KLDiscovery Inc. Announces Second Quarter 2023 Financial Results

Year- over-year: Quarterly Revenue Growth Accelerates to 20%, Net Loss Improves

58%, EBITDA Increases 91% and Adjusted EBITDA Increases 63%

EDEN PRAIRIE, Minn.--(BUSINESS WIRE)--KLDiscovery Inc. (“KLDiscovery” or the “Company”), a leading global provider of electronic discovery, information governance and data recovery technology solutions, announced today that revenue for the second quarter ended June 30, 2023 was $90.0 million versus $75.2 million in the second quarter of 2022. Net loss for the second quarter of 2023 was $(4.7) million compared to $(11.2) million in the second quarter of 2022.

EBITDA¹for the second quarter of 2023 was $18.5 million compared to $9.7 million in the second quarter of 2022. Adjusted EBITDA¹ (which excludes stock-based compensation, acquisition financing and transaction costs and other items as described below) for the second quarter of 2023 was $20.1 million compared to $12.4 million in the second quarter of 2022.

“For the first half of 2023, we achieved record revenue of $180.7 million, net loss of ($9.2) million and Adjusted EBITDA of $41 million,” said Christopher Weiler, CEO of KLDiscovery Inc. “In the second quarter of 2023, we delivered excellent financial results that are on par with the first quarter of 2023, which was the best financial quarter in KLDiscovery’s history. In the second quarter of 2023, we generated our second highest revenue quarter ever with $90.0 million, which is 20% higher than the second quarter of 2022. We also accelerated Nebula revenue growth sequentially from 34% in the first quarter of 2023 to 40% growth in the second quarter of 2023. We improved net loss by 58% year-over-year, EBITDA increased 91%, and Adjusted EBITDA was up 63% year-over-year to $20.1 million.”

Mr. Weiler continued. “Nebula, our proprietary e-Discovery technology platform, provides customers with a fully integrated technology stack solution with AI automation. We use Nebula processing for virtually every legal technology engagement. In addition to Nebula, our customer experience is continuously evolving and being enhanced as we release more functionality in Client Portal. Clients get case and project information in real time as our Client Portal can integrate seamlessly in their workflow allowing them to see the current status with over 30 key metrics across all of their matters in one place. Over the course of the next few months, we plan to create even more value for our clients through additional innovative features, such as our fully customizable alerting systems that can automatically and proactively inform clients when critical events occur on their matters. We believe there is significant upside to Client Portal’s future impact on our revenue as clients increase both their usage of our technology and the number of matters we support. This is an excellent example of how our strategy blends world class 24/7/365 customer service with bespoke, purpose-built technology to give us a strong competitive advantage in the marketplace.”

2022-2023 Quarterly Results
(in millions)

	2022 (unaudited)												2023 (unaudited)
	Q1			Q2			Q3			Q4			Q1			Q2
Revenue		81.9			75.2			74.5			85.8			90.7			90.0
Net loss		(9.6	)		(11.2	)		(17.4	)		(5.0	)		(4.5	)		(4.7	)
Net loss per share (basic and diluted)	$	(0.22	)	$	(0.26	)	$	(0.41	)	$	(0.12	)	$	(0.11	)	$	(0.11	)
Weighted average outstanding shares (basic and diluted)		42.7			42.7			42.8			42.9			42.9			43.0
EBITDA (Non-GAAP)		11.3			9.7			5.1			18.3			18.2			18.5
Adjusted EBITDA (Non-GAAP)		14.1			12.4			11.3			20.4			20.9			20.1

¹ Non-GAAP measure. See “Non-GAAP Financial Measures” and “Reconciliation of Non-GAAP Financial Measures” below for additional information and a reconciliation to the most directly comparable GAAP measure.

Earnings Conference Call

Management will conduct a conference call at 8:30 AM ET on Thursday, August 10, 2023, to discuss financial results for the second quarter 2023. The audio portion of the conference call will be broadcast live over the Internet in the Investors section of KLDiscovery's website https://investors.kldiscovery.com.

