Cheer Holding, Inc. current report, 14 February 2020

Business Context and Reporting Period

Cheer Holding, Inc., then named Glory Star New Media Group Holdings Limited, filed this Form 8-K reporting the completion of its business combination with Glory Star New Media Group Limited on February 14, 2020. The transaction transformed the former TKK Symphony Acquisition Corporation shell company into an operating online media, entertainment and e-commerce company focused on China.

The acquired business generates revenue from copyright licensing, advertising, customized content production and CHEERS e-Mall market services. Historical financial information relates primarily to Glory Star Group. The interim financial statements for the nine months ended September 30, 2019 were unaudited and had not been reviewed by an independent public accountant.

Key Financial Metrics

Metric	Nine months ended September 30, 2018	Nine months ended September 30, 2019	Change
Revenue	$38.698 million	$51.083 million	+32.0%
Cost of revenue	$26.213 million	$28.301 million	+8.0%
Income from operations	$8.415 million	$19.279 million	+129.1%
Operating margin	21.75%	37.74%	+15.99 percentage points
Income before income taxes	$8.121 million	$18.941 million	+133.2%
Net income	$8.234 million	$18.625 million	+126.2%
Net income attributable to shareholders	$7.983 million	$18.915 million	+136.9%

Net margin increased from approximately 21.3% to 36.5%. Management attributed the margin expansion principally to greater use of the company’s own platform and reduced payments to third-party channel owners for broadcasting.

Cash and cash equivalents at September 30, 2019 were approximately $3.969 million.
Working capital was approximately $35.478 million.
Operating cash flow improved from $11.125 million used in the first nine months of 2018 to $6.553 million provided in the first nine months of 2019.
Investing cash flow was $(0.104) million in 2018 and $(0.040) million in 2019, primarily for equipment purchases.
Financing cash flow changed from $8.157 million provided in 2018 to $4.809 million used in 2019, primarily reflecting repayment of bank loans.
Cash increased by $1.532 million during the first nine months of 2019, compared with a $3.175 million decrease in the comparable 2018 period.

The filing does not provide a clear total debt balance at September 30, 2019. It states that the company used short-term borrowings in prior periods, repaid $7.342 million of bank loans during the first nine months of 2019, and had a $1.4 million Amended Sponsor Note after the business combination.

Material Changes Versus the Prior Comparable Period

Revenue growth was driven by the CHEERS mobile platform, increased live-show activity, expanded short-video production, additional advertising opportunities and successful network dramas.
Cost of revenue increased only 8.0% despite 32.0% revenue growth, reflecting lower payments to broadcasting channel owners partly offset by higher production costs.
Selling and marketing expense declined 10.4% to $2.053 million, and general and administrative expense declined 8.1% to $1.225 million.
Research and development expense declined 49.7% to $0.225 million, primarily because a software development expense recorded in 2018 did not recur.
Accounts receivable increased and had historically required supplemental short-term borrowing. Management stated that more timely collections were expected to improve cash flow.
A $15.470 million long-term prepayment to a third-party software developer for development and maintenance of the CHEERS app was a significant use of operating cash in 2019.

Transaction, Capitalization and Unusual Items

GS Holdings acquired 100% of Glory Star in exchange for approximately 41.204 million ordinary shares, including 2.060 million escrow shares, plus up to 10 million potential earnout shares tied to 2019 and 2020 performance targets. Alternative earnout provisions may apply based on combined performance.
Immediately after closing, sellers owned approximately 82.79% of the combined company, former public shareholders owned approximately 5.05%, and former TKK directors, officers, initial shareholders and EarlyBirdCapital owned approximately 12.16%.
There were 49.768 million ordinary shares outstanding after the transaction.
EarlyBirdCapital agreed to reduce an $8.8 million marketing fee and waive expense reimbursement in exchange for a one-year, non-interest-bearing $4.0 million convertible promissory note. The note has a $5.00 conversion-price floor initially, subject to reductions if the related registration statement is not effective by the stated deadline.
The Sponsor Note was amended to extend maturity by one year after the business combination and permit conversion of approximately $1.4 million into ordinary shares at a price initially subject to a $5.00 floor.
Shares issued in the transaction and shares underlying the notes were issued under Section 4(a)(2) and/or Regulation S and were not registered in a public offering.

Guidance, Outlook, Management Commentary and Risks

Management stated that existing cash and working capital were expected to support working capital and capital expenditure needs for at least the next 12 months. The company did not anticipate major future purchases, but indicated that additional financing could be required if operating conditions deteriorated, capital expenditures increased or growth accelerated. Potential financing could involve additional debt or equity and could dilute existing shareholders.

The company expected to reinvest earnings and did not expect to pay dividends in the foreseeable future. Cash and cash equivalents were held in China and denominated in Renminbi. Dividend transfers are subject to PRC statutory reserve requirements, retained earnings, foreign-exchange procedures and other regulatory restrictions.

Coronavirus-related travel restrictions and quarantines had disrupted Chinese operations and delayed completion of the review of the September 30, 2019 interim financial statements.
Key structural risks include dependence on PRC subsidiaries and variable interest entities, regulatory changes, liquidity and financing availability, accounts receivable collection, market volatility and the ability to maintain Nasdaq listing standards.
The filing identifies material weaknesses involving limited personnel with SEC and U.S. GAAP expertise and the absence of a dedicated chief financial officer at Glory Star at the time discussed. The combined company appointed a CFO with relevant experience.
The company ceased to be a shell company following the business combination. Its trading symbols changed from TKKS and TKKSW to GSMG and GSMGW on February 19, 2020.
The filing reports subsequent changes in independent auditors: Marcum Bernstein & Pinchuk was dismissed for Glory Star and Marcum was dismissed for GS Holdings; Friedman LLP was appointed for the year ending December 31, 2019. These actions were dated February 21, 2020, after the February 14 transaction date.

Important Facts for Investors to Verify

Verify the audited 2017 and 2018 financial statements and the unaudited September 30, 2019 interim statements, particularly because the interim statements had not been reviewed.
Reconcile the reported $3.969 million cash balance and $35.478 million working capital with current post-combination liquidity, debt and restricted cash.
Assess accounts receivable aging, collection performance and the effect of the $15.470 million CHEERS app prepayment on future cash generation.
Review the $4.0 million EarlyBirdCapital Note, $1.4 million Sponsor Note, conversion terms and potential dilution.
Evaluate the earnout conditions for up to 10 million additional shares and the escrow and lock-up provisions.
Confirm ownership concentration, related-party transactions, PRC dividend and capital-control restrictions, and the legal enforceability of the variable interest entity arrangements.
Monitor the impact of coronavirus-related disruptions, Nasdaq compliance, auditor transition and remediation of reported financial-reporting weaknesses.