D2L Inc. Announces Second Quarter Fiscal 2023 Financial Results & Updated Outlook

• Total Q2 revenue grew 12% year over year to US$41.2 million and Constant Currency Revenue¹ increased 15% to US$42.4 million
• Total year-to-date revenue grew 16% year over year to US$83.0 million and Constant Currency Revenue¹ increased 18% to US$84.5 million
• Annual Recurring Revenue² increased by 10% year over year to US$158.5 million and Constant Currency Annual Recurring Revenue² increased 13% to US$162.4 million
• Gross profit for Q2 increased 13% to US$26.6 million (64.6% gross profit margin) and increased 19% for the year-to-date period to US$52.9 million (63.7% gross profit margin)
• Strong balance sheet at quarter end, with cash and cash equivalents of US$113.5 million and no debt

TORONTO, Sept. 7, 2022 /CNW/ - D2L Inc. (TSX: DTOL) ("D2L" or the "Company"), a global learning technology company, today announced financial results for its fiscal 2023 second quarter ended July 31, 2022. All amounts are in U.S. dollars and all figures are prepared in accordance with International Financial Reporting Standards (IFRS) unless otherwise indicated.

"We continue to see healthy long-term demand across our education and corporate markets as organizations replace legacy technology and experiences with modern platforms built for the future of work and learning," said John Baker, President and CEO of D2L. "The outstanding reception and feedback at our recent user conference also underscored that D2L's value proposition and differentiation remain exceptionally strong.  However, the overall pace of new business growth in the second quarter was slower than we expected, mainly reflecting delays in expanding our sales and marketing teams, as well as the impact of changes in foreign exchange rates. At the same time, we are pleased with our gross profit expansion and our ability to generate operating efficiencies and leverage as we scale, the combination of which will yield improved Adjusted EBITDA performance and a significantly faster path to profitability as reflected in our updated outlook. While we remain focused on expanding sales and marketing activities especially as our win rate and long-term value support the investment, in the current macroeconomic environment, we are evolving our medium-term operating model towards one of balanced growth and profitability."

Second Quarter Fiscal 2023 Financial Highlights

• Total revenue of $41.2 million, up 12% from the comparative period in the prior year. Constant Currency Revenue¹ grew 15% year-over-year to $42.4 million.
• Annual Recurring Revenue² increased by $14.5 million or 10% to $158.5 million, relative to the same period of the prior year. Constant Currency Annual Recurring Revenue² reached $162.4 million, an $18.4 million or 13% increase over the same quarter last year.
• Subscription and support revenue was $35.8 million, an increase of 8.5% over the prior year, and was primarily attributable to the growth in new customers coupled with strong revenue retention and expansion from existing customers.
• Professional services and other revenue was $5.4 million, up 41% from the same period of the prior year. The increase reflects several significant delivered professional services engagements, including new customer implementations and content development work for new and existing customers.
• Gross Profit for the quarter was $26.6 million (64.6% of revenue), an increase of 13% from Gross Profit of $23.5 million (63.9% of revenue) in the comparative period in the prior year.
• Adjusted EBITDA¹ loss of $1.5 million, compared to positive Adjusted EBITDA of $1.0 million for the comparative period in the prior year. Loss for the period decreased to $4.8 million, compared with a loss of $17.8 million for the same period of the prior year. The year-over-year improvement was largely the result of the $15.6 million fair value loss on the redeemable convertible preferred shares that was recognized in the prior period, with no corresponding impact in the current period.
• Cash flow from operating activities was $16.2 million, versus $20.4 million in the same period in the prior year, and Free Cash Flow¹ for Q2 was $16.0 million, compared to Free Cash Flow of $20.2 million in the same period in the prior year.

¹ A non-IFRS financial measure or non-IFRS ratio. Please refer to "Non-IFRS Financial Measures and Reconciliation of Non-IFRS Financial Measures" section of this press release.

² Please refer to "Key Performance Indicators" section of this press release.

