated from
the sales of newly released graphic novels and other published content.
Subscriptions and advertisement from our Grom Social app for the three months
ended September 30, 2022 was $250, compared to subscription and advertising
revenue of $568 during the three months ended September 30, 2021, representing a
decrease of $318 or 56.0%, 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 months ended September 30, 2022 and 2021 were
$572,948, or 38.6%, and $597,568, or 39.5%, respectively. The decrease in gross
profit is primarily attributable change in the mix of revenue streams as
compared to the prior quarter as revenue web filtering revenue carries a higher
gross profit as compared to animation revenue.
Operating Expenses
Operating expenses for the three months ended September 30, 2022 were
$2,271,398, compared to operating expenses of $2,750,989 during the three months
ended September 30, 2021, representing a decrease of $479,591 or 17.4%. The
decrease is primarily attributable to a decrease in selling, general and
administrative costs incurred during the three months ended September 30, 2022
resulting from a reduction in 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 $1,952,670 for the three months ended September 30, 2022, compared
to $2,307,830 for the three months ended September 30, 2021, representing a
decrease of $355,160 or 15.4%.
41
Professional fees are comprised of accounting and compliance services, legal
services, investor relations and other advisory fees. Professional fees were
$259,142 for the three months ended September 30, 2022, compared to $326,800 for
the three months ended September 30, 2021, representing a decrease of $67,658 or
20.7%. The decrease is largely attributable to reduced legal and accounting fees
incurred during the three months ended September 30, 2022. During the three
months ended September 30, 2021, we incurred higher fees as the result of our
financing efforts and acquisition of Curiosity Ink Media.
Depreciation and amortization included in operating expenses was $59,586 for the
three months ended September 30, 2022, compared to $116,359 for the three months
ended September 30, 2021, representing a decrease of $56,773 or 48.8%. 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 September 30, 2021.
Other Income (Expense)
Net other expense for the three months ended September 30, 2022 was $407,792,
compared to a net other expense of $178,996 for the three months ended September
30, 2021, representing an increase of $228,796 or 127.8%. The increase in other
expense is primarily attributable to the recognition of certain realized and
unrealized losses on settlement of a derivative liability during the three
months ended September 30, 2022 and a gain of $228,912 related to the
forgiveness of PPP loans recognized during the three months ended September 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
$366,840 for the three months ended September 30, 2022, compared to $492,783
during the three months ended September 30, 2021, representing a decrease of
$125,943 or 25.6%. The decrease is primarily attributable to the recognition of
less amortization of debt discounts and less interest expense resulting from
lower principal balances on convertible notes principal during the three months
ended September 30, 2022.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $2,196,958, or
$0.10 per share, for the three months ended September 30, 2022, compared to a
net loss attributable to common stockholders of $2,308,841, or $0.21 per share,
during the three months ended September 30, 2021, representing a decrease in net
loss attributable to common stockholders of $111,883 or 4.9%.
Comparison of Results of Operations for the Nine Months Ended September 30, 2022
and 2021
Revenue
Revenue for the nine months ended September 30, 2022 was $3,855,665, compared to
revenue of $4,778,527 during the nine months ended September 30, 2021,
representing a decrease of $922,862 or 19.3%.
Animation revenue for the nine months ended September 30, 2022 was $3,493,732,
compared to animation revenue of $4,373,409 during the nine months ended
September 30, 2021, representing a decrease of $879,677 or 20.1%. 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 nine months ended September 30, 2022 was $358,950
compared to web filtering revenue of $403,676 during the nine months ended
September 30, 2021, representing a decrease of $44,726 or 11.1%. The decrease is
primarily due to a decline in organic sales growth, and the timing or loss of
multi-year contract renewals.
42
Publishing revenue and other revenue have been nominal. Publication revenue for
the nine months ended September 30, 2022 was $2,321, compared to $0 for the nine
months ended September 30, 2021. Publishing revenues were generated from the
sales of newly released graphic novels and other published content.
Subscriptions and advertisement from our Grom Social app for the nine months
ended September 30, 2022 was $662, compared to subscription and advertising
revenue of $1,442 during the nine months ended September 30, 2021, representing
a decrease of $780 or 54.1%, 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 nine months ended September 30, 2022 and 2021 were
$1,079,247, or 28.0%, and $1,847,439, or 38.7%, 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 nine months ended September 30, 2022 were $6,577,533,
compared to operating expenses of $6,178,734 during the nine months ended
September 30, 2021, representing an increase of $398,799 or 6.5%. The increase
is primarily attributable to an increase in selling, general and administrative
costs and fees for professional services rendered during the nine months ended
September 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 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 $5,426,185 for the nine months ended September 30, 2022, compared
to $4,970,580 for the nine months ended September 30, 2021, representing an
increase of $455,605 or 9.2%.
