Executive Summary / Key Takeaways

• Cheer Holding, Inc. (NASDAQ:CHR) is strategically transforming into an AI-driven content and e-commerce powerhouse in China, leveraging its proprietary CHEERS Telepathy platform and ambitious metaverse initiatives to redefine digital interaction and marketing.
• The company's recent financial performance shows a slight revenue dip in the first half of 2025, with revenues of $70.99 million, but maintains strong profitability with a TTM Net Profit Margin of 17.64% and a robust current ratio of 7.66, indicating solid financial health despite competitive pressures.

• CHEERS Telepathy, powered by the Polaris intelligent cloud service, represents a significant technological differentiator, offering multimodal AI content creation capabilities that have rapidly expanded user engagement, with average monthly visits reaching 3.80 million in H1 2025.
• Significant risks include the highly dilutive nature of its recent offering, particularly the Series B Warrants (up to 65.00M Class A Shares via alternative cashless exercise), potential Nasdaq delisting concerns due to dilution, and inherent uncertainties associated with China's evolving regulatory landscape and the Variable Interest Entity (VIE) structure.
• CHR's long-term growth hinges on its ability to effectively scale its AI and metaverse platforms, acquire users efficiently, and navigate intense competition from larger, more integrated Chinese tech giants like Tencent and Alibaba, while prudently managing its capital and regulatory compliance.

The AI-Driven Transformation of Cheer Holding

Cheer Holding, Inc. (NASDAQ:CHR) is carving out a distinctive niche within China's dynamic digital media, advertising, and e-commerce sectors. Founded in 2016, the company has evolved from its initial focus on mobile and online advertising to become a content-driven e-commerce platform anchored by its CHEERS App. This strategic pivot is now accelerating with a profound commitment to artificial intelligence and immersive digital experiences, aiming to redefine content creation and consumer engagement in a highly competitive landscape.

The company's overarching strategy centers on leveraging advanced technology, innovation, and digital disruption. This is exemplified by its ambitious plan to develop a metaverse platform, integrating intelligent retail, video on demand, social networking, gaming, and NFTs, all built upon its existing CHEERS ecosystem and emerging blockchain, AR, and VR technologies. This forward-looking vision positions CHR at the forefront of next-generation digital interaction, seeking to capture value in rapidly expanding digital frontiers.

Technological Edge: CHEERS Telepathy and the Metaverse Vision

At the core of Cheer Holding's strategic differentiation is CHEERS Telepathy, a groundbreaking AI content creation platform launched in July 2023. This platform, powered by the company's intelligent cloud-based service, Polaris, incorporates multimodal functions that offer "unprecedented possibilities of art and creativity." Its tangible benefits include a stable and reliable AI content creation experience, significantly enhancing digital content production and interaction. The platform has rapidly evolved, with the "Year of the Dragon Edition" in February 2024 introducing substantial advancements in model architecture, computing power, and content creation capabilities, including painting, text-to-image, image-to-image, commercial scenarios, dialogue, and long-form text generation.

Further innovation arrived with CHEERS Telepathy 2 in June 2024, featuring "more advanced and complicated algorithms and models, more powerful application capacity, and more comprehensive AI interaction functionalities to improve user experience, as well as a richer, more diverse and authentic generation effect." By September 2024, CHEERS Telepathy supported users in 12 countries and regions, demonstrating its expanding reach. The subsequent release of CHEERS Telepathy 2.50 in December 2024 integrated even more innovative AI tools for content creators. These technological advancements are not merely incremental; they are designed to provide a competitive moat by enabling more efficient, diverse, and engaging content, which directly supports CHR's content-driven e-commerce and advertising models. The company's Beijing subsidiary's recognition as a National High-Tech Enterprise in December 2023 and a Specialized and Innovative Enterprise in April 2024 further underscores its leadership in technological innovation and its "dominant position within the media technology sector."

For investors, the "so what" of this technological push is clear: enhanced content creation capabilities can lead to higher user engagement, improved advertising effectiveness, and a more compelling e-commerce experience, potentially translating into higher average selling prices (ASPs) for advertising, lower content production costs, and ultimately, better margins. The metaverse initiative, while nascent, represents a significant long-term growth vector, aiming to capture value from emerging digital economies.

Competitive Landscape and Strategic Positioning

Cheer Holding operates within a fiercely competitive Chinese digital market, contending with established giants like Tencent Holdings (TCEHY), Alibaba Group (BABA), Baidu Inc. (BIDU), and Bilibili Inc. (BILI). These larger players possess extensive ecosystems, massive user bases, and significantly greater financial and R&D resources.

Compared to Tencent, CHR's CHEERS app and entertainment offerings appear less integrated and scalable than Tencent's WeChat ecosystem. While CHR's niche focus on specialized apps like CheerReal (NFTs) and CheerChat (social audio) offers customization in emerging areas, it faces a challenge in overall market reach and innovation speed against Tencent's broader platform. Similarly, against Alibaba, CHR's e-commerce platform, CHEERS e-Mall, is qualitatively narrower, lacking Alibaba's comprehensive logistics and payment infrastructure. CHR's strategy of blending advertising with content aims for deeper user engagement, but Alibaba's scale and AI-enhanced recommendations provide superior efficiency in ad delivery.

Baidu, with its AI-driven advertising and search dominance, presents a different challenge. CHR differentiates through entertainment-focused apps, but Baidu holds a qualitative edge in ad targeting precision and scale. Bilibili, focused on video-sharing and user-generated content, directly competes with CHEERS Video. While CHR explores digital assets like NFTs, Bilibili benefits from stronger community effects and more established content delivery infrastructure.