Second Quarter Fiscal 2023 Financial Results

Selected Financial Measures

	Three months ended July 31				Six months ended July 31
	2022	2021	Change	Change	2022	2021	Change	Change
	$	$	$	%	$	$	$	%
Subscription & Support Revenue	35,817	33,005	2,812	8.5 %	71,584	63,567	8,017	12.6 %
Professional Services & Other Revenue	5,356	3,789	1,567	41.4 %	11,460	7,763	3,697	47.6 %
Total Revenue	41,173	36,794	4,379	11.9 %	83,044	71,330	11,714	16.4 %
Constant Currency Revenue^1	42,372	36,794	5,578	15.2 %	84,509	71,330	13,179	18.5 %
Gross Profit	26,585	23,512	3,073	13.1 %	52,939	44,415	8,524	19.2 %
Adjusted Gross Profit ^1	26,671	23,543	3,128	13.3 %	53,095	44,477	8,618	19.4 %
Adjusted Gross Margin^1	64.8 %	64.0 %			63.9 %	62.4 %
Loss for the period	(4,803)	(17,803)	13,000	73.0 %	(9,566)	(52,249)	42,683	-81.7 %
Adjusted EBITDA (loss)^1	(1,465)	961	(2,426)	-252.4 %	(2,969)	922	(3,891)	-422.0 %
Cash Flows from (used in) Operating Activities	16,225	20,395	(4,170)	-20.4 %	927	551	376	68.2 %
Free Cash Flow^1	16,016	20,165	(4,149)	-20.6 %	-186	177	(363)	-205.1 %

¹ A non-IFRS financial measure or non-IFRS ratio.  Please refer to the "Non-IFRS Financial Measures and Reconciliation of Non-IFRS Financial Measures" section of this press release for more details.

Second Quarter Fiscal 2023 Business & Operating Highlights

• Launched Brightspace Creator+ Early Access Program, the next evolution of D2L's Engagement+ package, which will simplify the complexity of creating learning content, thereby empowering content creators to build compelling and engaging courses for their learners.
• In July 2022, D2L hosted its annual Fusion customer conference in person for the first time in three years. This year's conference was well attended, with nearly 3,000 registrations and 100 speaking sessions, including a spotlight on D2L's Brightspace Creator+ Early Access Program.
• Continued growth and market share expansion in the higher education market, as highlighted by new customer agreements with The University of Windsor, Bentley University, Colorado Christian University, and St. John Fisher University.
• Boston Public Schools contracted D2L Brightspace to help it deliver professional learning for all its staff because of the platform's flexibility and the partnership D2L offers to create truly individualized learning experiences.
• Signed a new customer agreement with the American College of Lifestyle Medicine that will enable them to scale the reach of their certifications, grow their membership conversion rate and bring forward a new B2B model with healthcare systems.
• Signed a new customer agreement with Midwest Communications, a radio and digital media company, to support automation of employee onboarding, training, and development programs.

Financial Outlook

The Company is updating its previous guidance for the 12 months ended January 31, 2023, as previously provided in its press release dated June 8, 2022, to reflect lower revenue growth and reduced Adjusted EBITDA loss. Specifically, for fiscal 2023 the Company is expecting:

• Total revenue in the range of $168 million to $170 million, implying growth of 11% to 12% over the year ended January 31, 2022 (12%-14% on a constant currency basis), rather than our previous guidance of total revenue in the range of $175 million to $178 million, implying growth of 15% to 17% over the same period; and
• Adjusted EBITDA loss in the range of $6 million to $8 million, rather than our previous guidance of Adjusted EBITDA loss in the range of $9 million to $11 million.

D2L continues to see robust long-term demand for learning platforms across its education and corporate markets. The change in the expected revenue growth for fiscal 2023 mainly reflects headwinds to scaling the Company's sales and marketing teams, elongated buying cycles in its corporate market, as well as the impact of changes in foreign exchange rates, particularly the strengthening U.S. dollar and weakening GBP. In addition, D2L is now expecting a lower Adjusted EBITDA loss in fiscal 2023, reflecting disciplined cost optimization and a measured prioritization of investments, thereby putting the Company on an accelerated path to profitability.

Medium Term Target Operating Model
In the current macroeconomic environment, we are evolving the Company's target operating model towards one of balanced growth and profitability. Management is presenting the updated target operating model due to an evolution of our strategy in response to changes including external factors outside our control, impacting the markets that our customers operate in, labour market constraints, and general economic conditions. These factors include interest rate uncertainty, inflationary pressure, foreign exchange impact, near-term pressures on new business growth as a result of sales and marketing capacity challenges, and buying pattern changes within areas of the markets we serve. 

