Cheer Holding, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities Market Information Our ordinary shares and warrants are each listed on the Nasdaq Capital Market under the symbols “TKKS,” and “TKKSW,” respectively. On February 19, 2020, our symbols were changed to “GSMG,” and “GSMGW.” Following the closing of the Business Combination, the Company’s units and rights are no longer traded on the Nasdaq Capital Market under the symbols “TKKSU,” and “TKKSR.” Holders On March 20, 2020, there were 39 holders of record of our ordinary shares, and two (2) holders of record of our warrants. Securities Authorized for Issuance Under Equity Compensation Plans. None. Recent Sales of Unregistered Securities None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. Dividends The Company did not declare or pay dividends on its common stock during fiscal years 2019 and 2018 and we presently do not expect to declare or pay such dividends in the foreseeable future and expect to reinvest all undistributed earnings to expand our operations, which the management believes would be of the most benefit to our stockholders. The declaration of dividends, if any, will be subject to the discretion of our Board of Directors, which may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among others. Recent Sales of Unregistered Securities None. Item 6. Selected Financial Data As a smaller reporting company, we are not required to provide this information. Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Explanatory Note For the purpose this Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations, we are providing the historical information of TKK for the year ended December 31, 2019 and from February 5, 2018 (inception) through December 31, 2018. The Management’s Discussion and Analysis of Financial Conditions and Results of Operations for Glory Star can be found in our Current Report on Form 8-K/A (Amendment No. 2) concurrently filed with the SEC on March 31, 2020. 59 Recent Developments Share Exchange Agreement On February 14, 2020, TKK consummated the Business Combination contemplated by the Share Exchange Agreement pursuant to which the Company acquired 100% of the equity interests of Glory Star from the Sellers. Upon closing of the Business Combination, the Company acquired all of the issued and outstanding securities of Glory Star in exchange for (i) approximately 41,204,025 of our ordinary shares (“Closing Payment Shares”), or one ordinary share for approximately 0.04854 outstanding shares of Glory Star, of which 2,060,201 of the Closing Payment Shares (the “Escrow Shares”) shall be deposited into escrow to secure certain indemnification obligations of the Sellers, plus (ii) earnout payments consisting of up to an additional 5,000,000 of our ordinary shares if we meet certain financial performance targets for the 2019 fiscal year, which we believe we have met, and an additional 5,000,000 of our ordinary shares if we meet certain financial performance targets for the 2020 fiscal year (the “Earnout Shares”). In the event that a financial performance target is not met for the 2019 fiscal year and/or 2020 fiscal year but we meet certain financial performance targets for the 2019 fiscal year and 2020 fiscal year combined, the Sellers will be entitled to receive any Earnout Shares that they otherwise did not receive (the “Alternative Earnout”). In connection with the Share Exchange Agreement: - TKK entered into a Registration Rights Agreement (“Registration Rights Agreement”) with the Sponsor and the Sellers pursuant to which TKK will grant certain registration rights to the Sellers with respect to the registration of the Closing Payment Shares and Earnout Shares. - TKK entered into a Lock-Up Agreement (“Lock-Up Agreement”) with certain Sellers that directly or indirectly own in excess of 10% of Glory Star Group equity prior to the Closing pursuant to which each Seller party thereto agreed that such Seller will not, during the period from the Closing and ending on the earlier of (i) with respect to 50% of the Closing Payment Shares (including Escrow Shares) and Earnout Shares (“Restricted Securities”), (x) the six month anniversary of the date of the Closing, (y) the date on which the Closing sale price of our ordinary shares equals or exceeds $12.50 per share for any 20 trading days within any 30 trading day period commencing after the Closing, and (z) the date after the Closing on which we consummate a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party (a “Subsequent Transaction”), and (ii) with respect to the remaining 50% of the Restricted Securities, (x) the one year anniversary of the date of the Closing and (y) the date after the Closing on which we consummate a Subsequent Transaction, sell, transfer, assign, pledge, hypothecate or otherwise dispose of, directly or indirectly, the Restricted Securities, or publicly disclose the intention to do any of the foregoing. Each Seller further agreed that the Escrow Shares will continue to be subject to such transfer restrictions until they are released from the escrow account. However, each Seller party thereto will be allowed to transfer any of our Restricted Securities (other than the Escrow Shares while they are held in the escrow