Straws are discrete research notes that relate to a particular aspect of the company. Grouped under #hashtags, they are ranked by votes.
A good Straw offers a clear and concise perspective on the company and its prospects.
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Bear case
I love the Dragontail story. It’s a proprietary tech/SaaS business that solves multiple problems for the QSR industry and sits within my circle of competence. They have strong organic store growth, with no sales team and zero churn. However, it has a few glaring weaknesses, specifically regarding their financials:
Company has 2,361 stores installed (e.g. Dominos Pizza, KFC) with 5,608 contracted. Store installations increased by a modest 314 from Q2FY19 – Q2FY20.
In a recent presentation for Coffee Microcaps, CEO Ido Levanon states their operating expenses are $500,000/month and that this should stay flat. If you have over 3,000 stores waiting to get installed and only accomplished 314/year shouldn’t you increase your costs to accelerate installations?
DTS’s Algo system has an average base cost of $100/month and $150 if you include features such as driver safety training. This indicates there are various price points depending on the package chosen and potential for upsell of additional features.
DTS’s QT camera has a minimum cost of $40/month and average of $50-60 according to Ido.
With 2,361 stores currently installed he states they need 6,500 stores to reach [cash flow] break even. This is a much different answer to what I was given earlier in the year; that they expect cash flow breakeven around Feb 2021.
Even assuming 1,000 store installations/year this leaves them 4 years off cash flow breakeven. Of course, if I’ve made a mistake or missed something, I’d love to hear it.
https://www.youtube.com/watch?v=J5UU-f2O4Vo
DRAGONTAIL DECEMBER 2020 QUARTERLY ACTIVITIES REPORT ANOTHER QUARTER OF GROWTH
Highlights
? Continued strong growth in Cash Receipts from Customers for the December ended quarter, Q4 FY2020, of US$516k 1 , up 28% compared to prior quarter of US$403k, and up 141% on Q4 FY2019 of US$214k.
? Cash Operating Expenses held constant for the quarter, demonstrating a continued trend of the business scaling well globally, with presence on all continents.
? Second round of funding commitment of US$4.2M by Eldridge confirmed during the quarter (subject to shareholder approval scheduled for 3 February).
? Contracted stores more than doubled in FY2020 with 9,291 stores at end of Q4 FY2020 (up on 3,814 stores at end of Q4 FY2019), and total installed stores increased to 2,663 stores from 2,003 stores (up 33%), achieved despite difficult COVID circumstances and using remote installation measures.
? Key agreements signed with leading USA QSR chains like Papa John's, Sweetgreen and a large QSR Franchisee, which reflects the initial success in the Company's effort to expand into the USA market.
? New integrated drone food delivery optimization capability was implemented into the Algo Platform following winning of a government tender.
? Customer retention: Dragontail continues to celebrate no single customer switching away from its game changing technology.
? Strong cash balance: US$2.2M1 per 31 December 2020 plus US$4.2M from a committed strategic fund raising expected to be received within 30 days following shareholder approval.
? Post quarter end: appointment of two US based Directors to the Board – Mr Jon Weber & Mr Jeff Wilbur.
? Outlook:
With the recent round of fund raising combined with the pre-existing cash balance at the end of December 2020 and consistently growing cash receipts, the Company has a very strong cash runway to grow the business substantially in calendar 2021, while maintaining a firm grip on the cost structure.
Dragontail Systems has put out an Update Jan 2021
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02330555-6A1015523?access_token=83ff96335c2d45a094df02a206a39ff4
DISC: I hold
Very early stage, and quite speculative -- but promising.
Unique value proposition for a very large addressable market with no apparent competitor.
100% retention.
Fast growing sales (off low base) from top tier customers.
Well managed costs and ability to scale well.
Recent funding gives path to break even (hopefuly)
Big backlog of installations.
Aside from winning new customers (most of which appear to be inbound inquiries), growth comes from these customers expanding the service within their network, and using more features.
Have taken a small stake here on SM and in my real portfolio.
The power to move mountains , or at least share prices by 12.5%.
congrats, Strawman, I hope the responsibility isn't too onerous!!
Management are recommending a takeover offer of 23.5 cents per share.
Deal is sealed in August, assuming all goes well
DRAGONTAIL RECEIVES COMMITMENT FROM ALCEON FOR 2ND STAGE OF STRATEGIC FUNDING CONCLUDING THE A$19.25M FUND RAISING
Highlights
~ Alceon to subscribe for additional Convertible Preference Shares to raise A$2.0M.
~ Funding is the second and final component of the two stage strategic agreement announced on 23 March 2020 totaling A$19.25M, of which A$12.0M was received in Stage 1.