OUR TARGET OPERATING MODEL

	Updated	Original
	Medium Term (FY25)	Medium Term (FY25)
Revenue Growth	12-15%	20-25%
Adjusted Gross Margin *	65-70%	65-70%
Adjusted EBITDA Margin *	13-16%	5-15%
Free Cash Flow Margin *	16-19%	10-20%

* As a % of revenue

Our target operating model reflects the operating levels that we expect to achieve by the 12 months ended January 31, 2025 ("FY25") and maintain thereafter. Our target operating model is based on assumptions and factors that we believe are reasonable in the circumstances, given the applicable time periods, our current and past growth rates, our current customer contractual commitments and renewal experience and historic results, as well as our view of the drivers of our growth, estimated growth in our target addressable market, and our expectations for our growth strategies. Our updated target operating model and the assumptions and factors underlying and supporting its achievement are described further in the "Financial Outlook - Medium Term Target Operating Model" section of the Company's Management's Discussion and Analysis for the three and six months ended July 31, 2022 ("MD&A"). See also the assumptions and factors noted at "Forward-Looking Information" below or in the Company's MD&A.

Adjusted EBITDA Margin, Adjusted Gross Margin and Free Cash Flow Margin are non-IFRS financial measures or non-IFRS ratios. Please refer to the "Non-IFRS Financial Measures and Reconciliation of Non-IFRS Financial Measures" section of this press release for more details.

The purpose of disclosing our medium-term financial target operating model is to provide investors with more information concerning the Company's results of operations that management currently believes is achievable. However, there can be no assurance that we will be successful in achieving the levels of revenue growth, Adjusted Gross Margin, Adjusted EBITDA Margin, and Free Cash Flow Margin set out above. Nor can any assurances be given regarding the realization of our expectations and drivers that anticipated growth and margin improvements are based on.  Our target operating model is also forward-looking information for the purposes of applicable securities laws in Canada and readers are therefore cautioned that actual results may vary materially from those discussed or referenced above. See also "Summary of Factors Affecting our Performance" and "Forward-Looking Information" in the Company's MD&A and "Risk Factors" in the Company's AIF, each of which is available under the Company's profile on SEDAR at www.sedar.com, for a description of other assumptions underlying the forward-looking information and of the risks and uncertainties that generally impact our business and that could cause actual results to vary materially.

Conference Call & Webcast
D2L management will host a conference call on Thursday, September 8, 2022 at 8:30 am ET to discuss its second quarter fiscal 2023 financial results.

Date:		Thursday September 8, 2022
Time:		8:30 am (ET)
Dial in number:		Canada: 1 [phone] United States: 1 [phone] Access code: 531024
Webcast:		A live webcast will be available at ir.d2l.com/events-and-presentations/events/
Replay:		Canada: 1 [phone] or US: 1 [phone] (replay code: 463686) Available until September 15, 2022

Forward-Looking Information
This press release includes statements containing "forward-looking information" within the meaning of applicable securities laws. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "expects", "budget", "scheduled", "estimates", "outlook", "target", "forecasts", "projection", "potential", "prospects", "strategy", "intends", "anticipates", "seek", "believes", "opportunity", "guidance", "aim", "goal" or variations of such words and phrases or statements that certain future conditions, actions, events or results "may", "could", "would", "should", "might", "will", "can", or negative versions thereof, "be taken", "occur", "continue" or "be achieved", and other similar expressions. Statements containing forward-looking information are not historical facts, but instead represent management's expectations, estimates and projections regarding future events or circumstances.

This forward-looking information relates to the Company's future financial outlook and anticipated events or results and includes, but is not limited to, statements under the heading "Financial Outlook" and information regarding: the Company's financial position, financial results, business strategy, performance, achievements, prospects, objectives, opportunities, business plans and growth strategies; the Company's budgets, operations and taxes; the markets in which the Company operates; industry trends and the Company's competitive position; expansion of the Company's product offerings; trends in research and development expenses as a percentage of revenue; the timing and pace for achieving profitability; and expectations regarding the growth of the Company's customer base, revenue and revenue generation potential.

