KeyStone’s Stock Talk Show Episode 280.
Great to chat with you again this week. I will start our YSOT segment on D2L Inc. (DTOL:TSX), a provider of Learning Management Systems to more than 1,000 customers in the Higher Education, Corporate and K12 verticals. The company just broke through into more meaningful profitability and is a business we are monitoring in our upcoming 2025 Net Cash, Profitable Canadian Small-Cap Report. The shares are up 65% year-to-date, I will review the current fundamentals. Aaron answers a viewer question on DocuSign Inc. a provider of electronic signature and agreement cloud solutions, enabling digital preparation, signing, and management of legal agreements. The stock jumped 20% after reporting strong Q3 FY 2025 numbers this past week. Aaron will let you know if the surge is justified. Brett will answer a viewer question on Flow Beverage Corp. (FLOW:TSX), a premium water company offering a diversified line of health and wellness-oriented beverage products. The company has had trouble growing and has been unprofitable since its IPO. Not surprisingly, it is down 40% YTD and Brett let’s you know if Flow offers any value trading today at $0.14. Finally, Brennan answers a viewer question on Simply Better Brands Corp. (SBBC:TSX-V), a consumer products company with emerging plant-based and holistic wellness products. The company has posted strong revenue growth, but profitability has been more challenging – Brennan gives you his take on the business.
Let’s get to the show – I welcome my cohost, Mr. Aaron Dunn, and killer B’s, Brett and Brennan!
Our Poll Question this week?
Do you currently find US or Canadian Stocks more appealing?
What does D2L do?
D2L’s core cloud-based learning innovation platform, Brightspace, serves three distinct markets: kindergarten to grade 12 schools (K-12), higher education, and corporate markets. The company’s platform is used for online learning, supporting learning in the classroom, and for professional development and training. D2L’s Brightspace Core functionality is extended through the company’s Performance+, an advanced analytics package, and Creator+, which provides easy-to-use authoring tools for efficient and effective learning and engages learners through add-on solutions such as video and catalogue capabilities to help instructors create engaging, video-based training and courses. The company’s solutions are sold through a subscription model and structured with a minimum user level commitment. The majority of its customers enter into contracts with a term of three to five years. Contracts are priced on a per user basis (excluding certain users such as administrators and teachers) that varies depending on the size of the organization, complexity, and required services.
YTD Stock Performance.
The stock is up around 65% on the year, and roughly 20% over the last month, largely powered by its latest quarterly number which bested analyst expectations – so let’s take a look at the quarter.
Q3 FY 2025 Highlights.
Total revenue was $54.3 million, up 18% from the same period in the prior year.
Subscription and support revenue was $46.8 million, an increase of 13% over the same period of the prior year.
Professional services and other revenue was $7.5 million, an increase of $2.8 million from the same period of the prior year. We caution that during the quarter, the company recognized services revenue of $1.2 million from re-evaluating the completion progress of certain professional services engagements. Excluding this revenue, services revenue increased by $1.6 million over the prior year, and total revenue increased by $7.1 million or 15.2% year over year. There was also an approx $0.5 MM pull forward in usage based subscription revenue.
These factors and lower cash costs drove a large Adj. EBITDA beat of $10.4 MM or a 19.2% Adjusted EBITDA margin from $2.1 million (or a margin 4.6%) in Q3 FY 2024.
Excluding the additional services revenue of $1.2 million recognized in the quarter, Adjusted EBITDA and Adjusted EBITDA Margin would have been $9.2 million and 17.4%, respectively, for the three months ended October 31, 2024.
Income for the period was $5.5 million or $0.10 per share, compared with a loss of $0.4 million or a loss of ($0.01) per share in Q3 FY 2024.
Strong balance sheet at quarter end, with cash and cash equivalents of $108.3 million and no debt.
Financial Outlook.
D2L updated its previously issued financial guidance for the year ended January 31, 2025 (Fiscal 2025) as follows:
Subscription and support revenue in the range of $180 million to $181 million, implying growth of 11% at the midpoint over Fiscal 2024, an increase from previously issued guidance of $178 million to $181 million; (really just a tightening up around the higher end of guidance).
Total revenue in the range of $204 million to $205 million, implying growth of 12% at the midpoint over Fiscal 2024, an increase from previously issued guidance of $199 million to $202 million; – a slight increase here.
Adjusted EBITDA in the range of $25.5 million to $26.5 million, implying Adjusted EBITDA margin of 13% at the midpoint, an increase from previously issued guidance of $22 million to $24 million (an increase here – which is a positive).