To join the conference call by telephone, please register via the following link:
https://conferencingportals.com/event/OpzKpVWo

Once registered, you will receive an email with Direct Entry and Registrant ID along with dial-in details. An audio recording of the conference call will be available for replay shortly after the call's completion and will remain available for two weeks following the call. To access the recorded conference call, please dial (800) 770-2030 (from the U.S. and Canada) or (647) 362-9199 (from all other countries) using access code 55139 or visit the Investors section of the KLD website.

KLDiscovery Inc.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands, except share and per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(unaudited)						(unaudited)

Revenues	$	90,007		$	75,191		$	180,666		$	157,089
Cost of revenues		44,995			39,626			88,582			82,898
Gross profit		45,012			35,565			92,084			74,191
Operating expenses
General and administrative		14,599			15,410			31,900			31,935
Research and development		3,257			3,638			6,457			6,706
Sales and marketing		10,856			10,309			21,247			21,153
Depreciation and amortization		4,926			4,891			9,739			9,805
Total operating expenses		33,638			34,248			69,343			69,599
Income from operations		11,374			1,317			22,741			4,592
Other expenses
Other expense		(3	)		(14	)		(2	)		(14	)
Change in fair value of Private Warrants		(317	)		(495	)		(508	)		(686	)
Interest expense		16,192			12,876			31,962			25,567
Loss before income taxes		(4,498	)		(11,050	)		(8,711	)		(20,275	)
Income tax provision		182			162			477			517
Net loss	$	(4,680	)	$	(11,212	)	$	(9,188	)	$	(20,792	)
Other comprehensive income (loss), net of tax
Foreign currency translation		(177	)		(5,683	)		648			(7,823	)
Total other comprehensive (loss) income, net of tax		(177	)		(5,683	)		648			(7,823	)
Comprehensive loss	$	(4,857	)	$	(16,895	)	$	(8,540	)	$	(28,615	)
Net loss per share - basic and diluted	$	(0.11	)	$	(0.26	)	$	(0.21	)	$	(0.49	)
Weighted average shares outstanding - basic and diluted		42,959,827			42,717,097			42,931,711			42,709,200

Set forth below is a reconciliation of EBITDA and Adjusted EBITDA, non-GAAP measures, to net (loss), the most directly comparable GAAP measure. See “Non-GAAP Financial Measures” below for additional information on these measures, including why we believe they are useful to investors and certain limitations thereof.

KLDiscovery Inc.
Reconciliation of Non-GAAP Financial Matters
(In thousands)
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022

Net loss	$	(4,680	)	$	(11,212	)	$	(9,188	)	$	(20,792	)
Interest expense		16,192			12,876			31,962			25,567
Income tax provision		182			162			477			517
Depreciation and amortization expense		6,766			7,831			13,375			15,681
EBITDA	$	18,460		$	9,657		$	36,626		$	20,973
Acquisition, financing and transaction costs		353			1,559			2,115			2,923
Stock compensation and other		877			1,353			1,710			2,471
Change in fair value of Private Warrants		(317	)		(495	)		(508	)		(686	)
Restructuring costs		556			21			719			78
Systems establishment costs		158			256			338			650
Adjusted EBITDA	$	20,087		$	12,351		$	41,000		$	26,409

Note:

Acquisition, financing and transaction costs generally represent earn-out payments, rating agency fees and letter of credit and revolving facility fees, as well as professional service fees and direct expenses related to acquisitions and public offerings.
Stock compensation and other primarily represent portions of compensation paid to our employees and executives through stock-based instruments.
Change in fair value of Private Warrants relates to changes in the fair market value of the Private Warrants issued in conjunction with the December 2019 business combination.
Restructuring costs generally represent non-ordinary course costs incurred in connection with a change in a contract or a change in the makeup of our personnel often related to an acquisition, such as severance payments, recruiting fees and retention charges.
Systems establishment costs relate to non-ordinary course expenses incurred to develop our IT infrastructure, including system automation and enterprise resource planning system implementation.

