If there's one word that the management of Israeli technology company N-trig won't want to hear during their road show ahead of the company's IPO on the Tel Aviv Stock exchange, that word is Modu. These two companies, the one now trying to become public and the one that tried unsuccessfully to do so four years ago and shut down shortly afterwards, do seem to have rather too much in common.
It's not just a matter of the same geographical location Modu was located in the Atir industrial zone in Kfar Sava, next door to the building in which N-trig operates today, and it was even reported in the past that N-trig leased some of Modu's offices after the latter closed. The amount sought in the offering, $20 million, is the same for both companies. What's more, N-trig's current CEO, Dan Inbar, was formerly a senior manager at M-Systems, founded by Dov Moran, the entrepreneur behind Modu.
But beyond these symbolic and piquant details, there are more significant common characteristics that should set warning lights flashing.
Dov Moran founded Modu in 2007, after the success of M-Systems, which was sold to SanDisk. It developed a lightweight mobile telephone that could be adapted using various add-on modules, and it planned to conquer the market. To that end, it needed large amounts of cash, and it managed to raise $120 million as a privately held start-up; not bad for a company just setting out.
After it burned the cash and had a "going concern" qualification appended to its financials, Modu sought to raise additional finance, this time from the local capital market. But the attempt to go public did not go well. Israeli institutions turned their backs, the offering was cancelled, and after a short time the company collapsed.
N-trig is a longer established company. It was founded in 1999, and has developed touch-screen technology. Its current products are digital pens for use with such screens. Like Modu, it has raised large amounts of finance over the years; more than $130 million in eight fund-raising rounds. Like Modu, N-trig makes losses, and its financials too carry a "going concern" warning.
N-trig has also failed to abide by the financial covenants for a loan that it took, and has to raise at least $20 million within a month. The feeling that arises from the prospectus is that the planned IPO is a matter of no choice. Does that remind you of something? Right, that was exactly the situation in the IPO that Modu tried to bring off, the failure of which sealed its fate.
Although four years have gone by between Modu's attempted IPO and the current attempt by N-trig, it seems that Israeli high-tech companies have not learned their lesson. It's hard not to wonder how, for all the desire of the chiefs of the Tel Aviv Stock Exchange to promote offerings by technology companies, Israeli companies come to the local stock exchange only after they have run out of gas.
N-trig and Modu are examples of companies that engendered a great deal of buzz (N-trig's name was connected to deals with giants like Intel, Microsoft, Dell and Lenovo), and raised a lot of capital, but approached the Israeli institutions only at the end, when they had no option.
Nevertheless, there is also a substantial difference between the two companies. Unlike Modu, which at the time that it filed its prospectus had negligible revenue, N-trig has annual sales in the tens of millions of dollars, even if it is not currently profitable. Most of its revenue comes from one main customer that is also a shareholder, namely Microsoft, which accounted for 79% of N-trig's revenue in the first half of 2014.
The growth in sales of Microsoft's Surface Pro 3 tablet computer, which is sold together with N-trig's pen, should support growth in the latter's sales as well. In the prospectus, N-trig states that it has dozens of potential customers, among them Samsung, Apple, Dell, Lenovo, ZTE, and others. Samsung and Apple are major players in this niche, with a market share substantially larger than Microsoft's, and if N-trig does work with them, its sales will presumably expand considerably.
On the other hand, Dell and Lenovo, which are mentioned as potential customers, were N-trig customers in the past. In 2009, the company reported that its technology was being integrated in a Lenovo product, in a contract estimated to be worth millions of dollars, but Lenovo is now mentioned in the prospectus as the customer of a rival digital pen company. N-trig's business with Dell ceased in 2013, which offset the growth from new sales to Microsoft. Why did sales to Dell stop? The prospectus furnishes no explanation.
But N-trig's sales took a dive even before that, in 2012. The top line shrank by 63% that year, because of what was explained as a cut in the average price of its products because of a change in the business model. In 2011, N-trig started to focus on digital pens only, instead of producing a complete touch-screen system. According to the figures in the prospectus, after the drop in pen sales in 2012 and 2013, sales grew back again, and overtook the 2011 pen sales figure, so that, from this point of view, the company is going in the right direction, even if total sales have fallen.
Still, in the peak sales year of 2011, N-trig was valued, as far as is known, at $200-300 million. It now plans to raise money at less than half that valuation.
Published by Globes [online], Israel business news - www.globes-online.com - on November 2, 2014
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