Cheer Holding, Inc. (then Glory Star New Media Group Holdings Limited) — Q1 2020 10-Q
Reporting period: Three months ended March 31, 2020. Financial amounts below are in U.S. dollars, generally thousands, unless noted. The filing’s financial statements are unaudited.
Business context and reporting period
The company operates digital advertising, media and entertainment businesses in China, including advertising, content production and licensing, and the CHEERS App e-commerce platform. On February 14, 2020, it completed a business combination with TKK Symphony Acquisition Corporation, accounted for as a reverse recapitalization with Glory Star as the accounting acquirer. Its China operations include variable interest entities (VIEs) consolidated through contractual arrangements.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2020 |
|---|---|---|
| Revenue | $13.753 million | $9.757 million |
| Operating income | $4.446 million | $2.894 million |
| Net income | $4.134 million | $2.842 million |
| Net income attributable to company shareholders | $4.143 million | $2.901 million |
| Basic / diluted EPS | $0.10 / $0.09 | $0.06 / $0.06 |
| Cash from operating activities | $2.722 million | $(1.118) million |
| Cash from investing activities | $(2.349) million | $0 |
| Cash from financing activities | $(1.521) million | $4.322 million |
- Operating margin was 29.7% in Q1 2020, compared with 32.3% a year earlier; net margin was 29.1% versus 30.1%.
- At March 31, 2020, cash was $9.961 million, accounts receivable net was $55.003 million, and working capital was $46.8 million. Current assets were $67.518 million and current liabilities were $20.714 million.
- Total bank loans were $4.943 million, comprising $3.672 million current and $1.271 million long-term. The balance sheet also reported a $1.4 million related-party convertible note, $1.999 million due to related parties, and $1.821 million in operating lease liabilities.
- Operating cash flow was negative despite reported net income, primarily reflecting a $5.253 million increase in accounts receivable. Financing inflows included $4.299 million of bank borrowing.
Changes versus the prior comparable period
- Revenue fell 29.1%. Advertising revenue declined 24.2% to $7.880 million; copyright revenue declined 63.6% to $0.992 million. Management attributed the decreases to COVID-19 disruption, reduced content filming and fewer available advertising placements, as well as copyright revenue from one TV channel versus three a year earlier.
- Cost of revenue declined 39.2% to $4.991 million, less than the revenue decline in absolute terms, and gross margin increased to approximately 48.8% from 40.3%.
- General and administrative expense rose 101.4% to $1.287 million, which management attributed mainly to public-company professional fees and higher bad-debt provision. Selling and marketing expense increased 46.3% to $0.379 million, partly reflecting e-Mall coupons and reward points.
- Net income declined 31.3%. Accounts receivable net rose from $51.061 million at December 31, 2019 to $55.003 million at March 31, 2020; the allowance for doubtful accounts was $2.290 million at quarter-end.
Guidance, management commentary, risks and unusual items
- Management said existing cash and working capital should cover working-capital and capital-expenditure needs for at least 12 months. It anticipated approximately RMB85.2 million (about $12 million) of near-term capital spending to enhance the CHEERS App; no formal revenue or earnings guidance was provided.
- Management reported that Q1 average daily active users were 4.12 million, versus 0.49 million in Q1 2019. CHEERS App downloads exceeded 100.5 million as of March 31. Q1 e-Mall GMV exceeded $5.8 million, including nearly $3.0 million in March. These are company-reported operating metrics, not revenue.
- Management said COVID-19 constrained content production and slowed customer collections from January through March, while online usage increased. It reported recovery in collections beginning in early April but gave no quantified forecast.
- The company cited VAT-invoice quota delays as a factor contributing to receivables and collection delays. It also warned that additional financing might be needed under adverse conditions or accelerated growth, and that financing could be unavailable or dilutive. Cash was primarily held in China and denominated in renminbi; dividend payments are subject to PRC restrictions, and the company said it intended to reinvest earnings.
- Disclosure controls and procedures were reported ineffective at March 31 because of a previously identified material weakness in SEC-compliant financial reporting capability. The company hired a finance controller, but management said remediation was ongoing and the weakness would persist until implementation and evaluation were complete.
- Business-combination effects included issuance of 41,204,025 closing shares and conversion of public rights into 2,504,330 shares. The company issued 5 million 2019 earnout shares on April 22, 2020, after the quarter. At March 31, 50,898,866 shares were outstanding; the filing reports 55,898,866 outstanding as of May 4.
- A $4 million EarlyBirdCapital convertible note was converted into 800,000 ordinary shares on March 26. A separate $1.4 million sponsor note was amended, with conversion rights and a $5 per-share floor. The company also disclosed bank loans guaranteed or counter-guaranteed by company executives and pledged receivables for one facility.
Important facts for investors to verify
- Whether receivables are collected as expected, including the timing of VAT invoices, customer payment trends and the adequacy of the doubtful-account allowance.
- Whether advertising and copyright revenue recover as content production resumes, and whether growth in app usage and GMV converts into monetized revenue and cash flow.
- The funding, timing and returns of the planned approximately $12 million CHEERS App investment, alongside the company’s debt maturities and financing needs.
- Completion and independent evaluation of the remediation of the material weakness in internal controls.
- The dilution and share-count impact of earnout shares, convertible notes, warrants and other potential equity issuances; also confirm the subsequent-event share issuance against the current capitalization.
- The continuing enforceability and regulatory risks of the PRC VIE arrangements, and the practical limits on moving cash from China or paying dividends.