account) by gift, will or intestate succession or to any affiliate, shareholder, members, party or trust beneficiary, provided in each such case that the transferee thereof agrees to be bound by the restrictions set forth in the applicable Lock-Up Agreement. - TKK entered into a Non-Competition and Non-Solicitation Agreement (“Non-Competition Agreement”) with certain Sellers that directly or indirectly own in excess of 30% of Glory Star’s equity prior to the Closing (including Glory Star Group’s chairman) and their principal shareholders (together with the applicable Seller, the “Subject Parties”). Under the Non-Competition Agreements, for a period of three (3) years after the Closing, each Subject Party and our affiliates will not, without our prior written consent, anywhere in the PRC or any other markets directly or indirectly engage in which we are engaged, or are actively contemplating to become engaged, in the Business (as defined below) (or own, manage, finance or control, or become engaged or serve as an officer, director, employee, member, partner, agent, consultant, advisor or representative of, an entity that engages in) of online media and entertainment services (collectively, the “Business”). However, the Subject Parties and their respective affiliates may own passive investments of no more than 3% of any class of outstanding equity interests in a competitor that is publicly traded, so long as the Subject Parties and their affiliates and their respective directors, officers, managers and employees who were involved with the our business, and the immediate family members of the Subject Parties or their respective affiliates, are not involved in the management or control of such competitor. Under the Non-Competition Agreements, during such restricted period, the Subject Parties also will not, without our prior written consent, (i) solicit or hire our employees, consultants or independent contractors as of the Closing (or during the year prior to the Closing) or otherwise interfere with our relationships with such persons, (ii) solicit or divert the our customers as of the Closing (or during the year prior to the Closing) relating to the Business or otherwise interfere with our contractual relationships with such persons, or (iii) interfere with or disrupt any of our vendors, suppliers, distributors, agents or other service providers for a purpose competitive with us as it relates to the Business. The Subject Parties will also agree in each Non-Competition Agreement to not disparage us and to keep confidential and not use our confidential information. 60 Immediately after the Business Combination, our public shareholders own approximately 5.05% of GS Holdings, TKK’s former directors, officers and initial shareholders, including the Sponsor, and EarlyBirdCapital, Inc. (“EBC”) own approximately 12.16% of GS Holdings, and the Sellers own approximately 82.79% of GS Holdings. After giving effect to the Business Combination transaction and the issuance of the Closing Payment Shares described above, there are 49,767,866 of our ordinary shares issued and outstanding. EBC Note In connection with the Business Combination, on February 14, 2020, we entered into a Business Combination Marketing Agreement Fee Amendment (“Fee Amendment”) with EBC whereby EBC agreed to amend the fees payable under the Business Combination Marketing Agreement, dated August 15, 2018, by and between EBC and TKK (“Original Marketing Agreement”). Under the Original Marketing Agreement, EBC agreed to assist TKK in connection with TKK’s business combination with one or more businesses or entities in exchange for a cash fee equal to 3.5% of the gross proceeds received in the IPO. In addition, TKK agreed to reimburse EBC for up to $20,000 of its reasonable costs and expenses incurred by it. Under the Fee Amendment, EBC agreed to reduce its fee of $8.75 million due under the Original Agreement and forgo reimbursement of expenses in exchange for a convertible promissory note in the amount of $4.0 million without interest (“EBC Note”). The EBC Note is for a period of one year and is convertible, at EBC’s option, into our ordinary shares at the conversion price equal to the volume-weighted average price of our ordinary shares on Nasdaq or such other securities exchange or securities market on which our ordinary shares are then listed or quoted, for the ten trading days prior to such conversion date; provided, however, the conversion price shall not be less than $5.00 (the “Floor Price”). The EBC Note automatically converts into our ordinary shares on the maturity date. The EBC Note includes a covenant that we will use our best efforts to register the shares issuable under the EBC Note pursuant to a registration statement with the SEC as soon as practicable, and obtain effectiveness of such registration statement with 180 calendar days from the date of the EBC Note (“Effectiveness Deadline”). In the event such registration statement is not effective by the Effectiveness Deadline, the Floor Price shall automatically decrease to $4.00, and by one dollar ($1.00) for every 30-day period thereafter; provided, however, the Floor Price shall not be less than $1.00. Amended Sponsor Note On February 14, 2020, we entered into an