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.

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

Dragtontail systems (DTS) offers an incredibly unique and exciting product.

They offer SaaS with their Algo and Algo light products. These products organise fast food/quick service restaurants (QSR) kitchens and delivery systems. Ever ordered Domino's and been able to pull up on your phone where and how far away your delivery driver is? This is DTS. It ensures any prepped food is put to the side and until the delivery driver arrives at the store as the food comes out of the oven, ensuring it arrives hot to the customer. This is all done through their patented AI driven software.
Ever heard of the Dom pizza checker? This is DTS as well.

Domino's pizza has shown a threefold reduction in late deliveries (down from 1.6% to 0.5%) and complaints (2.6% to 0.9%).
Rack time has been cut in half (I'll be honest I don't know what rack time is but assume it's how long food stays off to the side).

So Algo optimizes and manages the entire process starting from food preparation all the way to its delivery to the customer, completely streamlining the food preparation and delivery processes. The food preparation, delivery, marketing operations and Customer Relationship Management (“CRM”) are integrated into a single GPS-based algorithm and management software, which optimizes, manages and controls the entire operations chain in the restaurant.

As mentioned above DTS has a QT Quality Control Camera. This can be used to ensure orders are packed correctly, check toppings as pizzas come out of the oven, check ingredients quality, ingredient distribution and order matching.

The company’s states it's objective is to grow this license revenue, which represents a long-term recurring revenue stream with very high margins post installation.

In 2019, the installed base increased approximately 10-fold compared to December 2018, reaching more than 2,000 stores globally.
Cash receipts were up 41% over 2018.

DTS plans on/is working with food delivery aggregators (think Doordash etc) to further leverage their platform and gain additional revenue.

DTS does not have a sales and marketing team and as such all their acquisitions to date have been from company's such as Domino's approaching them, not DTS actively looking to sell their product.

They will be debt-free in the next month via the offering of up to 148,076,926 preference shares in 2 stages, raising $19.25M to be used to pay off debt with the remaining funds used to accelerate its entry into the US and other global territories, to explore significant business opportunities, and to build a dedicated Sales and Marketing department.

With patents protecting their IP DTS has a massive moat/competitive advantage and a huge addressable market.

Analysis:
Red Flag 1: up to 148,076,926 new shares to be issued in 2 stages massively diluting the existing 248,900,000 shares outstanding
Red Flag 2: management has missed milestones and isn't forecasting to be cash flow break-even until Feb 2021
Red Flag 3: This is a SaaS product that is claimed to and should have high margins but just doesn't
Red Flag 4: They've installed in over 3300 stores (Domino's, Pizza Huts etc) globally and still aren't cash flow breakeven. For reference there are 700 Domino's in Australia.

I don't like to get subjective but I feel Domino's has DTS by the balls. To be installed in that many stores with a SaaS product that should have high margins suggests they aren't charging enough for their services.

Disclaimer: I do not hold any shares in DTS and I plan on off-loading my Strawman position in this company.