Cheer Holding, Inc. — FY2023 Form 20-F
Reporting period: Fiscal year ended December 31, 2023; filed March 14, 2024. This is an annual report, not a standalone Q4 report. Financial statement amounts below are U.S. dollars unless noted. The company reports under U.S. GAAP.
Business context
Cheer Holding is a Cayman Islands holding company whose operations are conducted in China through subsidiaries and variable interest entities (VIEs). Its business combines digital advertising and content production, the CHEERS video and e-commerce apps, and traditional media. Advertising generated nearly all revenue. The company depends on contractual VIE arrangements rather than direct ownership of its principal PRC operating entities.
Financial and operating performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $152.3m | $157.1m | Down 3.0% in USD; up approximately 2.1% in RMB, according to management |
| Operating income | $29.3m | $26.7m | Up 9.6% |
| Net income | $30.5m | $26.4m | Up 15.5% |
| Net income attributable to Cheer shareholders | $30.5m | $26.9m | Up 13.3% |
| Operating cash flow | $42.2m | $7.7m | Improved substantially |
| Cash and cash equivalents at year-end | $194.2m | $70.5m | Up $123.7m |
| Working capital at year-end | $260.7m | Not stated here | — |
Operating margin was approximately 19.2% (17.0% in 2022); net margin was approximately 20.0% (16.8% in 2022). Gross profit was $112.8m, or approximately 74.0% of revenue, compared with approximately 74.2% in 2022. Advertising revenue was $149.0m, down from $152.1m, and represented 97.9% of 2023 revenue. Copyright revenue declined to $3.0m from $4.2m; e-Mall marketplace revenue was $0.2m versus $0.3m. Customized content production revenue was nil in 2023 and 2022.
Operating expenses totaled $123.0m, down 5.6%. Selling and marketing expense declined 7.7% to $76.2m, which management attributed mainly to lower promotion spending. R&D expense increased 22.8% to $1.6m. Other income included approximately $1.2m from reversal of payables to suppliers that were liquidated. The effective income tax rate was 0.2%, with management citing preferential PRC tax rates and changes in deferred tax valuation allowances.
Operating cash flow rose to $42.2m, with improved collections and a $15.2m cash-flow benefit from accounts receivable movements; increased vendor prepayments and other current assets partly offset this. Investing cash outflow was minimal at $0.003m. Financing cash inflow was $82.0m, principally from $80.0m of private placements. Year-end cash and restricted cash totaled $194.5m, including $0.3m restricted.
Year-end total assets were $327.6m and total liabilities $47.6m. Current assets of $306.9m exceeded current liabilities of $46.2m. Bank loans totaled $5.6m: $4.2m short-term and $1.4m long-term; operating lease liabilities were $0.3m. The short-term loans carried rates of 4.50%–6.00% and were due February–May 2024; the three-year loan bears 3.95% and matures in September 2026. Some bank borrowing is guaranteed by the VIE and the chairman, with one loan also involving the vice president.
Changes, outlook and notable items
- Management attributed the reported USD revenue decrease primarily to RMB depreciation. It reported that revenue increased approximately 2.1% in RMB, mainly from advertising growth, partly offset by lower copyright licensing activity.
- CHEERS app internet business revenue was $141.0m versus $144.0m; traditional media revenue was $11.3m versus $13.0m. Internet segment operating income increased to $27.1m from $24.5m, while traditional media operating income was $2.2m versus $2.2m.
- Management said cash and expected operating cash flows should cover working capital and capital expenditure needs for the next 12 months. It gave no numerical revenue or earnings guidance. It may seek additional equity, debt or credit facilities; equity financing would dilute shareholders.
- Management expects continued investment in the CHEERS app and advertising business. The company reported 2023 growth in app downloads to 474m from 376.5m and year-end monthly active users to 58.2m from 51.5m. CHEERS Video daily time spent averaged 59 minutes; CHEERS e-Mall 360-day repurchase rate was 39.6%. These are company-defined metrics.
- The company issued shares in two 2023 private placements for $80m gross proceeds and completed a one-for-ten share consolidation in November; it also changed its name and trading symbol from Glory Star/GSMG to Cheer Holding/CHR. The proposed going-private transaction was terminated in April 2023. The parent acknowledged a $1.056m termination fee obligation; the filing text does not clearly establish whether the fee was collected.
- Capital expenditure commitments were $7.1m at year-end, primarily related to CheerCar, CheerReal and a VR platform. In February 2024, the company repaid $2.1m of bank borrowing.
- There is no expectation of cash dividends in the foreseeable future. Cash is primarily held in China, in RMB; substantially all of the reported bank cash was uninsured or otherwise unprotected under the disclosed deposit protections.
Risks, contingencies and controls
- VIE and PRC regulatory exposure: The company does not directly own its VIEs. Changes in PRC law or enforcement, or a finding that the contracts are invalid or unenforceable, could impair control, consolidation, cash flows or business operations. CSRC overseas-listing filing and reporting requirements apply to certain future offerings and material events; the company says it is not currently required to obtain permission to continue its existing U.S. listing. Regulatory interpretation remains uncertain.
- Customer, receivable and vendor concentration: A small number of customers account for a substantial share of revenue and receivables. The filing gives inconsistent 2023 customer-concentration figures in different sections. It also reports a $2.3m allowance against vendor advances and prepayments, which increased to $31.2m net at year-end from $15.3m.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2023 because of a material weakness involving insufficient personnel with U.S. GAAP and SEC-reporting expertise. Remediation plans include hiring qualified accounting staff and providing training. The auditor did not attest to internal controls.
- Legal matter: A lawsuit filed in December 2023 alleges aiding and abetting breach of fiduciary duties and negligence relating to the terminated going-private transaction. Damages are unspecified; management said it was too early to assess the outcome and reported moving to dismiss on jurisdictional grounds.
- Other exposure: Risks include advertising and media-content regulation, data privacy and cybersecurity requirements, foreign-exchange and cash-transfer restrictions, tax preferences that may expire, competition, dependence on content and advertising customers, and the uncertain commercial and regulatory prospects of NFTs and metaverse products. The company does not maintain business interruption, liability, litigation or property insurance.
- The financial statement auditor issued an unqualified opinion on the consolidated financial statements. The auditor is Assentsure PAC, based in Singapore and registered with the PCAOB. The filing notes continuing uncertainty around future PCAOB inspection access generally.
Important facts for investors to verify
- Reconcile the reported 2023 customer revenue concentration: the market-risk section lists four customers at 18%, 15%, 15% and 11%, while the financial-statement note lists 25%, 17%, 13% and 12%.
- Confirm collection and accounting treatment of the $1.056m going-private termination fee, and review the status and potential exposure of the related lawsuit.
- Track collection of the $81.2m net accounts receivable balance, the $2.3m vendor-advance allowance, and the concentration of receivables among customers.
- Assess whether the stated internal-control remediation has been completed and whether qualified U.S. GAAP/SEC-reporting personnel have been added.
- Confirm repayment or refinancing of short-term bank loans due in February–May 2024 and evaluate guarantees, restrictions on PRC cash transfers, and the usability of cash held in China.
- Evaluate dilution from the 2023 placements, outstanding warrants and any future financing, as well as the company’s ability to meet Nasdaq listing requirements.
- Monitor the $7.1m capital expenditure commitments and whether new apps, AI, NFT and metaverse initiatives produce measurable revenue relative to their costs.