IPO Update: Strong Global Entertainment Proposes IPO Terms

A Quick Take On Strong Global Entertainment

Strong Global Entertainment (SGE) has filed to raise $15 million in gross proceeds from the sale of its Class A common stock in an IPO, according to an amended registration statement.

The company provides screen technology offerings, content production and support services for movie theaters.

While the $5.00 stock price may attract day traders seeking volatility, the firm’s worsening operating and net profit results as the global economy is slowing down give me pause as to the fundamentals of its business.

I’m on Hold for SGE at this time.

Strong Global Entertainment Overview

Charlotte, North Carolina-based Strong was founded to provide a full range of cinema screen technologies and related services to movie theater operators.

Management is headed by Chief Executive Officer Mark D. Roberson, who has been with the firm since inception in November 2021 and was previously COO of Chanticleer Holdings, a publicly held restaurant operating company and CEO of PokerTek, a previously publicly held gaming technology company.

The company’s primary offerings include:

• Projection screen systems

• Curvilinear screens

• Repair and maintenance

• Support services

• Strong Studios content production

Strong has booked fair market value investment of $13.8 million as of June 30, 2022 from investors including Strong/MDI (Ballantyne).

Strong Global – Customer Acquisition

The firm sells its products and related services to major movie theater operators in the United States and other products to customers in both North and South America.

SGE counts as customers major theater companies such as IMAX, AMC and Cinemark.

Selling expenses as a percentage of total revenue have decreased as revenues have grown, as the figures below indicate:

Selling	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended June 30, 2022	6.6%
2021	6.9%
2020	8.0%

Click to enlarge

(Source – SEC)

The Selling efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, rose to 6.7x in the most recent reporting period, as shown in the table below:

Selling	Efficiency Rate
Period	Multiple
Six Mos. Ended June 30, 2022	6.7
2021	2.9

Click to enlarge

(Source – SEC)

Strong’s Market & Competition

According to a 2020 market research report by The Insight Partners, the global market for projector screen technologies was an estimated $7.3 billion in 2020 and is forecast to reach $13.5 billion by 2027.

This represents a forecast CAGR of 9.6% from 2021 to 2027.

The main drivers for this expected growth are increasing demand from emerging economies due to lower costs and greater digitalization.

Also, the COVID-19 pandemic has slowed industry growth over the past few years as cinemas have had to close due to government restrictions.

Major competitive or other industry participants include:

• NEC Display Solutions of America

• Barco

• Harkness Screens International

• Severtson

• Screen Solutions

• Spectro

• Mechanische Weberei Bohemia

• Galalite Projection Screens

• Christie Digital Systems

• Moving Image Technologies

• Tri-State Digital Services

• Sonic Equipment Company

Strong Global’s Financial Performance

The company’s recent financial results can be summarized as follows:

• Growing topline revenue

• Increasing gross profit but variable gross margin

• Reduced operating profit and operating margin

• A swing to cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended June 30, 2022	$ 18,543,000	78.6%
2021	$ 25,972,000	24.7%
2020	$ 20,820,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended June 30, 2022	$ 4,304,000	28.1%
2021	$ 7,368,000	58.6%
2020	$ 4,647,000
Gross Margin
Period	Gross Margin
Six Mos. Ended June 30, 2022	23.21%
2021	28.37%
2020	22.32%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended June 30, 2022	$ 309,000	1.7%
2021	$ 1,200,000	4.6%
2020	$ (1,354,000)	-6.5%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
Six Mos. Ended June 30, 2022	$ 206,000	1.1%
2021	$ 821,000	4.4%
2020	$ 1,445,000	7.8%
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended June 30, 2022	$ (2,022,000)
2021	$ 4,831,000
2020	$ 4,023,000
(Glossary Of Terms)

Click to enlarge

As of June 30, 2022, Strong had $3.0 million in cash and $14.4 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2022, was $822,000.

Strong Global Entertainment IPO Details

SGE intends to sell 3 million shares of Class A common stock at a proposed midpoint price of $5.00 per share for gross proceeds of approximately $15.0 million, not including the sale of customary underwriter options.

Class A stockholders will be entitled to one vote per share and will have various economic rights.

The Class B shareholder (parent Ballantyne Strong) will be entitled to elect or appoint 50% of the Board of Directors but will not have the ability to receive dividends.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $35.6 million.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 33.3%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

[i] working capital, [ii] capital expenditures, including those related to a potential expansion of the Joliette Plant, which is estimated at approximately CAD$1.0 million to CAD$1.5 million (approximately US$0.8 million to US$1.2 million) and includes the estimated costs of CAD$0.3 million to CAD$0.5 million (approximately US$0.2 million to US$0.4 million) related to bringing the Joliette Plant (which we expect to be leased to us post-Separation pursuant to the Joliette Plant Lease) into compliance with certain codes and environmental permits, [iii] operational purposes and [iv] potential acquisitions in complementary businesses.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding pending legal proceedings, the firm’s parent is the subject of various asbestos-related product liability lawsuits. The company will indemnify Ballantyne for up to $250,000 per year in actual losses for products that may be found in a court to have injured plaintiffs. Management believes the resolution of any pending cases to have a material adverse effect on its financial condition or operations.

The sole listed underwriter of the IPO is ThinkEquity.

Valuation Metrics For Strong Global

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:

Measure [TTM]	Amount
Market Capitalization at IPO	$45,000,000
Enterprise Value	$35,613,000
Price / Sales	1.32
EV / Revenue	1.04
EV / EBITDA	41.70
Earnings Per Share	$0.08
Operating Margin	2.50%
Net Margin	2.24%
Float To Outstanding Shares Ratio	33.33%
Proposed IPO Midpoint Price per Share	$5.00
Net Free Cash Flow	$822,000
Free Cash Flow Yield Per Share	1.83%
Debt / EBITDA Multiple	6.27
CapEx Ratio	2.58
Revenue Growth Rate	78.56%
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

Commentary About Strong Global

SGE is seeking investment from U.S. public capital markets to fund its corporate expansion plans and make improvements to its Joliette plant.

The company’s financials have produced increasing topline revenue, growing gross profit but variable gross margin, lowered operating profit and operating margin but a swing to cash used in operations.

Free cash flow for the twelve months ended June 30, 2022, was $822,000.

Selling expenses as a percentage of total revenue have decreased as revenues have grown and its Selling efficiency multiple rose to 6.7x in the most recent reporting period.

The firm currently plans to pay no dividends on its capital stock and anticipates that it will retain substantially all future earnings to reinvest back into the business.

SGE‘s trailing twelve-month CapEx Ratio was 2.6, which indicates it has spent significantly on capital expenditures as a percentage of its operating cash flow.

The market opportunity for projector screen technology demand is expected to grow at a reasonably robust rate of growth in the coming years, so the firm enjoys positive growth dynamics as the industry recovers from the COVID-19 pandemic.

ThinkEquity is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (56.4%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is the current macroeconomic slowdown occurring on a global scale which may slow sales cycles from theater operators.

However, the firm has shown rebounding revenue in recent periods since the worst of the pandemic in 2020.

Despite this topline growth, operating profit and net profit have materially dropped, while the firm has swung to negative operating cash flow.

As for valuation, management is asking IPO investors to pay an EV/EBITDA multiple of nearly 42x, a very high figure.

While the $5.00 stock price may attract day traders seeking volatility, the firm’s worsening operating and net profit results give me pause as to the fundamentals of its business.

I’m on Hold for SGE at this time.

Expected IPO Pricing Date: To be announced.