EXCLUSIVE: Ever since it planted a flag in the shifting ground of the movie business, STX Entertainment has fashioned itself a different kind of studio, an operation bent on proving Hollywood’s long-held assumptions about mid-budget films wrong.

That bid to stand apart has faced a harsh test this month as two star-driven, tweener films have fizzled on consecutive weekends. The Happytime Murders, with Melissa McCarthy, missed the target in its opening, and the Mark Wahlberg action movie Mile 22 fell sharply after a soft debut. Up next on September 7 is vigilante thriller Peppermint with Jennifer Garner, which is tracking for a comparable domestic opening.

The dicey stretch at the box office comes as the company considers going public, a maneuver that could bring expansion capital. An initial public offering on the Hong Kong Stock Exchange would yield about $500 million and could happen as early as September, but there are major hurdles in the way. The IPO must gain regulatory approval, never a slam dunk, and the company could also hold off if choppy market conditions persist in Hong Kong. The Hang Seng has declined during this volatile summer on fears that the U.S. trade standoff with China and the threat of further tariffs could push investors toward more established companies and away from startups.

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Deadline obtained a copy of the 462-page prospectus STX filed with regulators ahead of the offering, and it offers a fairly complete snapshot of the company regardless of the next steps it takes. That document, along with numerous interviews with those familiar with the company’s operations, paint a picture of a company with grand designs but thus far decidedly mixed results.

Fogelson Rob Latour/Shutterstock

STX was formed in 2011 and released its first film in 2015. It has recorded four consecutive years of losses from a patchy initial slate. And yet, if the company is known for anything among casual observers, it is its ambition. Executives took part in a lavish 2016 New Yorker profile that put the company on the map from infancy (and, in some quarters, put a target on its back). In the piece, writer Tad Friend quotes an agent describing studio head Adam Fogelson and STX chairman and CEO Robert Simonds, who produced some of Adam Sandler’s early hits. “Bob and Adam are the chip-on-the-shoulder guys,” the agent told Friend. “Their brand is ‘We were right, and you should have listened.’”

One arena where the company believes it is right is China, where it sees itself as having the ability to unlock an opportunity available to few other Hollywood players. The backers of the company are strictly A-list, with Chinese heavyweights Tencent, PCCW Media, Hony Capital and TPG Growth joined by John Malone’s Liberty Global, which came aboard last November. The bankers and sponsors of the IPO are JP Morgan and Goldman Sachs. Sony Pictures Entertainment CEO Tony Vinciquerra was another early investor, long before he got his current job.

With box office in China tripling over the past five years, the territory is Valhalla for Hollywood, which has seen U.S. ticket sales flatten over the past generation. STX sees itself as a proxy for investors looking to buy into the most meaningful of all 21st century growth areas.

STX executives spent weeks this summer on a global road show, giving presentations to about 100 potential investors. Citing Hong Kong exchange restrictions and a mandatory quiet period before the offering, executives declined to comment for this article. But sources acquainted with the business environment in Hong Kong and China say the uncertainty shrouding other Asian-American entertainment partnerships is prompting regulators to take an especially close look at the company.

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If the IPO does move forward, STX would be the first U.S. entertainment entity listed in Hong Kong under the newly revised rules of the exchange, which is known for its thorough vetting of potential offerings. Canada-based Imax has been listed in Hong Kong, and rules changes are prompting many other media and digital entities to consider going public there despite the rigors.

STX’s game plan is to continue its current investment mix of roughly 40% Asian, 40% American and 20% European money.

Publicly traded or not, many in the industry wonder what a newly capitalized STX will look like. How will the company refine its identity and deliver a more reliable film pipeline, against the backdrop of the movie business battling streaming, gaming and mobile? The consensus is that it will need to evolve into something different than where they began, though as long as their doors have been open, execs have preached patience, noting they need time to demonstrate the viability of their approach.

STX’s box office results to date reflect the stiffness of the challenge. Although there are plenty of differences between the two companies, the unfolding meltdown of Global Road highlights the complexity of navigating international waters as a stand-alone company. STX has so far collected about $1.3 billion in box office receipts worldwide. One reason it has managed to show positive cash flow is modest overhead costs — in the $75 million range compared with rivals’ hundreds of millions. Its head count as of last December 31 was 156 employees, and its fiscal 2017 marketing and distribution costs came in at $103.8 million – both a fraction of the levels of rival companies, especially the six major studios.