~ Alceon’s commitment to take up their Stage 2 entitlement concludes the A$19.25M fund raising and follows the recent A$5.25M commitment from Eldridge Industries, a USbased holding company.
~ Funding demonstrates investors' support in the Company's vision and will strengthen Dragontail’s ability to rollout further store installations and bring to market innovative projects in its pipeline.
DISC: I hold
There is a long list of stuff in the ASX announcement. For me the key questions have been store rollout vs 'contracted stores' and revenue growth. In past quarters the contracted store growth was great but the rollout very slow. Management said this was due to COVID contraints. Pleasing then that the total number of installed stores increased 30% from the previous quarter. There is a chart in the announcement that shows what a distinct increase this is. They still have plenty to do with 9300 contracted stores of which they have rolled out to 3480.
Revenue also increased 30% from the past quarter. Not so great is that costs are around $2M/quarter so they need to rollout to all contracted stores to break even unless the average revenue per store increases. Even if the store rollout increases to 1000 per quarter and costs remain the same, it will be six quarters to break even.
From the announcement.
All the stuff they do and customers they have signed are really great and the franchises will be 'sticky' but the revenue seems slow to follow. So there is still plenty that could go wrong before they go big.
From ASX announcement:
"27 May 2021: Dragontail Systems Limited (ASX: DTS, the “Company” or “Dragontail”), an innovative
provider of technology solutions for the food industry, is pleased to announce that it has entered into a
Scheme Implementation Deed with Yum! Connect Australia Pty Ltd (YCA), an entity controlled by Yum!
Brands, Inc. (Yum), under which YCA undertakes to acquire 100% of the issued capital of the Company (on
a fully diluted basis) for an aggregate consideration of A$93.5M (Transaction). The Transaction in respect
of the fully paid ordinary shares of Dragontail (DTS Shares), which is to be implemented by way of a share
scheme of arrangement (Scheme), is not subject to a finance condition.
The unsolicited offer was received by the Company just as the Company was realizing its pre-arranged
plans to deepen its hold especially in the US while investing its best resources and intentions in realizing
this potential
Under the terms of the Scheme, Dragontail shareholders will be entitled to receive A$0.235 per DTS Share
(Scheme Consideration) subject to all applicable conditions being satisfied or waived and the Scheme
being implemented.
The Dragontail Board of Directors unanimously recommends that all Dragontail shareholders vote in favour
of the Scheme in the absence of a superior proposal and subject to an Independent Expert expressing an
opinion that the Scheme is in the best interests of Dragontail shareholders."
Thesis
•Dragontails largest customer is Dominos Pizza with ~3,480 stores using the company’s product with another ~3,000 stores awaiting installation
•In a Q&A, DTS CEO Ido Levanon states most QSRs won’t do anything without the blessing of the franchisee and that they typically wait for their feedback. Domino’s was different, head office decided to employ DTS product and franchisees had to follow
•YUM! Brands owns KFC, Pizza Hut, Taco Bell &The Habit Burger Grill
•DTS has further value add down the road for any acquirer. For example, the ability to leverage their driver safety data to bring QSRs driver insurance costs down.
Domino’s clearly values Dragontails product very highly and I can’t see them gifting the software to rival Pizza Hut without a fight. Dominos is also a company that values technology, such as what Dragontail offers, very highly.
Thesis is a merger arbitrage play (I hope this is the correct term?) that Domino’s comes in with a higher counteroffer. As Andrew has noted, the risk is that the deal falls through. With a personal valuation of $0.24 & a Strawman community valuation of $0.18 I think the risk to the downside is minimal and I would be happy to continue to hold.
Lodged at 7:03pm
DTS will now be suspended til approx 8/9/21 when the Scheme of Arrangement with YUM will now go ahead.
AS per ASX announcement_
"Dragontail Systems Limited (ASX: DTS) – Suspension from Official Quotation
Description
The securities of Dragontail Systems Limited (‘DTS’) will be suspended from quotation at the close of trading today, Tuesday, 31 August 2021, in accordance with Listing Rule 17.2, following lodgement of the Court orders with the Australian Securities and Investments Commission approving the scheme of arrangement by which Yum Connect Australia Pty Ltd will acquire all of the issued shares in DTS.
Issued by Laura Gomme Adviser, Listings Compliance (Perth)"
EDIT~I missed the announcement by DTS~
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02415869-6A1048230?access_token=83ff96335c2d45a094df02a206a39ff4
The announcement from DTS's Lawyers is attached.
DISC: Previously held, sold out on announcement of SOA