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uWink LogoIt’s been a recurring theme with the large scale selling in the market but uWink (NASDAQ: UWKI.OB) in particular, as those that own these stocks panic and try to make sense of their investments.

We’re at that juncture where it’s time to once again check in on uWink and their latest quarterly earnings release (or rather the 10-Q), and what this means for our investment going forward.

One thing is certain: the economy has hit uWink’s restaurants hard, and while I’ve written countless times how uWink is not a restaurant company, but rather a software development company, we are now at a critical juncture in the company’s genesis in that with the stock price where it is, and uWink’s cash burn rate, something will need to happen one way or another rather quickly.

uWink’s shares aren’t for the faint of heart, but for those interested in uWink’s Q3/2008 results, as well as in where uWink is headed and what progress is being made on getting their terminals inside more restaurant chains and other hospitality venues, read on.

New to the uWink story?

uWink is an entertainment and hospitality software development company that develops casual, interactive, social games, in addition to licensing the rights to those games and their proprietary touch-screen ordering and gaming interface to restaurants, entertainment venues and the hospitality industry.

uWink also owns and operates three restaurants under the uWink brand name that utilize this technology.

uWink’s CEO is Nolan Bushnell, who also founded Atari Inc. (OTC: ATAR.PK) and Chuck E. Cheese’s, now known as CEC Entertainment (NYSE: CEC).

Hit Me With Some Numbers

Another Steep Decline in Same-Store Sales

Before we can look ahead, we need to analyze what just took place.

uWink’s Q3 was a disaster in terms of comparing their sales year-over-year from their Woodland Hills, CA location, even when including the 2 recently opened locations in Hollywood, CA and Mountain View, CA.

Here’s a brief overview of the carnage:

uWink’s earnings highlights (growth from previous year’s Q3/there are no analysts that cover uWink):

  • Q3 sales of $1.03 million (up 53% vs. $.67 million in Q3/07)
  • Sales of $2.08 million for the 9 months ended September 30, 2008 (up 5.5% from the same period in 2007)
  • Q3 operating loss of -$1.66 million (a increase of 62.6%, from a -$1.02 million loss in the prior year)
  • Q3 net loss of -$1.64 million, or -$0.13 per diluted share (a increase of 11.0%, from -$1.48 million, or -$.23 per diluted share, (There was a lower share count last year.)
  • Gross margin of 71.1% (flat sequentially from Q2/2008, and down from 71.3% from prior year)
  • Same-store sales down 48.7% (ONLY at the Woodland Hills location, was also down 38.2% in Q2/2008)

Per restaurant revenue breakdown (3/9 months ended September 30):

  • Woodland Hills: ($338,232/$1,304,601) vs. ($659,560/$1,899,532 in 2007)
  • Hollywood: ($527,082/$609,152)
  • Mountain View: ($74,527/$74,527)
  • The percentage of revenue attributed to uWink’s 3 restaurant locations was 91% in Q3/08, and 96% for the 9 months ended September 30, 2008 (vs. 98% and 96% for the same periods in 2007)

My Take: Now if we parse the numbers further, we see that there are some decent things and bad things to be found.

Let’s start with the bad.

If you notice, uWink’s 9-month period ended September 30, 2008, showed revenues that were essentially flat with the same period in 2007.

This is a big problem in that this year’s comparable period includes revenue from 3 locations vs. just one location last year.

The only caveat is that the Mountain View location was only open for 2 weeks during the reporting period, so we can scratch those numbers as immaterial, but the Hollywood location was open for the entire period.

You can see that the discrepancy occurred as a result of a huge shortfall in the year over year comps at the Woodland Hills location, where the tough economy is wrecking absolute havoc on uWink’s operations there.

The shortfall is essentially a 50% decline in same-store sales at this location, which follows a 38% decline in same-store sales from last quarter as well.

As I wrote last time around, it’s a damn good thing uWink isn’t looking to their restaurants to prop up their future growth or continued execution, or else they would be in big trouble.