Valuations:
These are based on Adjusted EPS.
High valuations based on adjusted earnings which are down year over year.
And they get higher based on actual EPS.
PE (TTM): 147x.
PE (2025e): 92x.
Based on EV/EBITDA – the numbers look better.
EV/EBITDA (2025e): 21.4.
EV/EBITDA (2026e): 16.7.
The numbers are moving in the right direction in terms of margins and profitability.
Positives.
Q3 CFO (pre-WC) of $9.4 million was by far a record, which alongside a working capital inflow of $2.0 million drove FCF per share of $0.18.
Key competitors like Blackboard and Instructure are pulling out of certain international markets to maximize profitability, which enhances the opportunity for D2L.
Slight guidance increase.
FCF expected to continue to increase.
Conclusion
The company will be included in our upcoming 2025 profitable, net cash Canadian small-cap report for clients. We like the business, strength of balance sheet and breakthrough into more meaningful profitability.
Sustainability will be key.
Top line growth would be a positive – we would like to see the company sustain 12% but really getting into the 15% range would make if very interesting – not sure if they can get there. Right now the estimate for FY 2026 revenue growth is 11%.
Could be interesting on pull-backs.
YSOT FLOW Flow Beverage Corp. (FLOW:TSX)
1)
Flow Beverage Corp. Symbol FLOW on the TSX, is a premium water company offering a diversified line of health and wellness-oriented beverage products: original mineral spring water, award-winning organic flavours and sparkling mineral spring water. The company also has a co-packing service on top of its branded products.
2)
The stock is trading at $0.14 a share and an $11 million market cap. The stock is down 40% year to date. It is down 97% since it conducted a reverse takeover to get listed on the TSX in 2021. So, does the stock have any hope of recovery?
3)
The company has had trouble growing and has been unprofitable since its IPO. Since it has been unprofitable it has needed to fund its operations through both share issuance and debt issuance. So both a lack of growth as well as a deteriorating balance sheet and dilution can be seen as the financial drivers behind the poor stock performance. The company is now attempting to turn around the poor performance.
4)
Looking at the financials for fiscal Q3 2024 ending July 31st.
Net revenue was up 5% to $13.8 million.
Brand revenue was down 15% to $8.4 million, the company does state it expects to return to brand growth in fiscal Q1 2025.
Gross profit increased substantially to 34% compared to 3% in the prior year. The cost of revenue dropped substantially due to the consolidation of Flow brand production being moved to the Aurora Ontario production facility, a focus on higher margin channels, ramping up copacking, and profitability improvements for e-commerce.
EBITDA loss was $3.5 million compared to $12.7 million. So still a loss but an improvement. Adjusted EBITDA which removes share comp and restructuring was a loss of $1.9 million compared to $10.7 million. The company does state it expects to be adjusted EBITDA positive in fiscal Q4 so that is something to watch out for.
Net loss came in at $7.2 million compared to $14.3 million.
So, overall still unprofitable but less unprofitable which is a positive.
FFO was a deficit of $2.5 million for the quarter, whereas cash from operations was positive at $194k due to a positive impact from working capital.
5)
As I said before the company has been issuing debt to cover expenses. The company has $1.9 million in cash, $15.3 million in leases, and $24.4 million in borrowings. Resulting in a net debt and leases position of $37.8 million, over 3 times the current market capitalization, so a very significant amount of debt.
The company has an array of debt instruments, with fixed-rate debt between 9.25% and 14.75% at the end of the quarter. Also, much of the debt had warrants attached to the deal but are all well out of the money at this time. This debt load materially impacts the company’s attempt at any future profitability, for the last quarter, finance expenses ate up 19.3% of revenue or 57.3% of gross profit.
Further, after the quarter’s end, the company issued another $4.1 million in debt at a 15.0% interest rate. So, even a higher interest rate for a six-month secured loan. As well, they issued a US $2.0 million convertible bond the prior week.
6)
In conclusion,
The company is in the process of restructuring to attempt a turnaround, but it is an uphill battle.
The company is already very leveraged, and although the company is choosing debt to lower dilution, it increases risk and puts nominal profitability further away.
The company did make financial strides in the last quarter with the improved gross margin and lower levels of losses.
Two financial miles to watch for are if management can meet their statement of being adjusted EBITDA positive in the next quarter and seeing brand growth in Q1. But even if both of these do occur it does not mean the company will be successful as it still is not GAAP profitable and needs to overcome the big interest expense hurdle.
For now, the company is just too far away from our criteria.