Forward-looking information is based on certain assumptions, expectations and projections, and analyses made by the Company in light of management's experience and perception of historical trends, current conditions and expected future developments and other factors it believes are appropriate, including the following: the Company's ability to win business from new customers and expand business from existing customers; the timing of new customer wins and expansion decisions by existing customers; the Company's ability to generate revenue and expand its business while controlling costs and expenses; the Company's ability to manage growth effectively; the Company's ability to hire and retain personnel returning to levels consistent with historical experiences; the effects of foreign currency exchange rate fluctuations on our operations; the ability to seek out, enter into and successfully integrate acquisitions; business and industry trends, including the success of current and future product development initiatives; positive social development and attitudes toward the pursuit of higher education; the Company's ability to maintain positive relationships with its customer base and strategic partners; the Company's ability to adapt and develop solutions that keep pace with continuing changes in technology, education and customer needs; the ability to patent new technologies and protect intellectual property rights; the Company's ability to comply with security, cybersecurity and accessibility laws, regulations and standards; the Company's ability to retain key personnel; the factors and assumptions discussed under "Financial Outlook - Medium Term Target Operating Model" above and that the list of factors referenced in the following paragraph, collectively, do not have a material impact on the Company.

Although the Company believes that the assumptions underlying such forward-looking information were reasonable when made, they are inherently uncertain and are subject to significant risks and uncertainties and may prove to be incorrect. The Company cautions investors that forward-looking information is not a guarantee of the future and that actual results may differ materially from those made in or suggested by the forward-looking information contained in this press release. Whether actual results, performance or achievements will conform to the Company's expectations and predictions is subject to a number of known and unknown risks, uncertainties, assumptions and other factors, including but not limited to: the Company's ability to hire and retain personnel returning to levels consistent with historical experiences; the effects of foreign currency exchange rate fluctuations on our operating results; and the risks identified herein, including at "Summary of Factors Affecting Our Performance" of the Company's MD&A, or in the "Risk Factors" section of the Company's AIF. If any of these risks or uncertainties materialize, or if assumptions underlying the forward-looking information prove incorrect, actual results might vary materially from those anticipated in the forward-looking information.

Given these risks and uncertainties, investors are cautioned not to place undue reliance on forward-looking information, including any financial outlook. Any forward-looking information that is contained in this press release speaks only as of the date of such statement, and the Company undertakes no obligation to update any forward-looking information or to publicly announce the results of any revisions to any of those statements to reflect future events or developments, except as required by applicable securities laws. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

About D2L Inc. (TSX: DTOL)
D2L is transforming the way the world learns—helping learners of all ages achieve more than they dreamed possible. Working closely with clients all over the world, D2L is supporting millions of people learning online and in person. Our growing global workforce is dedicated to making the best learning products to leave the world better than they found it. Learn more about D2L for K-12, higher education and businesses at www.D2L.com.

D2L Inc.
Condensed Consolidated Interim Balance Sheets
(In U.S. dollars)

As at July 31, 2022 and January 31, 2022
(Unaudited)

		July 31,	January 31,
		2022	2022
Assets
Current assets:
	Cash and cash equivalents	$    113,485,070	$    114,675,495
	Trade and other receivables (note 3)	32,333,635	26,155,906
	Uninvoiced revenue	2,341,679	2,253,146
	Prepaid expenses	7,391,026	7,930,462
	Deferred commissions	3,723,363	3,711,334
		159,274,773	154,726,343
Non-current assets:
	Prepaid expenses	158,384	178,585
	Deferred income taxes	140,586	139,101
	Right-of-use assets (note 4)	12,865,546	1,323,017
	Property and equipment	2,492,430	2,323,708
	Deferred commissions	7,525,467	7,510,242
	Intangible assets	5,298,706	5,537,024
	Goodwill	7,434,702	7,474,647
Total assets		$    195,190,594	$    179,212,667
Liabilities and Shareholders' Equity
Current liabilities:
	Accounts payable and accrued liabilities	$    20,205,509	$    24,340,115
	Deferred revenue	96,537,092	82,915,871
	Lease liabilities (note 4)	768,792	1,199,013
	Provisions (note 6)	3,265,449	3,265,449
		120,776,842	111,720,448
Non-current liabilities:
	Deferred income taxes	366,556	418,403
	Lease liabilities (note 4)	13,163,452	693,921
		13,530,008	1,112,324
		134,306,850	112,832,772
Shareholders' equity:
	Share capital (note 8):	355,272,944	354,277,986
	Additional paid-in capital	44,961,975	41,686,794
	Accumulated other comprehensive loss	(3,530,963)	(3,330,708)
	Deficit	(335,820,212)	(326,254,177)
		60,883,744	66,379,895
Subsequent event
Contingencies
Related party transactions
Total liabilities and shareholders' equity		$    195,190,594	$    179,212,667