As it stands now, uWink is in the process of renegotiating the lease agreement with the owner of the Woodland Hills location so that the lease terms become more in line with the current economic climate, and thus allow uWink to continue their goal of being cash flow even to positive in all 3 locations.

My last conversation with management I was told that as of now, they are cash flow even or better at all locations except the Woodland Hills location, which once they renegotiate lease terms, will then fall into this same threshold.

So what’s the good news?

It’s small as of right now, but portends the future of what uWink is trying to do and their continued execution in that realm.

It comes in the form of the restaurant revenues becoming a smaller percentage of their overall revenues.

This year uWink has started to secure some of the deals and revenue that they need to survive in the form of software licensing deals from their terminals, which is what they are ultimately after.

The restaurants merely serve as testing grounds for their technology and software, and as examples for what it can do for those companies in the hospitality industry that uWink is trying to court for long term relationships.

Bottom Line: uWink is getting crushed on the retail front. The good news is that they won’t be relying on their restaurants to prop up future revenue and profit, and therefore, as long as they can break even with these locations, they are useful for promotional purposes as well as testing grounds for uWink’s concepts.

Other Business Highlights

Liquidity starting to get tight

Now that we see that uWink is no different than any other restaurant chain in that they are not immune to the slowdown in consumer spending, we then need to ask: what is uWink’s cash position and liquidity, and what are they doing to secure their future?

Let’s start with the here and now.

uWink has used about $6.027 million in cash for the first 9 months of 2008, or about $2 million per quarter.

This number was greatly inflated as a result of opening the Hollywood and Highland uWink, as well as the one in Mountain View.

Now that those two locations are out of the way and have largely been accounted for in terms of capital expenditures and cash flows, we should see the spigot slow greatly in the last quarter of 2008, and into 2009.

uWink currently has about $1.265 million in cash and equivalents on hand with no debt, or about $.10 per share in cash.

According to management this should be enough cash to allow uWink to operate without having to tap into the equity markets or raise more capital for 6-9 months, but I would gather it is much closer to the 6 month or less time frame than 9.

In addition, in order to conserve cash, uWink is reigning in all expenditures in the form of additional software development (most of their architecture and development has already been paid for and completed), cutting extraneous expenses, renegotiating the lease at their Woodland Hills location, and looking at ways they can raise additional funding to see them through until they get more software and licensing deals.

So where is this cash going to come from?

It certainly isn’t going to come from the capital markets, especially with tight credit and uWink’s stock under $1.00 per share.

In addition, uWink would be unwise to raise money via a stock offering and dilute shareholders, or other pursue another stock related transaction, also because of their low stock price.

So what’s left for uWink to do? At current valuation levels, uWink is trading for around cash value, and less than their tangible book value, even if you assumed the carrying value of their assets was 50% less than what they have stated they are worth on their balance sheet.

How does a company in uWink’s shoes get money?

Here are some possibilities and my expectations of the chances of them happening:

  • Stock or follow-on offering (15%): Undesirable considering how many additional shares would need to be tenured to even raise $1 million. Management doesn’t want to do this, and frankly, it would be hard to find buyers for the shares.
  • Loan of some sort (35%): Forget about uWink getting a line of credit or other type of bank financing. What I see potentially happening is uWink getting a loan of some type through a benefactor, investor, or perhaps even the CEO, Nolan Bushnell. It would have to be from someone with a vested interest in seeing uWink succeed, and perhaps can come from one of the companies that is using uWink’s technology right now to test in their facilities.
  • Acquisition: (50%): This to me seems like the most likely scenario right now with all things considered. Who would buy uWink? Simple: one of the below mentioned companies that is using uWink’s proprietary technology that wants it all for themselves. At uWink’s current valuation, this would be a breeze for any of the larger restaurant or hospitality companies that are either using uWink’s technology, or testing it.

Bottom Line: Cash is getting tight, and uWink knows it.