CHR's competitive advantages stem from its proprietary app ecosystem and its focus on niche digital experiences. This can foster stronger customer loyalty through personalized content, potentially leading to recurring revenue and improved growth. For instance, the integrated live streaming and shopping on the CHEERS app could result in qualitatively superior user engagement, supporting higher pricing power in advertising segments. This ecosystem helps CHR counter the network effects of larger rivals by offering more targeted entertainment options, potentially exploiting weaknesses in broader content personalization to gain market share in specific areas. However, CHR's smaller scale leads to higher operational costs and potential technological gaps in AI integration, making it vulnerable to rivals with superior infrastructure and R&D investment.

Financial Performance and Operational Momentum

Cheer Holding's financial performance reflects a company in a transitional phase, investing in its AI and platform capabilities while facing market headwinds. For the six months ended June 30, 2025, the company reported revenues of $70.99 million, a slight decrease from $71.06 million in the same period of 2024. Despite this, the company demonstrated solid profitability, with net income for the six months ended June 30, 2025, at $7.76 million, down from $12.42 million in the prior year period. For the full year 2024, revenues were $147.20 million, with a net income of $25.97 million.

Key operational metrics provide insight into user engagement and platform growth. CHEERS App downloads as of June 30, 2025, reached 440 million for CHEERS Video, 70.40 million for CHEERS e-Mall, and 14.10 million for CHEERS Telepathy. Notably, CHEERS Telepathy downloads grew by approximately 24.78% from June 30, 2024, to June 30, 2025, highlighting the rapid adoption of its AI platform. Monthly Active Users (MAU) for CHEERS Telepathy also saw significant growth, surging from 0.90 million in June 2023 to 3.30 million in June 2024, an increase of approximately 266.67%. Average monthly visits on CHEERS Telepathy were approximately 3.80 million during the first half of 2025. The CHEERS e-Mall reported a repurchase rate (RPR) of 38.80% for the first half of 2025, indicating reasonable customer retention. Daily time spent on CHEERS Video averaged 54.30 minutes during the same period, suggesting strong content stickiness.

From a liquidity standpoint, as of June 30, 2025, the company reported total current assets of $323.54 million against total current liabilities of $39.04 million, resulting in a robust current ratio of 8.29. Cash and cash equivalents stood at $203.23 million. The company expects to raise approximately $10.62 million in net proceeds from its current offering, earmarked for general working capital, user acquisition, and potential acquisitions. Management intends to retain all future earnings for business expansion and does not anticipate paying cash dividends in the foreseeable future.

Outlook and Risks

Cheer Holding's outlook is intrinsically linked to its ability to execute on its AI and metaverse strategy. The company's commitment to "utilizing innovative product applications and technologies to drive its long-term sustainable and scalable growth" forms the bedrock of its future prospects. However, this path is fraught with significant risks.

The current offering itself presents considerable dilution risk. "If the Series B Warrants are exercised by way of the alternative cashless exercise, investors may suffer substantial dilution," with a maximum of 65.00 million Class A Shares issuable under all Series B Warrants. The "best efforts" nature of the offering means the company may not raise sufficient capital, potentially necessitating further fundraising on unfavorable terms. Furthermore, the Nasdaq may halt trading or delist Class A Shares "for public interest concerns or if we fail to maintain The Nasdaq Stock Market listing standards due to dilutive effect of the Series A and Series B," a risk amplified by similar situations faced by other Nasdaq-listed companies.

Operational risks are heavily influenced by the complex Chinese regulatory environment. Cheer Holding operates through a Variable Interest Entity (VIE) structure, which "involves unique risks to investors" as they do not directly hold equity in the Chinese operating entities. The uncertainty surrounding PRC laws and regulations, including those related to foreign ownership of internet technology companies, cybersecurity reviews, and data security, could lead to "material changes in the operations of our subsidiaries and VIEs, significant depreciation of the value of our Class A Shares, or a complete hindrance of our ability to offer our securities to investors." While legal counsel advises no immediate approval is needed to maintain its U.S. listing, future offerings or major events will require reporting to the CSRC, with no assurance of timely clearance. The company is also subject to the Holding Foreign Companies Accountable Act (HFCAA), and while its current auditors are PCAOB-inspectable, "there is no guarantee... that any future auditor engaged by the Company would remain subject to full PCAOB inspection."

Finally, Mr. Bing Zhang, the Chairman, CEO, and CFO, is expected to control approximately 74.60% of the voting power post-offering, making Cheer Holding a "controlled company" under Nasdaq rules. This allows the company to rely on exemptions from certain corporate governance requirements, such as having a majority independent board, which could impact minority shareholder protections.

Conclusion

Cheer Holding stands at a pivotal juncture, aiming to leverage its foundational content-driven e-commerce business into an AI-powered digital ecosystem. The strategic integration of CHEERS Telepathy and the ambitious metaverse vision represent the core investment thesis, promising long-term sustainable growth through technological differentiation and enhanced user engagement. The company's operational metrics, particularly the rapid adoption of its AI platform, suggest early traction in this transformation.

However, investors must weigh this growth potential against significant risks, including substantial share dilution from the current offering, potential Nasdaq delisting, and the inherent uncertainties of operating under China's evolving regulatory framework and the VIE structure. While CHR demonstrates solid financial health and a clear strategic direction, its ability to effectively compete with larger, more integrated rivals and successfully navigate regulatory complexities will be paramount to realizing its vision and delivering value to shareholders. The company's future trajectory will largely depend on its execution in scaling its AI innovations and prudently managing its capital amidst these formidable challenges.