The prospectus makes the core objective clear, while noting the risks. “We seek to limit our exposure while adding films to our release schedule and film library,” it says. The success of a given film “depends primarily upon acceptance by the audience. … The popularity of films and TV programs depends on a variety of factors.” (Because a prospectus is meant to be thorough, two of the risk factors listed are communicable diseases and inclement weather.)

“Bad Moms” STX Entertainment

The company scored with its two Bad Moms titles (Bad Dads is also now in the works, naturally), the first STX franchise. Together, the first two films grossed more than $310 million worldwide, meaning they represent nearly one-quarter of STX’s box-office footprint.

None of the company’s 22 other releases has cracked the $50 million mark domestically, and the slate has yielded distinctly modest Stateside performers like The Foreigner, Adrift, I Feel Pretty and Molly’s Game. The company has explained along the way that the way it has structured its foreign deals means those films and several others booked a profit. A typical release will make 70%-80% of its money within the first 12 months — but VOD and other windows are downstream and staggered, making profit projections difficult. Distribution titles like Tom Hanks curio The Circle and director Luc Besson’s Valerian and the City of A Thousand Planets also fared poorly, though they weren’t full-stakes investments for STX.

Despite the early commercial struggles for Mile 22, a TV series based on it is in development, one of six now percolating at STX. Hulu snapped up a small-screen version of 2016 film The Edge of Seventeen. A bit farther down the road are feature projects such as Killer’s Game, an action movie with Jason Statham (a huge draw in China). Another is the family animation title Ugly Dolls, with Robert Rodriguez producing and Kelli Clarkson and Pitbull contributing voice and soundtrack performances. The film is seen as having strong merchandise and multi-platform potential, and Hulu has already picked up an animated series version of the property. YouTube has acquired a series version of 2016 dramatic comedy The Edge of Seventeen.

In the film pipeline, Vin Diesel is attached to another title, as are talent from Disney’s two top 2018 Marvel entries: the Russo Brothers, directors of Avengers: Infinity War, and Chadwick Boseman, star of Black Panther.

Co-productions with Chinese companies – a model which has seen mixed success by Hollywood – are another area of focus. There are two projects involving Tencent, and four more with Alibaba. Those ties also extend to opportunities to handle high-profile projects in China, for example Netflix’s Martin Scorsese-Robert De Niro reteaming The Irishman. (Netflix does not operate in China.) In a similar arrangement, award shows owned by Dick Clark Productions, including the Golden Globes, are handled by STX in China.

Because it has not yet reached what the prospectus calls a “steady state” in terms of releasing, the document notes annual losses from fiscal 2015 through 2017 of between $11.8 million-$56 million. (The company’s fiscal year ends in September.)

One difference between STX and its peers in wide-release moviemaking is that it is operating without a library beyond its 25 releases. In its two-plus decades, Lionsgate has accumulated thousands of library titles, as has MGM over nearly a century of on-and-off operation. And major studios, of course, are built on decades of library fare, arguably a more valuable chess piece today in the era of direct-to-consumer services.

“We seek to build a library of films and other intellectual property,” the prospectus states, adding the caveat, “Building such a library will take time, and the revenue from our library will depend on the success of our films in the theatrical and post-theatrical markets.”

Helping stabilize things as the library takes shape are two key output deals, one with Showtime for pay-TV, which runs through 2021, and the other for home video with Universal through 2020.

STX has not spelled out exact plans for the proceeds from the IPO. The prospectus lists the goal of funding an annual slate of 12-15 “model films,” with budgets between $20 million-$80 million. (The output has steadily ramped up toward the 12-15 target — two releases in 2015, six in 2016, eight in 2017, 10 expected in 2018 by year’s end and 14 projected for 2019.) Talent is cast in “signature roles” – McCarthy and Amy Schumer doing comedy, Statham and Wahlberg doing action, and so on, which has been the business plan since the beginning. Although it has fortified its TV and digital arms, film remains the core of STX, comprising about 90% of revenue. Over time, the plan is to lower that number to 70%.

As the New Yorker headline put it, Universal alum Fogelson aspires to be “the mogul of the middle,” supplying the kinds of films Hollywood increasingly avoids: moderate-budget fare. STX has bet against the tack of major studios, which buttress $300 million tentpoles with theme parks, TV networks and merchandising divisions, all aiming to offset the massive negative costs of films. (The very lowest end of the wide-release budget range, especially for horror or comedy, has also grown in Hollywood.)

