What's the Connection Between a Soaring Israeli Startup and Interpol?

The story behind MySize: How did Shoshana and Yitzhak Zigdon become millionaires and who predicted $7 billion in sales from an app that measures people for clothing sizes?

Interpol website

Late last year, at a modest investor conference in a Ramat Gan hotel, dozens of people showed up to hear about three startups traded on the Tel Aviv Stock Exchange. One of them was MySize, which was developing a mobile app that measures the user’s body to provide exact size information and make it easier to buy clothing over the Internet.

What most of those at the conference probably didn’t know about MySize was that among those in attendance was someone Interpol would have been happy lay its hands on. That man is Yitzchak Zigdon, an accountant who features on the Interpol website’s Wanted Persons — as Izhack Zigdon. He is one of 16 Israelis sought by the United States and one of 74 wanted by law enforcement agencies around the world. The Interpol listing says he is wanted by the United Stateson charges of conspiracy to commit securities fraud, wire fraud and mail fraud.

Zigdon’s name may be familiar to sports fans. He was the accountant of the Hapoel Tel Aviv soccer team when it was owned by Shaul Eisenberg, who died in 1997. In 2012, when the team was owned by Eli Tabib, Zigdon was made comptroller. Zigdon’s wife, Shoshana, is controlling shareholder of MySize, with a 23% stake in the company. Her husband has been closely involved in the business as well.

The company reported that last year Shoshana Zigdon sold to a shell company the patent rights to an invention that has still not been recognized as such in any country. She received a 23% stake in the new company, MySize.

Yitzhak Zigdon attended meetings with potential investors in the company and a meeting with accountants from BDO Ziv Haft, which provided advice on the sale of the patent rights to the publicly traded company. In return for the patent rights, Shoshana Zigdon was promised 18% of the operating profits of the company for seven years.

But MySize claims that Yitzchak Zigdon has no connection to the company. It gave TheMarker a letter from the Spiegelman, Koren, Barak, Zamir & Company law firm dated April 2013 and stating that in January of that year a Florida court had approved a settlement between Yitzchak Zigdon and the U.S. Securities and Exchange Commission in which a settlement was paid to the SEC without any admission of guilt or liability on Zigdon’s part. Nonetheless, as of late last night, Zigdon was still on Interpol’s Wanted list.

MySize CEO Ronen Luzon, a controlling shareholder in the company, told TheMarker that Yitzchak Zigdon has no involvement in the company. “In the past, he helped recruit investors, but he received no compensation for it,” Luzon said.

The company also said that Zigdon did not take part in its official meetings with accountants. It referred questions about the Interpol listing to Zigdon, saying the matter had “nothing to do with the company.”

In conversations with acquaintances, Shoshana Zigdon has frequently mentioned “our investment in the company.” Asked to whom “our” refers, she said she and her husband initially invested “as a family” but that today her husband has no connection to the company; he works as an independent accountant for sports associations.

The Israel Police said in a statement that it “does not disclose details about citizens, and especially not about investigations by other law enforcement agencies worldwide.”

This is what Yitzchak Zigdon has to say. “The U.S. authorities filed suit against me in early 2011. On January 23, 2013, a Florida court approved a settlement between me and the U.S. Securities and Exchange Commission. Under this settlement, a financial payment was made to the SEC and the suit against me was withdrawn with no admission of responsibility or guilt. Under section 11 of the settlement, I cannot give any information to the press, so under the circumstances, I can’t discuss the content and implementation of the settlement.”

Asked about his presence at meetings with MySize investors, he said, “I’m not involved in MySize’s operations. There were a few acquaintances who were interested in the venture. I received no fee, either directly or indirectly.”

Share price quintuples

MySize ID, the company’s smartphone app, scans the user’s body and records and stores the measurements in order to help the user find clothing that fits from online retailers. Since the share began trading in late 2014, its market cap has quintupled.