Simply Better Brands Corp. (SBBC:TSX-V)
YSOT from James one of our VIP Client’s – “You may have have already screened/filtered this company; SBBC.v (Simply Better Brands Corp.). Latest earnings US$0.049 with shelf space at Walmart and Costco. If not already on your radar would you investigate and/or possibly consider a candidate on “your stock our take” Youtube presentation.”
Price: $1.03
Market Cap: $92.2M
Yield: N/A
Description:
Simply Better Brands is a consumer products company with emerging plant-based and holistic wellness products. . The company has an asset light model using Co-Manufacturers and its products include:
- Plant-based TRUBAR protein bars.
- Skin care products to consumers through its No B.S. brand.
- Hemp derived products including CBD under the brands of Seventh Sense and Vibez.
And if we look at the most recent quarter, about 95% of revenue was from protein bars.
Slide 2
This is a company that we are familiar with, as I interviewed the previous CEO Kathy Casey back in September 2023 in Vancouver. And when I spoke with Kathy she gave me the run down that they “Went public December 2020. Have done 5 acquisitions over that period. And the ethos of the company is to bring in “shark tank” kind of brands where they may actually build them and sell them off….” HOWEVER, management hasn’t executed exactly to plan as we have seen a few of the businesses’ subsidiaries struggle, leading the company to restructure and disolve Herve Edibles and PureKana in 2024 as it filed for bankruptcy.
Slide 3
So to see the restructuring here we can see that operating expenses have been reduced which is positive, and the company is focusing on its growthier assets such as TruBar. For example, the company grew Trubar sales from approximately $10M in 2022, $24.7M in 2023, and anticipates to be between $45-$50M in 2024.
So again, good to see that the company is restructuring and focusing on core assets, but this shows how the company’s past strategy and execution was weak… And the company is now up to 93M shares outstanding… up from 73M shares for the same period last year.
Slide 4
Now looking at the recent quarter of Q3 2024 (Keep in mind all values are in USD$). AND ALL THE NUMBERS I GO OVER HERE ARE FROM CONTINUING OPERATIONS SO THEY DO NOT INCLUDE DISPOSED OF ASSETS:
- Revenue from continuing operations increased 124% to $12.1M driven by a 156% increase in TRUBAR revenue.
- Gross profit from continuing operations was $5.5 million (or 45% gross margin percentage) compared to gross profit of $2.2 million for the same period last year (or 41% gross margin percentage). The increase in gross margin percentage was driven by lower production costs of TRUBAR.
- Adjusted EBITDA was positive $1.0M, up 376% from the same period last year.
- Net income from continuing operations was a gain of $4.1M or $0.04 per share compared to $400K or $0.01 per share for the same period last year. HOWEVER, its important to recognize that there was a gain of $4.18 million on remeasurement of warrant liabilities which boosted profitability dramatically. If we removed this, net income would actually be much closer to just breakeven or in a slight loss… So the profitability isn’t actually as robust in Q3 2024 as on the surface level.
- The balance sheet is in a slight net debt position of $0.8 million. And, management just announced a new $10M credit facility with BMO in December 2024 which is intended to be used to support expansion of TRUBAR sales. The interest rate on the new facility will be Canada OR US prime rate plus 3.5%.
And looking at the valuations, the company was profitable in the last quarter but the trailing twelve-month earnings, EBITDA and cash flow were negative. So if we use the company’s forward price to sales the stock is trading around 1.35x.
Slide 4
Now looking to this year FY 2024, the company is guiding toward $45-$50M in TRUBAR revenue which will represent an increase of 92% over FY 2023. But I could not find any Adj. EBITDA targets like they had provided in the past. If we look at 2023 the company was guiding toward $80M in consolidated revenue, which it achieved, but its Adjusted EBITDA was actually a loss of $(2.7M) rather than a gain of $3-$4M which it was guiding toward……
So we are somewhat in the dark on the profitability picture….
Slide 6
So to conclude here on Simply Better Brands:
- The company has a spotted past of executing on accretive acquisitions and generating profitability which led it to restructure in the beginning of 2024. Executionally it is not a good look, but at least looking forward the company is focusing on its growth products.
- The company’s TRUBAR protein bar makes up a majority of its sales and has shown strong growth. But it is a consumer product facing strong competition.
- The balance sheet remains relatively healthy but is in a slight net debt position now as the business generates minimal cash flow and EBITDA. And they have a $10M credit facility they may tap into.
- Given the growth in TRUBAR it is intriguing, and profitability may trend in the right direction following the restructuring, but this is the gamble an investor would be making. And for me, I think I would rather monitor at this point given the lack of profit.