STX/Warner Bros.

Marketing is a key area of efficiency. With CPMs on television continuing to climb despite network ratings fragmentation, the cost of opening a movie the traditional way keeps climbing. When STX released the Tooley Entertainment co-production Den of Thieves, starring Gerard Butler, last January, it noted its target was a male demographic similar to Warner Bros’ 12 Strong on the same weekend. Each cost about $30 million to make, but Den of Thieves’ $25 million P&A was backstopped by Diamond Films, which also provided gap financing.

Data from iSpot, which tracks advertising spending, shows that TV costs for Thieves were about one-third those of 12 Strong, and the total tab for marketing was $25 million, compared with $45 million to $50 million for 12 Strong, but the films’ grosses wound up the same in the U.S., around $45 million. (Worldwide, Thieves came out ahead, $80.5 million to $67 million.) As talent and partners see the model work, STX says they are increasingly persuaded even if they are not seeing galactic explosions comparable to Disney’s heavy artillery. And even in a period like the current one, when the model doesn’t click, viability with talent will keep STX in the game as long as the checks clear.

Foreign presales are another area where the company has aggressively worked to upend norms. On Bad Moms, roughly 66% of the $20 million gross production cost was covered by foreign output partners. Another 19% was covered by the Louisiana tax rebate, meaning STX’s gross exposure was around 15%. The company gets minimum guarantees from foreign partners. In failure, it eats the losses, but in success it shares in any revenue taken in above the MG. Den of Thieves came in at about 30% exposure, but the model was similar.

The prospectus describes a “highly efficient infrastructure,” with data-driven marketing and partnerships with key Chinese players enabling the company to do more with less. Even so, the cost of maintaining offices around the world and compensation for the top execs in the $8 million range looms a bit larger now given the inconsistency of revenue.

Other moves disclosed in the prospectus show an independent company growing so fast it may overlook potential conflicts of interest. While the executive suite boasts veterans of NBCUniversal, Time Warner and Discovery and pedigreed financial backers, the company’s board approved a payment of what the prospectus calls “less than $100,000” to Simonds’ wife, Anne, for a TV pilot script. While Anne Simonds lacks any screenwriting experience, she is one of the largest shareholders in the company, and her father, Frank Biondi, sits on the board. That TV pilot now has Christian Gudegast attached to direct, and Vince Vaughn attached to star.

Given the challenging path of continuing to go it alone, the prospectus notes that Hong Kong cash could also propel STX’s M&A ambitions, a natural step in a climate of consolidation of historic proportion. There are certainly some ripe targets, including pieces of companies caught up in large-scale consolidation, such as DreamWorks or Blue Sky Animation. The company could also itself be an acquisition target, as content companies look for suppliers and moves like Disney’s landscape-altering purchase of most of 21st Century Fox to equip themselves for a streaming future.

McGlashan

Another end game that seems entirely plausible, given the relationships of TPG Growth founder Bill McGlashan, would be a more fully developed 50-50 partnership between STX and the Chinese government in the first true China-U.S. studio. Wanda may have failed to deliver on its ambitions for its massive studio in Qingdao, but McGlashan has spent three decades working in China and is seen as a savvy dealmaker who understands the cultural nuances better than most. Not for nothing are STX’s business cards printed in both English and Mandarin.

While Hong Kong has certain rigors, it differs markedly from China in terms of public listings. In China, the two main exchanges are the Shanghai (roughly equivalent to the New York Stock Exchange) and the Shenzhen (more like the Nasdaq). In Hong Kong, China-style rules do not apply and it can be attractive to companies looking for new sources of investment. Compared with mainland markets, it is easier for offshore investors to get a piece of companies in Hong Kong. For Tencent and other companies listed in Hong Kong, their equity is outside mainland China and therefore exempt from restrictions the Chinese government puts on companies traded on the Shenzhen or Shanghai exchanges.

One widely tracked example shows how difficult it is for companies to win government approval. Chinese regulators never signed off on Wanda on its planned IPO showcasing its film assets, including Legendary Entertainment. In that context, STX threading the needle would be a considerable accomplishment. “Everyone is still obsessed with Legendary,” one seasoned exec who has done a lot of business in China told Deadline. “There is a lot more scrutiny now.”

Deadline’s Nancy Tartaglione, Anthony D’Alessandro and Andreas Wismean contributed to this report.