Today, it trades at a market value of almost 300 million shekels ($77 million), even though its product is still in development, has no sales and the company’s financial reports include a going-concern warning. It’s burning cash at a rate of 850,000 shekels a quarter, and its quarterly losses run to 1.4 million shekels.

It also hasn’t yet obtained a patent on its idea — the basis for the entire company — in any of the many countries where it has applied, including Israel, Japan, several European states, Australia, the United States and Russia. The company’s financial reports say the applications are in process.

The company notes that patent applications take time, but if a patent is approved, protection is retroactive to the date the application was filed.

Meanwhile, the jump in its share price has already made Shoshana Zigdon and Luzon, who owns 11.5% of the company, multimillionaires. On paper, they are worth 65 million shekels and 32 million shekels, respectively.

In a report issued in late 2014, Yigal Toledano of BDO Ziv Haft made dizzying projections for the company, predicting that sales through the MySize ID would reach $1 billion in 2016 and $6.75 billion in 2022. But that forecast refers not to the company’s own sales, but to other companies’ sales through the app. Moreover, it is based on assumptions supplied by Luzon, which Toledano apparently accepted without question.

For instance, he wrote, “based on the entrepreneur’s assumption,” sales via MySize would account for 0.5% of all clothing sales over the Internet in 2016, and its market share would thereafter grow by 0.25% a year, to 3% in 2022.

BDO declined to comment. MySize replied, “BDO conducted market research that included a possible forecast for the company’s potential market share. This document addressed the market’s size and revenues, on the assumption that the company will capture 0.1% of the market (as noted in the study). The company doesn’t publish revenue forecasts in its annual reports.”

Despite the jump in the company’s share price, no institutional investor has yet become a substantial shareholder. Nevertheless, MySize is already looking at the American market. Two months ago, it applied to register its shares on Nasdaq, for which purpose it hired the brokerage ViewTrade Securities.

What remains to be seen is whether Nasdaq will accept a company whose owner’s husband is listed on Interpol’s website as wanted by the American government.

On Monday, the company announced the launch of its SizeUp app, which can measure two-dimensional figures but not yet a three-dimensional body. It said the app was being reviewed by Apple’s App Store, and if accepted, would be downloadable there for free.

It also said that to the best of its knowledge, this is the first app worldwide that enables precise measurement via an iPhone without the need for sensors or other accessories. All you have to do is to pass the smartphone over the area in question.

If Apple requests no substantial changes, the company expects the app to be available from the App Store in the coming weeks.

‘Returns are a burning problem’

The company’s business model, Luzon told TheMarker, is for retail chains to adapt their websites to use MySize ID and then pay the company a percentage of every purchase made via the app — hopefully 1%. Customers would use the app for free.

Luzon said this would be a good deal for the chains, because “product returns to Internet fashion stores are a burning problem for retailers.” For the same reason, he noted, many competitors are also trying to solve this problem, but their solutions are usually based on the cellphone’s camera.

“The main problem with this system is that the user has to photograph himself wearing minimal clothing to get precise body measurements, and then upload the picture to the app’s server,” Luzon says. “Many users aren’t interested in exposing themselves that way.”

Another solution, he said, is a virtual measurement chamber located in the physical store that does a 360-degree body scan. That produces accurate measurements, but it’s expensive, and also requires the customer to visit a physical store before shopping online.

Asked how the company would survive in light of its going-concern warning, Luzon says it had recently raised $4 million to finance operations, research and development and marketing. Moreover, it recently signed a cooperation agreement with the Spanish fashion chain Trucco, which has 240 outlets worldwide as well as an online store

But Luzon declined to comment on one important issue relating to MySize’s operations: the fact that it still doesn’t have a patented product.

In a recent conversation with someone interested in the company, Shoshana Zigdon asserted that it did have a registered patent. But when asked why, in that case, its financial reports said it doesn’t, and even noted that patent offices in various countries had expressed doubts about whether the app qualifies as a new invention, she backtracked. “It’s in the registration process, which began some time ago,” she said. “We believe it will be registered.”