An Irvine memory products maker is gearing up to go public within the next month.
US Modular Corp., which sells everything from external hard drives to souped-up memory for gamers, is set to go public via a reverse merger.
The tactic is an increasingly popular one for small companies that don’t want to go through the process of holding an initial public stock offering. In a reverse merger, a company,in this case US Modular,buys a shell company that has maintained its public listing even as its operations have shuttered.
US Modular is set to trade on Nasdaq’s Over the Counter exchange. It is acquiring Continental Beverage and Nutrition Inc. of Garden City, N.Y., to get its listing.
Going public could boost the company’s prospects by giving it more access to funding, said Nick Payzant, founder and chief executive of US Modular.
Payzant is a former business development manager at Rancho Santa Margarita-based Viking InterWorks Inc., a unit of Sanmina-SCI Corp. in San Jose.
“Now we can really grow with the pedal down,” Payzant said.
US Modular is looking to stake ground in the competitive, somewhat commoditized memory business by developing products quickly, using sleek designs and building patent-protected gear that can’t be copied.
Four-year-old US Modular, which has been profitable for all but two quarters since starting, should hit about $40 million in sales this year, up from $25 million last year, the company said.
The company’s market value could equal its annual sales when US Modular goes public, Payzant said.
Next year, the company expects to more than double its sales to nearly $90 million.
A public stock listing will allow US Modular to offer shares in exchange for funds. It can get financing via PIPEs,private investment in public equity, which is a strategy used by smaller public companies.
Financing could boost US Modular’s product development. The company could add workers or make acquisitions, Payzant said.
US Modular considered going public through an initial public offering, but balked at the cost, which Payzant said would have been about $500,000.
The reverse merger process is simpler and will cost the company about $250,000, Payzant said.
He said it did take a lot of work to find a “clean” shell company that wouldn’t produce any surprises, such as undisclosed liabilities or shareholders.
Payzant and other executives may have passed up a chance at a big payday by not doing an initial public offering.
US Modular had attracted serious attention from venture investors. But Payzant declined, wanting to keep a bigger chunk of ownership in-house.
Payzant put about $500,000 of his own money into US Modular in its first couple of years. He used funds from a second mortgage on his home and sold off properties he had bought during the mid-1990s.
Last summer Reston, Va.-based Snowbird Capital stepped in with financing. US Modular took on more than $1 million in debt, to be paid off with interest. The company gave up a small equity stake of less than 5%.
“It’s a tough market, but they’ve been very effective in finding niches to grow into,” said Nelson Carbonell, chairman and chief executive of Snowbird Capital. “Their product design is awesome.”
US Modular is going after some established competitors, such as South Korea’s Samsung Electronics Co., as well as locals Viking, Fountain Valley-based Kingston Technology Co. and Santa Ana-based SimpleTech Inc.
The companies all sell basic memory products,and they’ve weathered the storms of the tech downturn.
US Modular has made a name for itself by mixing the flash (computer-chip based memory) and disk drives (small machines) with style and function.
Its Monstor external hard drive looks more like a slim Zippo lighter than an electronic accessory, but costs about as much as a flash drive with up to 8 gigabytes of memory.
Another drive holds up to 120 gigabytes of memory, but still is less than a half-inch thick.
The company began in late 2001 by selling memory products online. US Modular later moved into the vast reseller network that targets manufacturers and the military.
With just a handful of employees, the company was able to offer low prices by working with suppliers that don’t require US Modular to manufacture, package or even ship products from its own operations.
It did focus on its products. One disk drive was made tough enough to be used on a battlefield during war.
“I knew we had one shot at this,” Payzant said. “We didn’t just want to blast a bunch of commodities.”
US Modular hit $5 million in sales its first year and then grew about 50% annually after that.
Sales to Dell, Wal-Mart
In the past year or so, the company has been reaching beyond memory resellers to sell directly to big manufacturers and retailers. Customers include Dell Inc., Radio Shack Corp. and Wal-Mart Stores Inc. Its products are sold on amazon.com and buy.com, among other shopping Web sites.
The company now is looking to patent its product designs.
“I knew we could get sales with commodity products, develop an infrastructure and then start to become a technology company and develop technology and IT,” Payzant said.
The first such product: Stik and Stor. It uses a tiny flash chip to give users of cell phones a way to store massive video and music files. The product has a patent pending.
