Strong Global Entertainment (SGE) Seeks IPO To Begin Separation From Parent

A Quick Take On Strong Global Entertainment

Strong Global Entertainment (SGE) has filed to raise an undisclosed amount in an IPO of its Class A common stock, according to an S-1 registration statement.

The firm designs and sells cinema projection screen systems to exhibitors in the United States.

SGE seeks to diversify its revenue streams into content production.

I’ll provide a final opinion when we learn more IPO details from management.

Company

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 $12.4 million as of December 31, 2021 from investors including Strong/MDI (Ballantyne).

Strong – 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 (IMAX), AMC (AMC) and Cinemark (CNK).

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

Selling	Expenses vs. Revenue
Period	Percentage
2021	6.9%
2020	8.0%

(Source)

The Selling efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, was 2.9x in the most recent reporting period. (Source)

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 Entertainment’s Financial Performance

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

• Growing topline revenue from 2020’s drop

• Increasing gross profit and gross margin

• A swing to operating profit

• Higher cash flow from operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2021	$ 25,972,000	24.7%
2020	$ 20,820,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
2021	$ 7,368,000	58.6%
2020	$ 4,647,000
Gross Margin
Period	Gross Margin
2021	28.37%
2020	22.32%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2021	$ 1,200,000	4.6%
2020	$ (1,354,000)	-6.5%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
2021	$ 821,000	3.2%
2020	$ 1,445,000	5.6%
Cash Flow From Operations
Period	Cash Flow From Operations
2021	$ 4,831,000
2020	$ 4,023,000
(Glossary Of Terms)

(Source)

As of December 31, 2021, Strong had $4.5 million in cash and $13.4 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021 was $4.4 million.

Strong Global Entertainment’s IPO Details

Strong intends to raise an undisclosed amount in gross proceeds from an IPO of its Class A common stock.

Class A common stockholders will be entitled to one vote per share. Class B holders, which will be the parent firm at least for now, will be entitled to special board member voting rights.

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

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO 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)

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

Regarding outstanding legal proceedings, the firm’s indirect parent company, Ballantyne, is subject to:

Various product liability/personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of commercial lighting products previously distributed by the operations of the businesses being transferred to us in the Separation containing wiring that may have contained asbestos. Each case names dozens of corporate defendants in addition to Ballantyne. Management does not expect the resolution of these cases to have a material adverse effect on [its] financial condition, results of operations or cash flows.

(Source)

The sole listed bookrunner of the IPO is ThinkEquity.

Commentary About Strong’s IPO

SGE is seeking to go public as part of the separation process from its parent firm.

The company’s financials have produced increasing topline revenue (although 2020’s figure was a significant drop from 2019), growing gross profit and gross margin, operating profit in 2021 and increased cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021 was $4.4 million.

Selling expenses as a percentage of total revenue have dropped as revenue has increased; its Selling efficiency multiple was 2.9x in 2021.

The firm currently plans to pay no dividends on its shares and anticipates that it will retain any future earnings to reinvest in the firm’s growth initiatives.

The market opportunity for providing projection and related systems to theater owners has been negatively affected by the global pandemic.

Notably, management has begun diversifying into content production via its Strong Studios initiative.

ThinkEquity is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (47.4%) 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 a shift in consumer behavior away from theater-going activities as a result of the pandemic.

When we learn more about the IPO, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.