What will be interesting to see is what they are going to be doing about it.

It’s clear that they simply cannot survive in their current form for much longer unless they secure a huge software and licensing deal, which is not entirely out of the realm of possibility, but not likely, before they run out of cash.

Where Is uWink Headed?

Material deals in the pipeline

It is more than likely, I would say about 90% or higher, that uWink will NOT survive in its current form with the cash that they have on hand. (More below)

That being said, management understands that they need to secure more software licensing deals ASAP in order to improve their financial standing, and make themselves more attractive to a potential suitor/financier.

In the latest 10-Q filing, management went out of their way to explain in detail what’s going on with the pilot programs that are in place and where uWink’s terminals are being tested.

Here’s a brief breakdown of those test/pilot programs and their potential implications on the company going forward:

  • Deal with Brinker International: As I wrote about before, uWink has already inked a deal with a Chili’s Too Margarita Grill in the Ft. Lauderdale airport utilizing 13 of their touch screen terminals through the franchisee Delaware North Companies.

This deal came with the approval of Chili’s parent company Brinker International (NYSE: EAT) and as a result, uWink is looking to become Chili’s system-wide approved technology vendor.

This could prove to be a huge deal if successful and if implemented across more Chili’s locations.

  • Deals with Quick Service Restaurants (QSR): uWink has been prototyping table and booth-mounted screens with a focus on kid’s entertainment at several “major” QSR in Texas over the last several months.

According to uWink, they have begun the “corporate vendor approval process” with two of the major chains as we speak, and have partnered with several sales executives with prior experience securing deals of this caliber. These sales reps would essentially get a cut of the transaction and perhaps a recurring fee for securing these deals.

uWink wouldn’t say any more about who these mysterious “chains” are, but the 10-Q says that they are “major”, so you can do your own deduction.

  • Another Fast Casual Deal: uWink stated that they are awaiting approval to install some of their terminals in a “major” fast casual restaurant chain in an airport in the Southwest U.S.

If this deal is anything like the Chili’s deal mentioned above, this could portent another great synergy with another strong restaurant chain.
uWink will most likely partner with the concession company as they did with the Chili’s Too location at Fort Lauderdale that is run by Delaware North Companies.

These deals generally are better suited for these locations and franchisees as they are usually in a more flexible position to try something new, as well as being in airports where new technology is quicker to catch on, before it migrates to other locations and other restaurant chains.

  • Stadium/Arena Deals: uWink stated in their 10-Q as well that they are in advanced talks with two major arenas to install their self-ordering kiosks/terminals in luxury suites and premier seating at these locations.

These installations will be merely a test installation, whereby uWink will look to expand their relationship both with the current arenas/stadiums, in addition to expanding into other sports venues.

If you are curious as to which arenas or stadiums you might find these terminals in, I would start the search with the TD Banknorth Garden that plays host to the world champion Boston Celtics NBA basketball team, as well as the Boston Bruins NHL hockey team, as the concessions operations are run by Delaware North Companies, which already has a deal in place with uWink at their Chili’s Too Margarita Grill in Ft. Lauderdale.

  • Advertising Subsidies for Costs of Terminals: uWink is currently in talks to find advertisers that are willing to pay either in full or partially, the cost of the terminals in exchange for sponsorship and advertising either on the exterior of the terminals, and/or in the actual software.

An example of this would be a drink list that was sponsored by Grey Goose Vodka, regardless of where the terminal was located.

What this would essentially do is lower or possibly eliminate the cost of the terminals, and thus a potentially high barrier to entry for many restaurant and hospitality chains, and allow more and more businesses to test and begin implementing uWink’s terminals and only having to pay for the software license, rather than also purchasing the terminal itself and increasing their cash outlay and capital expenditures.

This sounds like a great arrangement to me, and I’ll be looking forward to seeing how this plays out in the future and how uWink will execute this potential strategy.

Why Haven’t We Heard of These Deals?