D2L Inc.
Condensed Consolidated Interim Statements of Comprehensive Loss
(In U.S. dollars)

For the three and six months ended July 31, 2022 and 2021
(Unaudited)

		Three months ended July 31		Six months ended July 31
		2022	2021	2022	2021
Revenue:
	Subscription and support	$    35,817,285	$    33,005,333	$    71,583,788	$    63,566,943
	Professional services and other	5,356,142	3,788,969	11,459,723	7,763,117
		41,173,427	36,794,302	83,043,511	71,330,060
Cost of revenue:
	Subscription and support	11,403,524	10,284,569	22,842,152	21,342,615
	Professional services and other	3,184,484	2,997,665	7,262,849	5,572,809
		14,588,008	13,282,234	30,105,001	26,915,424
Gross profit		26,585,419	23,512,068	52,938,510	44,414,636
Expenses:
	Sales and marketing	14,021,773	11,057,440	27,078,863	21,193,790
	Research and development	10,450,798	9,569,557	21,735,965	17,894,388
	General and administrative	6,578,462	4,584,794	12,985,502	8,934,191
		31,051,033	25,211,791	61,800,330	48,022,369
Loss from operations		(4,465,614)	(1,699,723)	(8,861,820)	(3,607,733)
Interest and other income (expenses):
	Interest expense	(166,257)	(60,485)	(403,857)	(175,843)
	Interest income	156,835	19,195	175,081	22,106
	Loss on redeemable convertible preferred shares	—	(15,609,413)	—	(47,924,708)
	Foreign exchange loss	(150,140)	(245,069)	(178,358)	(240,772)
		(159,562)	(15,895,772)	(407,134)	(48,319,217)
Loss before income taxes		(4,625,176)	(17,595,495)	(9,268,954)	(51,926,950)
Income taxes (recovery):
	Current	165,580	62,039	355,096	116,322
	Deferred	12,616	145,678	(58,015)	206,063
		178,196	207,717	297,081	322,385
Loss for the period		(4,803,372)	(17,803,212)	(9,566,035)	(52,249,335)
Other comprehensive gain (loss):
	Foreign currency translation gain (loss)	(146,590)	756,922	(200,255)	1,176,970
Comprehensive loss		$  (4,949,962)	$   (17,046,290)	$   (9,766,290)	$   (51,072,365)
Loss per share – basic		$   (0.09)	$   (0.64)	$   (0.18)	$   (1.89)
Loss per share – diluted		(0.09)	(0.64)	(0.18)	(1.89)
Weighted average number of common shares – basic		53,004,320	27,968,240	52,996,253	27,690,520
Weighted average number of common shares – diluted		53,004,320	27,968,240	52,996,253	27,690,520

D2L Inc.
Condensed Consolidated Interim Statements of Shareholders' Equity (Deficiency)
(In U.S. dollars)

For the six months ended July 31, 2022 and 2021
(Unaudited)

	Share Capital		Additional paid-in capital	Accumulated other comprehensive loss	Deficit	Total
	Shares	Amount
Balance, January 31, 2022	52,912,502	$    354,277,986	$    41,686,794	$   (3,330,708)	$   (326,254,177)	$    66,379,895
Issuance of Subordinate Voting Shares on exercise of options	120,224	994,958	(368,690)	—	—	626,268
Stock-based compensation	—	—	3,643,871	—	—	3,643,871
Other comprehensive loss	—	—	—	(200,255)	—	(200,255)
Loss for the period	—	—	—	—	(9,566,035)	(9,566,035)
Balance, July 31, 2022	53,032,726	$    355,272,944	$    44,961,975	$   (3,530,963)	$   (335,820,212)	$    60,883,744
Balance, January 31, 2021	26,468,768	$    217,633	$    45,285,371	$   (4,190,459)	$   (228,601,100)	$   (187,288,555)
Issuance of Class O common shares on exercise of options	1,521,332	17,765,188	(6,450,017)	—	—	11,315,171
Stock-based compensation	—	—	795,724	—	—	795,724
Other comprehensive gain	—	—	—	1,176,970	—	1,176,970
Loss for the period	—	—	—	—	(52,249,335)	(52,249,335)
Balance, July 31, 2021	27,990,100	$    17,982,821	$    39,631,078	$   (3,013,489)	$   (280,850,435)	$   (226,250,025)

D2L Inc.
Condensed Consolidated Interim Statements of Cash Flows
(In U.S. dollars)