Professional fees are comprised of accounting and compliance services, legal
services, investor relations and other advisory fees. Professional fees were
$963,149 for the nine months ended September 30, 2022, compared to $839,831 for
the nine months ended September 30, 2021, representing an increase of $123,318
or 14.7%.
Depreciation and amortization included in operating expenses was $188,199 for
the nine months ended September 30, 2022, compared to $368,323 for the nine
months ended September 30, 2021, representing a decrease of $180,124 or 48.9%.
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 nine
months ended September 30, 2021.
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Other Income (Expense)
Net other expense for the nine months ended September 30, 2022 was $3,263,780,
compared to a net other expense of $2,821,202 for the nine months ended
September 30, 2021, representing an increase of $442,578 or 15.7%. The increase
in net other expense is primarily attributable recognition of interest expense
of $1,052,350 related to the recognition of a derivative liability and a loss of
$119,754 on the settlement of a substantial portion of the derivative liability
recognized during the nine months ended September 30, 2022.
Interest expense is comprised of interest incurred on our convertible notes and
from the amortization of note discounts. Interest expense was $3,312,370 for the
nine months ended September 30, 2022, compared to $2,236,545 during the nine
months ended September 30, 2021, representing an increase of $1,075,825 or
48.1%. The increase is primarily attributable to the recognition of interest
expense of $1,052,350 related to the recognition of a derivative liability and
an increase in amortization of debt discounts during the nine months ended
September 30, 2022.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $9,045,980, or
$0.50 per share, for the nine months ended September 30, 2022, compared to a net
loss attributable to common stockholders of $7,128,941, or $0.91 per share,
during the nine months ended September 30, 2021, representing an increase in net
loss attributable to common stockholders of $1,917,059 or 26.9%.
Liquidity and Capital Resources
At September 30, 2022, we had cash and cash equivalents of $1,311,495
Net cash used in operating activities for the nine months ended September 30,
2022 was $5,432,002, compared to net cash used in operating activities of
5,373,687 during the nine months ended September 30, 2021, representing an
increase in cash used of $58,315, primarily due to the increase in our net loss,
recognition of a derivative liability, change in our operating assets and
liabilities, stock-based compensation and amortization of debt discounts.
Net cash used in investing activities for the nine months ended September 30,
2022 was $71,215, compared to net cash used in investing activities of $425,789
during the nine months ended September 30, 2021 representing a decrease in cash
used of $354,574. This decrease is directly attributable to $400,000 of cash
consideration paid for the acquisition of Curiosity Ink Media during the nine
months ended September 30, 2021, offset in part by an increase of $58,511 in the
amount of fixed assets purchased and/or leasehold improvements made by our
animation studio in Manilla, Philippines during the nine months ended September
30, 2022.
Net cash provided by financing activities for the nine months ended September
30, 2022 was $223,100, compared to net cash provided by financing activities of
$14,768,735 for the nine months ended September 30, 2021, representing a
decrease in cash provided of $13,471,566. The primary reason for the decrease is
attributable to our public equity offering and issuance of convertible notes
completed in 2021.
Our primary sources of cash from financing activities during the nine months
ended September 30, 2022 were attributable to $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, $950,000 and $100,000 in proceeds
from the sale of our Series B Stock and Series C Stock, respectively, and
$908,500 in proceeds from the sale of 8% to 12% senior secured convertible notes
during the nine months ended September 30, 2021. These sources of cash were
offset, in part, by the repayment of convertible notes and loans payable of
$146,831 and cash settlement of a derivative liability of $1,074,069 in
accordance with note conversions during the nine months ended September 30,
2022, as compared to repayments of convertible notes and loans for $1,058,307
during the nine months ended September 30, 2021.
44
We believe that based on our current operating levels that we will need to raise
additional funds by selling additional equity or incurring debt. To date, hawse
have funded our operations primarily through sales of our common stock in public
markets and proceeds from the exercise of warrants to purchase common stock and
the sale of convertible notes. We have a substantial doubt about the our ability
to continue as a going concern for the twelve months from the date of this
report.
Our management intends to raise additional funds through the issuance of equity
securities or debt. There can be no assurance that, in the event that we require
additional financing, such financing will be available at terms acceptable to
us, if at all. Failure to generate sufficient cash flows from operations, raise
additional capital and reduce discretionary spending could have a material
adverse effect on our ability to achieve our intended business objectives. As a
result, the substantial doubt about our ability to continue as a going concern
has not been alleviated. The accompanying condensed consolidated financial
statements do not include any adjustments that might be necessary if we are
unable to continue as a going concern.
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.
During the three and nine months ended September 30, 2022, there were no
significant changes to the critical accounting estimates disclosed under the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 2021 Annual Report on Form 10-K.
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