amended and restated promissory note with the Sponsor (the “Amended Sponsor Note”) to (i) extend the maturity date from the closing of the Business Combination to a date that is one year from the closing of the Business Combination and (ii) increased the principal amount of the note to $1.4 million, which included $300,000 in advances we received from the Sponsor from November 2019 to January 2020. In addition, under the Amended Sponsor Note, we granted the Sponsor the right to convert the $1.4 million Amended Sponsor Note to our ordinary shares at the conversion price equal to the volume-weighted average price of our ordinary shares on Nasdaq or such other securities exchange or securities market on which our ordinary shares are then listed or quoted, for the ten trading days prior to such conversion date; provided, however, the conversion price shall not be less than $5.00. The Amended Sponsor Note automatically converts into our ordinary shares on the maturity date. 61 Special Note Regarding Forward-Looking Statements All statements other than statements of historical fact included in this Form 10-K including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding TKK’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-K, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or TKK’s management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the SEC. The following discussion and analysis of TKK’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Overview Prior to the Business Combination, TKK was a blank check company incorporated on February 5, 2018 as a Cayman Islands exempted company and formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or similar business combination with one or more businesses. Results of Operations TKK has not engaged in any operations or generated any revenues during the year ended December 31, 2019. TKK’s only activities from February 5, 2018 (inception) through December 31, 2019 were organizational activities, those necessary to consummate the initial public offering, described below, identifying a target company for a business combination and the proposed acquisition of Glory Star. TKK does not expect to generate any operating revenues until after the completion of its business combination. TKK generates non-operating income in the form of interest income on marketable securities. TKK incurs expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses. For the year ended December 31, 2019, TKK had net income of $3.28 million, which consists of interest income on marketable securities held in the Trust Account $5.61 million and an unrealized gain on marketable securities held in our Trust Account $19,313, offset by operating costs of $2.35 million. For the period from February 5, 2018 (inception) through December 31, 2018, TKK had net income of $1.61 million, which consists of interest income on marketable securities held in the Trust Account $1.95 million, offset by operating costs of $0.28 million and an unrealized loss on marketable securities held in our Trust Account of $61,139. Liquidity and Capital Resources On August 20 and 22, 2018, TKK consummated the initial public offering of 22,000,000 Units and the sale of an additional 3,000,000 Units pursuant to the underwriters’ partial exercise of their over-allotment option at a price of $10.00 per Unit, generating aggregate gross proceeds of $250 million. Simultaneously with the closings of the initial public offering and the sale of the additional Units, TKK consummated the sale of an aggregate of 13,000,000 private placement warrants to Symphony Holdings Limited at a price of $0.50 per warrant, generating gross proceeds of $6.5 million. In connection with the initial public offering and the private placement, TKK placed a total of $250 million in the trust account. TKK incurred $5.74 million in initial public offering related costs, including $5.0 million of underwriting fees and $0.74 million of other costs. For the year ended December 31, 2019, cash used in operating activities was $1.72 million. Net income of $3.28 million was affected by interest earned on marketable securities held in the trust account of $5.61 million, an unrealized gain on marketable securities held in TKK’s trust account of $19,313 and changes in our operating assets and liabilities, which provided $0.63 million of cash from operating activities. For the period from February 5, 2018 (inception) through December 31, 2018, cash used in operating activities was $0.37 million. Net income of $1.61 million was affected by interest earned on marketable securities held in the trust account of $1.95 million, an unrealized loss on marketable securities held in our trust account of $61,139 and changes in TKK’s operating assets and liabilities, which used $96,102 of cash from operating activities. 