Cheer Holding, Inc. (formerly Glory Star New Media Group Holdings Limited) — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. Although the request labels the period “2020 Q4,” this is an annual report; the filing does not provide separate Q4 results. Financial statements are audited and prepared under U.S. GAAP. The company completed its business combination on February 14, 2020, accounted for as a reverse recapitalization, with Glory Star treated as the accounting acquirer.
Business context and financial performance
The company operates a China-focused digital media, advertising, content-production and e-commerce business. Its CHEERS App combines video content, live streaming, games and an e-Mall marketplace. Substantially all operations and revenue are generated in China, including through variable interest entities (VIEs).
| Metric (US$ millions, except per-share data) | FY2019 | FY2020 | Change / comment |
|---|---|---|---|
| Revenue | 65.8 | 123.8 | +88.2% |
| Advertising revenue | 48.4 | 104.7 | +116%; largest revenue source |
| Customized content production | 9.1 | 10.2 | Increased |
| Copyright revenue | 7.4 | 6.9 | Decreased |
| CHEERS e-Mall marketplace service revenue | 0.7 | 1.5 | Increased |
| Gross profit / gross margin | 33.9 / 51.5% | 85.3 / 68.9% | Margin calculated from revenue less cost of revenue |
| Operating income / margin | 26.8 / 40.8% | 30.7 / 24.8% | Income rose, margin fell |
| Net income | 26.4 | 29.2 | +10.8% |
| Basic / diluted EPS | $0.64 / $0.57 | $0.54 / $0.50 | Lower amid higher weighted-average shares |
| Operating cash flow | 26.1 | 8.7 | Declined despite higher net income |
| Cash and cash equivalents at year-end | 6.9 | 17.7 | Cash is primarily held in China and denominated in RMB |
Liquidity, debt and cash flow
- At December 31, 2020, current assets were $103.1 million and current liabilities were $35.4 million, yielding working capital of approximately $67.8 million and a current ratio of about 2.9.
- Net accounts receivable rose to $81.1 million from $51.1 million. Management attributed the weaker operating cash flow mainly to receivables growth and $19.3 million of increased prepayments, including $17.5 million for co-produced television series. The company said it was focusing on faster collections.
- Investing cash outflow was $4.4 million, principally for intangible assets and short-term investments. Financing cash inflow was $5.4 million, primarily from bank borrowing. Cash increased by $10.8 million during the year.
- Bank loans totaled $6.5 million at year-end: $5.2 million short-term and $1.4 million long-term. Total liabilities were $38.1 million. A $1.4 million related-party convertible note was also current at year-end; it automatically converted into 280,000 ordinary shares on February 14, 2021.
- Disclosed commitments included $7.0 million of capital commitments, $2.0 million of future office lease payments and $6.6 million of loan principal and interest obligations. Management believed cash and anticipated operating cash flows would cover working capital and capital needs for the next 12 months, while noting that additional financing might be needed and was not assured on acceptable terms.
Material changes and notable items
- CHEERS App Internet Business revenue grew to $83.6 million from $28.3 million; segment operating income increased to $24.3 million from $11.5 million. Traditional Media revenue increased to $40.2 million from $37.5 million, while its operating income declined to $11.7 million from $15.3 million.
- Selling and marketing expense surged to $43.8 million from $3.2 million, primarily due to approximately $40.9 million in advertising and user-acquisition spending. General and administrative expense rose to $10.1 million from $3.1 million, including increased share-based compensation. These costs contributed to the decline in operating margin.
- Management reported 169 million CHEERS App downloads versus 85 million, average daily active users of 5.37 million versus 1.91 million, and e-Mall GMV of $132 million versus $19.36 million. GMV is an operating metric, not recognized revenue.
- COVID-19 restrictions reduced content-production capacity and media-sector revenue in Q1 2020; management also reported faster growth in online activity and e-commerce during the period. It said uncertainty over the pandemic’s continuing effects remained.
- The 2020 earn-out target was amended on December 29, 2020, from RMB315 million to RMB182 million. The company said it believed the 2020 performance targets had been met; the filing also reports issuance of 5 million earn-out shares in 2020, but the precise allocation between earn-out periods should be checked in the underlying disclosures.
- After year-end, the company completed a February 2021 public offering and fully exercised over-allotment in March, raising approximately $13.0 million net in total, before considering subsequent uses. These transactions are not FY2020 results.
Outlook, risks and controls
- No formal numerical revenue or earnings guidance is provided. Management expressed confidence in its positioning and expected operating net income to continue increasing, but this is forward-looking and not a quantified forecast.
- Key business risks include reliance on advertising revenue and customer retention, high competition for users and content, substantial content and marketing investment, and collection risk on large receivables. One customer generated 14% of 2020 revenue; the top five customers represented 70% of year-end net receivables.
- China-related risks include extensive media, advertising and e-commerce regulation; uncertainty over the enforceability of the VIE contracts and foreign-investment rules; currency conversion and remittance restrictions; and possible changes in preferential tax treatment. The company also disclosed that its China bank deposits are uninsured.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2020 because of a material weakness: insufficient accounting and financial-reporting personnel with appropriate U.S. GAAP and SEC-reporting expertise. Planned remediation included hiring qualified personnel and providing ongoing training. The auditor did not provide an internal-control attestation because the company was an emerging growth company.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management reported no material pending legal proceedings and no off-balance-sheet financing arrangements. The company does not expect to pay dividends in the foreseeable future.
Most important facts for investors to verify
- Receivables: aging, subsequent collections, customer concentration and the assumptions behind the allowance for doubtful accounts.
- Whether the sharp increase in marketing and user-acquisition spending is generating durable revenue, retention and profitable growth.
- Cash conversion and the nature, timing and recoverability of the $20.6 million in non-current prepayments and other assets, including co-production advances.
- Current debt, related-party balances, guarantees and collateral, and the effect of subsequent note conversion and equity offerings on dilution.
- Progress in remediating the material weakness and whether financial reporting controls have since become effective.
- Enforceability and practical operation of the VIE arrangements, and regulatory, tax and foreign-exchange developments affecting access to China-based cash.
- The filing’s VIE financial-information note reports 2020 net income of $37.6 million, while the consolidated statements report $29.2 million; verify the source and explanation of this apparent inconsistency.