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Re: Rawnoc post# 17683

Monday, 08/25/2008 12:33:59 PM

Monday, August 25, 2008 12:33:59 PM

Post# of 19383
Good post.

This company is a B-school business case in the making. Thinking strategically, they have 2 options:
1. be a restaurant company with cool technology that some people may want to buy.
2. be a technology company with revenue-generating restaurants to sustain them in lean times.

Of the two, I like (1). The profitability of the restaurants is not in question. Take that model and duplicate across the US and you have something. Unfortunately, now they can't do that. They have no money. Someone else could..

So they have chosen Option (2), but executed poorly, IMO because they let them selves get into a position where they are suddenly financially strapped. Big salaries, stock option expenses, etc.

Possible outcomes for (2):
1. they magically sell licenses and everything works out OK.
2. they lower their costs and live within their means.
3. They continue as is and fade to oblivion. (can't go bankrupt as they have no debt, odd)..
4. They raise more capital and keep on going.

Of these, I like (2). Unfortunately, I just have not seen companies do that. IMO (1) is difficult. btw, a sales cycle in the s/w business (from time of first call to closed deal) takes 6 months. And if they attract the attention of a major player... lookout. They ae underfunded and have just a small development staff. (4) may be helpful temporarily, but if nothing else is done, will just be a temporary fix.

Overall, I liked the package of technology plus restaurants (Strategic Option #1). In thinking about it, I think that was their best option. They have abandoned it. All of the scenarios in the second option (licensing), except for success as a vendor, will lead to a lower share price. Cost-cutting will lower the price, because even if it rationally means that things are better, cost-cutting has costs like severances and so on that add one-time costs and are just not popular. Raising capital will lead to dilution, but may also prop up the price temporarily.

I would like to see them cut their cost and subsist on the 3 restaurants. Count on the share price to fall lots before then. Then, they become a vendor with revenue-producing restaurants, a movie about the owner and founder, and who knows... so bottom-feed, let things unfold and bottom-feed... wait until things resolve themsleves, which will be soon.

Still another possibility, what if an other entity takes them over and pursues Strategy Option (1) above of the restaurant thing? If you are bottom-feeding, that could very well be the outcome. Investors will profit from that. So, wait it out.

As an example of another company facing similar issues, check out AZD (TSX). Azure Dynamics. They are a Michigan-based automotive company that builds hybrid drivetrains. They sell to fleets, where gas costs are a huge issue. They have been getting deals, but delivering for .. NEGATIVE GROSS MARGIN .. lol. Result is they are losing gobs of money. Stock was recently down at .17. Well, they just announced a Private Placement by a pension fund. This will give them 8-9 mo. The PP happened at .25. Stock is up marginally. Now, if they get a volume deal.. imagine the possibilities. Could be a huge profit. uWink likewise if they stabilize with 3 restaurants and focus on selling, could do the same. Then it depends on how good their product is, and how well they can deal with the competition. Difficult question.