High and dry: How Highcon went from $190 million valuation to verge of bankruptcy
The company, backed by Benny Landa’s Landa Ventures and Erel Margalit’s JVP, has seen its market cap drop to less than $10 million as it continues to amass losses
Packaging technology manufacturer Highcon Systems reported a loss of 43 million shekels (approximately $11.5 million) in the first half of the year and a going concern note regarding the company's ability to continue was added to its report by its accountants.
Highcon entered the Tel Aviv Stock Exchange in November 2020 as part of the wave of technology company IPOs at the end of 2020 and during 2021. This period saw 74 IPOs by companies in the technology and biomed sectors, fueled by low interest rates and central banks' expansionary policies encouraging investments in unprofitable companies.
Highcon Systems, whose controlling owners are Landa Ventures (22%) owned by Benny Landa and JVP (21%) led by Erel Margalit, specializes in manufacturing digital systems for the production of folding packaging and cardboard display stands. Most of its sales are to packaging manufacturers, to whom it also sells the consumables needed to operate the systems.
In the IPO prospectus, Highcon reported that from its founding in 2009 until the end of 2019, it accumulated losses of $97 million. In that year, it experienced a negative cash flow of $13 million and a loss of $16 million, which was 30% higher than its 2018 losses, with approximately $8 million recorded as R&D expenses.
Despite these figures, the IPO successfully raised NIS 151 million ($45 million), and the company started trading at a valuation of NIS 630 million (approximately $190 million at the time). However, its stock value began to rapidly decline after the IPO. By the end of 2021, after its first full year as a public company, it had lost 64% of its value. At the end of the last week, its value plummeted to NIS 36 million ($9.5 million), reflecting a 94% drop.
In the first half of this year, Highcon's revenues totaled $3.4 million, marking a 63% decrease compared to the corresponding half of the previous year. The company attributed this decline to reduced equipment sales due to longer sales processes and a slowdown in the markets. Rising inflation and interest rates were cited as factors affecting customer behavior in the packaging market. While Highcon reported a 34% improvement in the sale of consumables and services, it did not specify the extent of these sales in relation to total sales. Due to decreased sales, Highcon recorded a gross loss of approximately $800,000. This was further compounded by R&D expenses of approximately $6.3 million, along with sales and marketing, management, and general expenses of $4.3 million, resulting in an operating loss of $11.3 million.
Highcon's losses in the first half, combined with negative cash flow of NIS 11.4 million from its current operations, add to the losses of $49 million it incurred in 2021-2022, with negative cash flows of $19 million and $28 million, respectively, during those years.
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In all recent years, R&D expenses have been the largest portion of the company's operating expenses: $14.9 million in 2022 and $12.8 million in 2021. These expenses led to a negative bottom line despite improvements in sales revenue during these years, which reached $16.9 million in 2022 and $14.3 million in 2021, compared to $8.4 million in 2020.
To finance its operations, Highcon relies on its own resources, capital raising, and bank credit. As of the end of June, the company had cash and cash equivalents of only $5.8 million, down from $18 million at the end of 2022. Due to its losses and negative cash flow, the company's accountants added a 'going concern' note to its financial statements.
In April, Highcon initiated an efficiency plan that included the layoff of 26 employees (20% of its workforce), a reduction in senior executives' salaries (in 2022, the salary cost of the company's top five earners reached NIS 6.9 million), and the postponement of development activities. In July, the company issued shares and options with hopes of raising up to NIS 14.7 million ($3.87 million), but it managed to raise less than NIS 6 million ($1.58 million), primarily from existing shareholders.
Given its accumulated losses and cash flow situation, Highcon is actively seeking partners and additional funding sources. The company has reported ongoing discussions with several parties, including private funds and industrial companies. According to Highcon, these efforts are expected to take approximately three to six months to complete.
