Modu-David Bachar
Dov Moran, Modu founder, holds the tiny phone of which he has such fond expectations. Photo by David Bachar
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Mobile phone manufacturer Modu is dialing up a stock offering on the Tel Aviv Stock Exchange, but some may be deterred by its financial situation.

The three-year-old startup has submitted a prospectus for an IPO of shares, bonds and options at a pre-money valuation of $120 million. The company will issue about 25% of its share capital, with Clal Underwriting and Leumi Partners handling the flotation. In it's prospectus, Modu reported a going concern warning was attached to its results in light of its current financial position.

The natural habitat for technology companies is Wall Street's NASDAQ. However, that venue toughened its listing requirements following the financial crisis, and Modu was forced to look for capital in the Israeli market where technology stocks are somewhat rare. The company doesn't expect the capital raised in this issue to suffice before it turns a profit, and it will probably need to follow up with an additional stock offering.

Hoping for a rebound

Modu, based in Kfar Sava, was launched in 2007 by CEO Dov Moran, known as the man who made a fortune on the mobile memories popularized as "disk on key". The company now has offices in South Korea, Croatia, Russia and Austria. Its main product is what it calls the world's lightest mobile phone.

"Even Apple failed with its first cellular device, launched together with Motorola," said Moran in an interview granted in the past to TheMarker. "But Apple is an amazing company. It made mistakes and introduced products that didn't succeed, but went back and fixed them. I think many of Modu's investors knew from the start that it wouldn't work at first go. Meanwhile none of them have given up and jumped ship. They understand is that it's a lengthy process and appreciate the importance of having a company like Modu in the Israeli hi-tech market."

According to the prospectus, the major shareholders in the company are Moran, with 35.9% before the IPO, whose share will dilute to 29.8% after the offering, and SanDisk, with 8.6% currently, which will decrease to 6.5% following the issue. Idan Ofer's Lynav Shipping currently holds 12.7% of the shares.

Moran has taken on the obligation not to sell any of his shares over the next two years, and if the share price doesn't exceed $4 he won't sell his shares for at least five years. A $4 share price would reflect a company valuation of about $250 million.

Modu also revealed the salary costs for its top executives. Moran took home $69,700 in the first half of 2010 and $133,300 for all of 2009. The top salary, however, went to CFO Ronen Faier, who got $290,400 in 2009 and $150,900 in the first half of this year.

About 78% of the cpaital to be raised will be used for product development, with the rest earmarked for sales and marketing activities in the launch of its new products: Modu T and Modu W.

Modu T, slated to hit the market in the near future, is a newer version of the company's older cellphone, listed by Guinness World Records as the smallest touchscreen of any cellular device in the world.

Modu W, scheduled for release before the end of this year, is a non-cellular telephone device based on Wi-Fi connectivity and VoIP technology, without the need to connect with a cell phone operator. Users of the new device should be able to make calls to every destination at lower costs, and the radiation emitted from the device is significantly lower than that of a standard cell phone.

Employment at Modu peaked at 221 souls last year, but 110 were fired at the end of November 2009 after the company failed to raise the funds it needed at the time. The company currently has 131 employees.

Small phones, big expectations

Modu's phones link up with a wide range of physical applications. For instance, the company offers a photography application that turns the phone into a five megapixel camera. Another application, for sports, enables the device to follow the user's walk or run and plan a workout. The company is also developing a keyboard to attach to its products, enabling them to serve as QWERTY-like devices.

Modu approaches its IPO with revenues of $1.7 million for the first half of the year, against $182,000 for the entire 2009. Its net loss for the half came to $8.1 million, compared to annual net losses of $45.7 million, $51.6 million and $10.2 million for the years 2009, 2008 and 2007 respectively. At the end of June 2010 it had a capital equity deficit of $1.5 million and cash reserves of about $14.3 million.

But Modu has great expectations for the longer run. While the company forecasts 2010 sales of only $1.9 million with an operating loss of $24.6 million for the year, it expects sales to reach $73.3 million with an operating loss of $15.4 million in 2011. For 2012 a switch to operating profit is expected, of $1.5 million, on sales of $295.9 million. Sales of $597.4 million and operating income of $45.2 million are projected for 2013, and $968.7 million in sales with $99.2 million in operating income are projected for 2014.

Modu believes it is entering a growth market. In 2010 about 1.4 billion cellphone devices are expected to be sold worldwide at a value of $187 billion. The future growth rate for the market, in terms of sales revenues, is expected to stabilize at 8.5% for the years 2011-2014, with sales reaching $266 billion in 2014.

The company intends to concentrate on markets such as India, Asia, Latin America and Africa, and prefers to wait on entering the U.S. market, where competition is stiffer.

In the market breakdown of types of cellphone devices, 25% of those sold in 2010 are basic models, 36% have basic added features, 12% have advanced features and 27% are smartphones.

By 2014 basic models are expected to comprise just 12% of units sold, with basic feature phones holding 27% of the market, advanced feature models having a 21% market slice, and smartphones with a 40% chunk of the market, estimate industry observers. Modu positions its products between those with basic and advanced features.

Ace in the hole

The company's ace in the hole is Moran. Born in Israel in 1955, Moran studied at the Technion and served in the Israel Navy. His last job in the navy was as head of the micro-computer section. Several years following his release he and friends founded the company M-Systems, the originator of the Disk On Key for the USB flash drive which went on to great commercial success worldwide, being called one of the twentieth century's greatest consumer inventions.

M-Systems, run by Moran, grew to annual sales of about $1 billion, and was one of the best known Israeli companies trading on the NASDAQ. Moran owned 6% of its shares when, in 2006, the company was sold outright to SanDisk for about $1.6 billion.

Thus far about $123.5 million has been invested in Modu. The investors include Moran ($13.5 million ), Idan Ofer's Lynav Shipping ($25 million ), Rhodium ($15 million ), the Generali insurance group ($11.5 million ), The Gemini Fund, The Genesis Fund, SanDisk and Softbank ($10 million each ), Qualcomm ($7.5 million ), Kingston Technology ($5 million ) and Greylock Partners ($5 million ).