For the six months ended July 31, 2022 and 2021
(Unaudited)

			2022	2021
Operating activities:
	Loss for the period		$   (9,566,035)	$   (52,249,335)
	Items not involving cash:
		Depreciation of property and equipment	938,887	699,429
		Depreciation of right-of-use assets	1,101,355	722,331
		Amortization of intangible assets	208,472	9,527
		Fair value loss on redeemable convertible preferred shares	—	47,924,708
		Stock-based compensation	3,643,871	795,724
		Net interest expense	228,776	153,737
		Income tax expense	297,081	322,385
	Changes in operating assets and liabilities:
		Trade and other receivables	(6,472,931)	(10,047,249)
		Uninvoiced revenue	(115,215)	1,454,906
		Prepaid expenses	505,606	(1,684,069)
		Deferred commissions	(266,499)	(580,544)
		Accounts payable and accrued liabilities	(4,129,872)	(4,331,171)
		Deferred revenue	14,467,740	17,763,284
		Right-of-use assets and lease liabilities	133,336	(18,810)
	Interest received		175,081	22,106
	Interest paid		(75,052)	(78,925)
	Income taxes paid		(147,493)	(326,670)
	Cash flows from operating activities		927,108	551,364
Financing activities:
	Payment of lease liabilities		(1,113,960)	(1,178,507)
	Proceeds from exercise of stock options		626,268	11,315,171
	Borrowings on credit facility		—	7,000,003
	Repayments to credit facility		—	(7,000,003)
	Cash flows (used in) from financing activities		(487,692)	10,136,664
Investing activities:
	Purchase of property and equipment		(1,113,301)	(374,161)
	Issuance of shareholder loan		—	(16,138,612)
	Cash flows used in investing activities		(1,113,301)	(16,512,773)
Effect of exchange rate changes on cash and cash equivalents			(516,540)	1,615,075
Decrease in cash and cash equivalents			(1,190,425)	(4,209,670)
Cash and cash equivalents, beginning of period			114,675,495	45,303,944
Cash and cash equivalents, end of period			113,485,070	41,094,274

Non-IFRS Financial Measures and Reconciliation of Non-IFRS Financial Measures

The information presented within this press release refers to certain non-IFRS financial measures (including non-IFRS ratios) including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, Adjusted Gross Margin, Free Cash Flow, Free Cash Flow Margin, and Constant Currency Revenue.  These measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS. Non-IFRS financial measures should not be considered in isolation nor as a substitute for analysis of the Company's financial information reported under IFRS and are unlikely to be comparable to similar measures presented by other issuers. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of the Company's results of operations, financial performance and liquidity from management's perspective and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS measures. The Company believes that securities analysts, investors and other interested parties frequently use non-IFRS financial measures in the evaluation of the Company. The Company's management also uses non-IFRS financial measures to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts, and to assess our ability to meet our capital expenditures and working capital requirements.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is defined as net income (loss), excluding interest, taxes, depreciation and amortization (or EBITDA), as adjusted for changes in the fair value of redeemable preferred shares, stock-based compensation, foreign exchange gains and losses, transaction-related expenses and other income and losses. Adjusted EBITDA Margin is calculated as Adjusted EBITDA expressed as a percentage of total revenue.  For an explanation of the management's use of Adjusted EBITDA and Adjusted EBITDA Margin see "Non-IFRS and Other Financial Measures" section in the Company's MD&A.

The following table reconciles Adjusted EBITDA to loss for the period, and discloses Adjusted EBITDA Margin, for the periods indicated:

(in thousands of U.S. dollars, except for percentages)	Three months ended July 31		Six months ended July 31
	2022	2021	2022	2021
Loss for the period	(4,803)	(17,803)	(9,566)	(52,249)
Loss on redeemable convertible preferred shares	—	15,609	—	47,925
Stock-based compensation	1,994	406	3,644	796
Foreign exchange loss	150	245	178	241
Transaction-related costs^(1)	—	1,585	—	2,302
Interest expense net of interest income	9	41	229	154
Income tax expense	178	208	297	322
Depreciation and amortization	1,007	670	2,249	1,431
Adjusted EBITDA	(1,465)	961	(2,969)	922
Adjusted EBITDA Margin	-3.6 %	2.6 %	-3.6 %	1.3 %

(1)  These costs include professional, legal, consulting and accounting fees incurred in connection with the Company's IPO, which closed on November 3, 2021, and related other activities, and are not considered indicative of continuing operations. These costs did not meet the criteria for capitalization and thus were expensed in the Company's consolidated statements of comprehensive loss. Share issuance costs that met the criteria for capitalization are described in Note 13(b) of the Company's annual audited consolidated financial statements for the year ended January 31, 2022. 

Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is defined as gross profit excluding related stock-based compensation expenses. Adjusted Gross Margin is calculated as Adjusted Gross Profit expressed as a percentage of total revenue. For an explanation of the management's use of Adjusted Gross Profit and Adjusted Gross Margin see "Non-IFRS and Other Financial Measures" section in the Company's MD&A.

The following table reconciles Adjusted Gross Margin to gross profit expressed as a percentage of revenue, for the periods indicated:

(in thousands of U.S. dollars, except for percentages)	Three months ended July 31		Six months ended July 31
	2022	2021	2022	2021
Gross profit for the period	26,585	23,512	52,939	44,415
Stock based compensation	86	31	156	62
Adjusted Gross Profit	26,671	23,543	53,095	44,477
Adjusted Gross Margin	64.8 %	64.0 %	63.9 %	62.4 %

Constant Currency Revenue
Constant Currency Revenue is defined as foreign-currency-denominated revenues translated at the historical exchange rates from the comparable prior period into our U.S. dollar functional currency. For an explanation of the management's use of Constant Currency Revenue see "Non-IFRS and Other Financial Measures" section in the Company's MD&A.

The following table reconciles our Constant Currency Revenue to revenue, for the periods indicated:

	Three months ended July 31		Six months ended July 31
(in thousands of U.S. dollars, except for percentages)	2022	2021	2022	2021
	$	$	$	$
Total revenue for the period	41,173	36,794	83,044	71,330
Impact of foreign exchange rate changes over the prior period	1,199	—	1,465	—
Constant Currency Revenue	42,372	36,794	84,509	71,330

Free Cash Flow and Free Cash Flow Margin
Free Cash Flow is defined as cash provided by (used in) operating activities less net additions to property and equipment. Free Cash Flow Margin is calculated as Free Cash Flow expressed as a percentage of total revenue. For an explanation of the management's use of Free Cash Flow and Free Cash Flow Margins see "Non-IFRS and Other Financial Measures" section in the Company's MD&A.

The following table reconciles our cash flow from (used in) operating activities to Free Cash Flow, and discloses Free Cash Flow Margin, for the periods indicated:

(in thousands of U.S. dollars, except for percentages)	Three months ended July 31		Six months ended July 31
	2022	2021	2022	2021
Cash flow from operating activities	16,225	20,395	927	551
Purchase of property and equipment, net of proceeds on disposal	(209)	(230)	(1,113)	(374)
Free Cash Flow	16,016	20,165	(186)	177
Free Cash Flow Margin	38.9 %	54.8 %	-0.2 %	0.2 %

Key Performance Indicators

Management uses a number of metrics, including the key performance indicators identified below, to help us evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Our key performance indicators may be calculated in a manner different than similar key performance indicators used by other issuers. These metrics are estimated operating metrics and not projections, nor actual financial results, and are not indicative of current or future performance.

• Annual Recurring Revenue: We define Annual Recurring Revenue as the annualized equivalent value of subscription revenue from all existing customer contracts as at the date being measured, exclusive of the implementation period. Our calculation of Annual Recurring Revenue assumes that customers will renew their contractual commitments as those commitments come up for renewal. We believe Annual Recurring Revenue provides a reasonable, real-time measure of performance in a subscription-based environment and provides us with visibility for potential growth to our cash flows. We believe that an increasing Annual Recurring Revenue indicates the continued strength in the expansion of our business, and will continue to be our focus on a go-forward basis. Annual recurring revenue as at July 31, 2022 was $158.5 million ($144.0 million as at July 31, 2021).
• Constant Currency Annual Recurring Revenue: Constant Currency Annual Recurring Revenue is defined as foreign-currency-denominated Annual Recurring Revenue translated at the historical exchange rates from the comparable prior period into our U.S. dollar functional currency. Constant Currency Annual Recurring Revenue as at July 31, 2022 was $162.4 million ($144.0 million as at July 31, 2021).

SOURCE D2L Inc.

Craig Armitage, Investor Relations, [email protected], [phone]