Grom Social Enterprises, Inc. (NASDAQ:GROM) is a leading provider of family-friendly media, technology, and entertainment solutions, carving out a unique niche in the rapidly evolving digital landscape. With a mission to deliver content and experiences that cater to the needs of children under the age of 13, Grom has established itself as a trusted name in the industry, offering a safe and secure online environment for young users.
Company Background
Grom's journey began in 2012 with the launch of its social media platform, Grom Social, designed specifically for children. Recognizing the growing concerns around online safety and the prevalence of cyberbullying, the company set out to create a platform that would empower parents to monitor and guide their children's digital interactions. By prioritizing COPPA (Children's Online Privacy Protection Act) compliance, Grom has positioned itself as a pioneer in the kid-safe social media space, providing a nurturing and controlled environment for its users.
The company was initially incorporated in the State of Florida on April 14, 2014, under the name Illumination America, Inc. On August 17, 2017, it acquired Grom Holdings, Inc., a Delaware corporation, pursuant to a share exchange agreement. This acquisition led to the company changing its name to Grom Social Enterprises, Inc.
Operating Subsidiaries
Grom operates its business through five operating subsidiaries: Grom Social, Inc., TD Holdings Limited, Grom Educational Services, Inc., Grom Nutritional Services, Inc., and Curiosity Ink Media, LLC. Each subsidiary focuses on a specific aspect of the company's diverse portfolio. Grom Social, Inc. manages the company's social media network for children under 13 years old. TD Holdings Limited, through its subsidiaries Top Draw Animation Hong Kong Limited and Top Draw Animation, Inc., provides production services for animated films and television series. Grom Educational Services, Inc. offers web filtering services to schools and government agencies. Although currently non-operational, Grom Nutritional Services, Inc. was established to market and distribute nutritional supplements to children. Curiosity Ink Media, LLC focuses on developing, acquiring, and maximizing the commercial potential of kids and family entertainment properties.
Strategic Acquisitions
In 2017, Grom expanded its portfolio by acquiring Curiosity Ink Media, a company focused on developing, acquiring, and maximizing the commercial potential of kid-friendly entertainment properties. This strategic move allowed Grom to further strengthen its content creation capabilities, positioning the company as a well-rounded provider of entertainment solutions for the family market.
Grom's acquisition of Top Draw Animation, a leading global supplier of premium 2D animation production services, in 2017 was another significant milestone. Top Draw's expertise in bringing animated films and television series to life has enabled Grom to offer world-class animation services to a diverse base of global content providers and publishers.
The company's commitment to innovation and growth is evident in its recent announcement of the acquisition of Arctic7, a Texas-based gaming industry service provider. This pending deal is expected to broaden Grom's portfolio of entertainment offerings, allowing the company to tap into the rapidly expanding gaming market and provide a more comprehensive suite of services to its clients.
Business Overview
Grom Social Enterprises operates through three primary business segments: Animation, Original Content, and Social Technology. The Animation segment, which includes the business of TD Holdings Limited (TDH) and its subsidiaries primarily based in the Philippines, provides production services for animated films and television series to a diverse base of global content providers and publishers.
The Original Content segment, operated by Curiosity Ink Media, LLC (CIM) in Los Angeles, California and Salt Lake City, Utah, focuses on developing, acquiring, building, growing, and maximizing the commercial potential of kids and family entertainment properties and associated business opportunities.
The Social Technology segment, which includes the businesses of Grom Social, Inc. (GSOC) and Grom Educational Services, Inc. (GEDU), delivers content to children under the age of 13 in a safe, secure COPPA-compliant platform and provides protective web filtering solutions to block unwanted or inappropriate content.
Financials
Grom's financial performance has been challenging in recent years. For the fiscal year 2023, the company reported annual revenue of $4.04 million, a net loss of $12.53 million, annual operating cash flow of -$8.87 million, and annual free cash flow of -$8.91 million.