62 As of December 31, 2019, TKK had cash of $34,527 held outside of the trust account and marketable securities held in the trust account of $256.52 million (including approximately $7.5 million of interest income and unrealized gains) consisting of U.S. treasury bills with a maturity of 180 days or less. Interest income on the balance in the trust account may be used by TKK to pay taxes. Through December 31, 2019, TKK did not withdraw any funds from the interest earned on the trust account. On September 6, 2019, TKK issued the Sponsor an unsecured promissory note in a principal amount of up to $1.1 million (the “Sponsor Note”) for working capital loans made or to be made by the sponsor, pursuant to which $0.35 million of previously provided advances were converted into loans under the Sponsor Note. The Sponsor Note bears no interest and is due on the earlier of (i) the consummation of a Business Combination or (ii) TKK’s liquidation. Up to $1.0 million of the loans under the Sponsor Note may be converted into warrants, each warrant entitles the holders to receive one half of one ordinary share, at $0.50 per warrant. As of December 31, 2019, the total outstanding balance due under the Note was $1.1 million. In November and December 2019, TKK Capital Holding, an affiliate of the Sponsor, advanced TKK an aggregate of $0.25 million to be used for working capital purposes and for the payment of transaction costs in connection with a Business Combination. The advances are unsecured, non-interest bearing and due on demand. As of December 31, 2019, there was $0.25 million of advances outstanding. On February 14, 2020, TKK entered into the Amended Sponsor Note to extend the maturity date from the closing of the Business Combination to a date that is one year from the closing of the Business Combination and (ii) increased the principal amount of the note to $1.4 million, which included $0.3 million in advances we received from the Sponsor from November 2019 to January 2020. In addition, under the Amended Sponsor Note, TKK granted the Sponsor the right to convert the $1.4 million Amended Sponsor Note to our ordinary shares at the conversion price equal to the volume-weighted average price of our ordinary shares on Nasdaq or such other securities exchange or securities market on which our ordinary shares are then listed or quoted, for the ten trading days prior to such conversion date; provided, however, the conversion price shall not be less than $5.00. The Amended Sponsor Note automatically converts into our ordinary shares on the maturity date. Off-balance sheet financing arrangements TKK has no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2019. TKK does not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. TKK has not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets. Contractual obligations TKK does not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay an affiliate of TKK’s Chief Executive Officer and Chairman a monthly fee of $15,000 for general and administrative services, including office space, utilities and administrative services provided to the Company. TKK began incurring these fees on August 15, 2018 and will continue to incur these fees monthly until the earlier of the completion of the business combination and our liquidation. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. TKK has identified the following critical accounting policies: 63 Ordinary shares subject to possible redemption The Company accounts for its ordinary shares subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Ordinary shares subject to mandatory redemption are classified as a liability instrument and are measured at fair value. Conditionally redeemable ordinary shares (including ordinary shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, ordinary shares are classified as shareholders’ equity. The Company’s ordinary shares feature certain redemption rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future events. Accordingly, ordinary shares subject to possible redemption are presented at redemption value as temporary equity, outside of the shareholders’ equity section of the Company’s balance sheets. Adjusted Net loss per ordinary share Adjusted net loss per ordinary share is computed by dividing adjusted net loss by the weighted average number of ordinary shares outstanding for the period. The Company applies the two-class method in calculating earnings per share. Ordinary shares subject to possible redemption at December 31, 2019 and 2018, which are not currently redeemable and are not redeemable at fair value, have been excluded from the calculation of basic adjusted net loss per share since such shares, if redeemed, only participate in their pro rata share of the Trust Account earnings. The Company has not considered the effect of (1) warrants sold in the Public Offering and private placement to purchase 19,000,000 ordinary shares and (2) rights sold in the Initial Public Offering that convert into 2,500,000 ordinary shares in the calculation of diluted adjusted net loss per ordinary share, since the exercise of the warrants and the conversion of the rights into ordinary shares are contingent upon the occurrence of future events. As a result, diluted adjusted net loss per ordinary share is the same as basic adjusted net loss per ordinary share for the periods presented. Recent accounting pronouncements Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on TKK’s financial statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The Financial Statements that constitute Item 8 are included at the end of this report beginning on Page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.