Grom Social Enterprises, Inc. (NASDAQ:GROM) is a media, technology, and entertainment company that focuses on delivering content to children under the age of 13 in a safe and secure platform, creating and developing kids and family entertainment properties, providing world-class animation services, and offering protective web filtering solutions. Despite facing headwinds, the company's diversified business model and expertise in animation production have positioned it for potential long-term growth.

Financials

In the fiscal year ended December 31, 2023, Grom reported annual revenue of $4,041,019, a decrease from the prior year. The company's net loss for the year was $12,527,429, and its annual operating cash flow and free cash flow were -$8,873,024 and -$8,906,272, respectively. These financial results reflect the challenges the company has faced in recent years.

For the three months ended March 31, 2024, Grom reported revenue of $874,232, a decrease of 27.1% compared to the same period in the prior year. The company's gross profit for the quarter was $262,337, or 30.0% of revenue, down from 45.0% in the same period of 2023. The decrease in gross profit was primarily attributable to lower animation revenue levels.

Grom's operating expenses for the first quarter of 2024 were $2,023,354, down 12.2% from the same period in 2023. The decrease was largely due to reduced employment and benefit costs from a decrease in headcount. However, the company's net loss attributable to common stockholders for the quarter was $4,146,202, or $1.47 per share, compared to a net loss of $2,329,931, or $8.55 per share, in the same period of the prior year.

Liquidity

The company's cash and cash equivalents stood at $452,454 as of March 31, 2024, down from $2,505,449 at the end of 2023. Grom used $2,245,591 in cash for operating activities during the first quarter of 2024, compared to $2,172,556 in the same period of the prior year. This increase in cash used was primarily due to the change in the company's operating assets and liabilities and the reduction in its loss from operations.

Business Overview

Grom's business is organized into three reportable segments: Animation, Original Content, and Social & Technology. The Animation segment, which includes the company's Top Draw Animation subsidiary, is the largest contributor to Grom's revenue, accounting for $761,505, or 87.1%, of total revenue in the first quarter of 2024. However, this segment experienced a 28.0% decrease in revenue compared to the same period in 2023, primarily due to a smaller number of animation projects currently in production.

The Original Content segment, which includes Curiosity Ink Media, generated $45,064 in revenue, or 5.2% of the total, during the first quarter of 2024, a decrease of 11.4% from the same period in the prior year. This decline was attributable to a reduction in sales of the company's published products.

The Social & Technology segment, which includes Grom Social and Grom Educational Services, contributed $67,663, or 7.7%, of total revenue in the first quarter of 2024, a decrease of 25.7% compared to the same period in 2023. This decrease was primarily due to a decline in sales and the timing or loss of multi-year contract renewals from the company's web filtering solutions.

Risks and Challenges

Grom's financial performance has been impacted by various challenges, including the ongoing effects of the COVID-19 pandemic, which have affected its animation production and content development activities. The company has also faced increased competition in the kids and family entertainment market, as well as challenges in securing new customer contracts for its web filtering solutions.

Outlook

Despite these headwinds, Grom remains focused on leveraging its diversified business model and expertise in animation production to drive long-term growth. The company's Top Draw Animation subsidiary has a strong track record of providing high-quality animation services to global entertainment providers, and the company is continuously seeking to expand its client base and secure new animation assignments.

In the Original Content segment, Grom is working to develop, acquire, and build the commercial potential of its kids and family entertainment properties, with the goal of maximizing their short-, mid-, and long-term commercial potential. The company's Curiosity Ink Media subsidiary is at the forefront of this effort, and Grom is actively exploring new opportunities to expand its content portfolio and reach.

In the Social & Technology segment, Grom is focused on enhancing its Grom Social platform and web filtering solutions to better serve its target market of children under 13 and the schools and government agencies that utilize its services. The company is investing in technology and product development to improve the user experience and expand its customer base.

Looking ahead, Grom's management team remains cautiously optimistic about the company's long-term prospects. The company has taken steps to streamline its operations, reduce costs, and improve its financial position, and it is actively exploring new strategic initiatives and partnerships to drive growth.

However, Grom continues to face significant challenges, including the need to raise additional capital to fund its operations and growth initiatives. The company's ability to successfully navigate these challenges and execute on its strategic plans will be crucial to its future success.

Conclusion

Overall, Grom Social Enterprises, Inc. is a diversified media and entertainment company with a strong focus on the kids and family market. While the company has faced headwinds in recent years, its expertise in animation production and its efforts to develop and acquire new content and technology solutions position it for potential long-term growth, provided it can overcome its current challenges and execute on its strategic initiatives.