In the most recent quarter (Q1 2024), Grom reported total revenue of $874,230, a significant decrease of 27.1% compared to the prior year period. This decline was driven by decreases across all three of the company's business segments. The Animation segment generated revenue of $761,500, down 28% compared to the prior year period, primarily due to a smaller number of animation projects in production. The Original Content segment revenue was $45,060, down 11.4% from the prior year period, due to a reduction in sales of published products. The Social Technology segment revenue was $67,660, down 25.7% from the prior year period, primarily due to a decline in sales and the timing or loss of multi-year contract renewals from the web filtering solutions business.
Gross profit for Q1 2024 was $262,340, or 30% of revenue, compared to $540,140, or 45% of revenue, in the prior year period. The decrease in gross profit was primarily attributable to the lower revenue levels in the Animation segment. Operating expenses for the quarter were $2.02 million, down 12.2% from the prior year period, primarily due to a decrease in selling, general and administrative costs.
The company reported a net loss attributable to common stockholders of $4.15 million, or $1.47 per share, for Q1 2024, compared to a net loss of $2.33 million, or $8.55 per share, in the prior year period. The increase in net loss was largely driven by higher interest expense related to the amortization and write-off of debt discounts on convertible promissory notes.
Geographic Performance
Grom operates primarily in the United States and Philippines. For the three months ended March 31, 2024, 86.9% of revenue was generated from the Philippines, with the remaining 13.1% from the United States. This geographic distribution highlights the importance of the company's Animation segment, which is primarily based in the Philippines.
Industry Trends
The global animation industry is expected to grow at a compound annual growth rate (CAGR) of approximately 10% from 2023 to 2030. This growth is driven by rising demand for animation content across various platforms such as TV, film, and online streaming. Grom's strong presence in the animation sector through its TD Holdings subsidiary positions the company to potentially benefit from this industry trend.
Liquidity
As of the most recent reporting period, Grom's liquidity position remains challenging. The company has a debt-to-equity ratio of 0.08, cash on hand of $452,450, a current ratio of 0.60, and a quick ratio of 0.59. These metrics indicate that the company may face challenges in meeting its short-term obligations and funding its operations.
The company has faced several financial challenges over the years. In 2022, it recorded an impairment charge of $11.34 million related to goodwill. Grom has also incurred significant operating losses since its inception, with an accumulated deficit of $96.74 million as of December 31, 2023. To fund its operations, the company has relied primarily on sales of its common stock in public markets, proceeds from the exercise of warrants, and the sale of convertible notes.
Risks and Challenges
One of the key risks facing Grom is its reliance on a limited number of large customers, which can expose the company to potential revenue fluctuations. Additionally, the highly competitive nature of the kid-friendly entertainment market and the ongoing threat of cybersecurity breaches pose significant challenges that the company must navigate.
The company's recent financial performance, characterized by declining revenues across all segments and widening losses, underscores the challenges Grom faces in growing its business and achieving profitability. The management team is focused on identifying ways to streamline operations, reduce costs, and explore strategic opportunities to enhance the long-term viability of the organization.
Conclusion
In conclusion, Grom Social Enterprises, Inc. (NASDAQ:GROM) is a unique player in the kid-friendly entertainment and media landscape, offering a safe haven for children to explore digital experiences. While the company's financial performance has been challenging, with declining revenues and increasing losses, its strategic focus on animation, content creation, and portfolio diversification suggests potential for future growth. The expected growth in the global animation industry may provide opportunities for Grom to leverage its strong presence in this sector.
However, the company faces significant challenges, including declining revenues across all segments, liquidity concerns, and the need to achieve profitability. As Grom navigates the dynamic and competitive industry, investors and stakeholders will closely follow the company's ability to capitalize on emerging opportunities, streamline operations, and mitigate the inherent risks associated with its business model. The success of Grom's efforts to turn around its financial performance and capitalize on the growing demand for kid-friendly digital content will be crucial in determining its long-term viability and success in the market.