After reading all these deals and potential deals, you are probably asking yourself, as I was, why the heck we haven’t heard more about these deals until the 10-Q was released in the form of press releases, or other marketing initiatives.

According to management, uWink has not been able to make any formal announcements about these pilot/test projects until they become final, and they gain full approval for installation in more locations.

Apparently, you don’t want to piss off the good folks at one of these major restaurant chains by announcing a deal too soon, or else they can pull the rug right out from under you before a deal is done.

Rest assured, uWink’s management team, as well as their stockholders, are chomping at the bit to put out some good news and press releases related to these items, and I expect to see something concrete and more definitive within the next 6 months.

Bottom Line

Second verse, same as the first

I’m sure there’s been some panic or at the very least frustration, as we have watched uWink’s stock price plummet to a level that resembles the cost of a stick of gum.

What I want you all to realize is that this is a risky stock (Risk rating of 10), and I have never made any bones about saying every single time I write about uWink, that it is just about the riskiest stock that you will ever own this side of a biotech/pharmaceutical company in Phase II trials.

If you are unable to divest yourself emotionally from the day-to-day stock price machinations of uWink, it means one of two things:

  • You have too much money invested in this one stock
  • You shouldn’t be invested in this stock if you can’t handle the volatility or losing your entire investment

At this point in time, owning or purchasing shares in uWink amounts to owning LEAP call options, whereby you are under water, and have already factored in a total loss.

I am not recommending further purchase in shares of uWink at this time except for those that currently do not own shares, or for those that only have a small position and want to add to that position knowing full well that they could lose their entire investment.

As a small portion of your portfolio, no more than 5-15% depending on your risk tolerance, age, and other factors, uWink represents a great play on a company that has been beaten down with the rest of the market, but one that, as a result of its penny stock status, can rise like a bullet on any decent news with one of the “major” restaurant chains that I spoke of earlier.

As long as uWink can break even on their restaurant chains and solely focus their efforts on the software and licensing deals, I believe that one of the financing scenarios that I spoke of earlier will come to pass, and uWink will get a reprieve from the potential of going out of business.

At this market cap, uWink is trading around cash value, albeit that cash is being utilized quickly, and less than the tangible assets on their books even if you discounted them by 50%.

This doesn’t even include the intangible intellectual assets of their software/hardware combination, and proven applications for the restaurant and hospitality industry.

uWink has good stuff here. What they are doing has not been implemented on a large scale in the same form by anyone else yet.

It wouldn’t take much for a larger company to just come in and scoop up uWink as an ongoing concern for let’s say $10-20 million, which would lead to a stock price 5 x 10 higher than where it sits now and allow us to recoup some of our losses, and potentially even make some profit in the process.

If things go the other way and uWink is forced to close its doors, because the shares have already tumbled so far from my cost average price of about $1.00 per share, they represent a small portion of my overall portfolio, and at this point, would not disproportionately affect the returns of my or your portfolio.

At this point, with the research and digging around that I have done, I would say that the chance of uWink’s shares rising to around $1.00 or more per share are about 50/50 and are worth holding on to if you already own them, and purchasing if you don’t, but only in a very limited and risk-tolerant manner.

I want to reiterate for all you potential penny stock millionaires out there with stars in your eyes, do NOT ever bet the farm on any one company, especially one in this territory.

Taken as a part of a wider and more diversified holding strategy with other stocks (I would recommend you start with my other top picks before uWink), I think there is a place in most portfolios for shares of uWink.

Stay tuned as we are nearing a very important juncture in what could be either a decent to wonderful success story, or a total collapse.

We’ll know how it plays out in less than 6 months.

Fasten your safety belts and hold on.

Second verse, same as the first.

New to the uWink story?
  • Start: with my initial buy recommendation and company overview here.
  • OR: read about uWink’s latest deal to test their terminals at a Chili’s Too Margarita Grill, and possible expansion plans to other Chili’s restaurants here.
Source: uWink's Chances of Survival