KLDiscovery Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)

	June 30, 2023			December 31, 2022
	(unaudited)
Current assets
Cash and cash equivalents	$	20,895		$	32,629
Accounts receivable, net of allowance
for doubtful accounts of $3,339 and $5,403, respectively		107,815			95,727
Prepaid expenses		15,286			10,726
Other current assets		1,345			1,175
Total current assets		145,341			140,257
Property and equipment
Computer software and hardware		75,493			71,720
Leasehold improvements		25,741			25,869
Furniture, fixtures, and other equipment		2,274			2,209
Accumulated depreciation		(84,724	)		(79,958	)
Property and equipment, net		18,784			19,840
Operating lease right of use assets, net		11,531			12,412
Intangible assets, net		43,488			46,862
Goodwill		391,091			391,114
Other assets		8,931			8,957
Total assets	$	619,166		$	619,442
Current liabilities
Current portion of long-term debt, net	$	289,491		$	3,000
Accounts payable and accrued expense		29,789			25,009
Operating lease liabilities		6,966			7,850
Deferred revenue		3,036			4,536
Total current liabilities		329,282			40,395
Long-term debt, net		243,936			524,529
Deferred tax liabilities		7,885			7,793
Long term operating lease liabilities		9,405			10,340
Other liabilities		1,737			2,694
Total liabilities		592,245			585,751
Commitments and contingencies
Stockholders' equity
Common stock
$0.0001 par value, 200,000,000 shares authorized, 43,086,267 and 42,920,136 issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		4			4
Preferred Stock
$0.0001 par value, 1,000,000 shares authorized, zero issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		—			—
Additional paid-in capital		393,747			391,977
Accumulated deficit		(368,329	)		(359,141	)
Accumulated other comprehensive income		1,499			851
Total stockholders' equity		26,921			33,691
Total liabilities and stockholders' equity	$	619,166		$	619,442

KLDiscovery Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

	Six Months Ended June 30, 2023			Six Months Ended June 30, 2022
Operating activities
Net loss	$	(9,188	)	$	(20,792	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		13,374			15,681
Paid in kind interest		10,416			9,817
Stock-based compensation		1,709			2,360
Provision for losses on accounts receivable		1,571			1,240
Deferred income taxes		98			337
Change in fair value of contingent consideration		—			18
Change in fair value of Private Warrants		(508	)		(686	)
Changes in operating assets and liabilities:
Accounts receivable		(13,374	)		(579	)
Prepaid expenses and other assets		(6,189	)		(4,334	)
Accounts payable and accrued expenses		593			697
Deferred revenue		(1,528	)		(1,882	)
Net cash (used in) provided by operating activities		(3,026	)		1,877
Investing activities
Purchases of property and equipment		(6,106	)		(7,429	)
Net cash used in investing activities		(6,106	)		(7,429	)
Financing activities
Payments for capital lease obligations		(1,272	)		(1,139	)
Payments on long-term debt		(1,500	)		(1,500	)
Net cash used in by financing activities		(2,772	)		(2,639	)
Effect of foreign exchange rates		170			(740	)
Net decrease in cash		(11,734	)		(8,931	)
Cash and cash equivalents at beginning of period		32,629			46,468
Cash and cash equivalents at end of period	$	20,895		$	37,537
Supplemental disclosure:
Cash paid for interest	$	21,912		$	15,854
Net income taxes paid	$	536		$	302
Significant noncash investing and financing activities
Purchases of property and equipment in accounts payable and accrued expenses on the condensed consolidated balance sheets	$	212		$	51

About KLDiscovery

KLDiscovery provides technology-enabled services and software to help law firms, corporations, and government agencies solve complex data challenges. With 25 locations across 16 countries, KLDiscovery is a global leader in delivering best-in-class data management, information governance, and eDiscovery solutions to support the litigation, regulatory compliance, and internal investigation needs of clients. Serving organizations for over 30 years, KLDiscovery offers data collection and forensic investigation, early case assessment, data processing, application software and data hosting for web-based document reviews, and managed document review services. In addition, through its global Ontrack data management business, KLDiscovery delivers world-class data recovery, disaster recovery, email extraction and restoration, data destruction, and tape management. KLDiscovery has been recognized as one of the fastest growing companies in North America by both Inc. Magazine (Inc. 5000) and Deloitte (Deloitte's Technology Fast 500), and CEO Chris Weiler was a 2014 Ernst & Young Entrepreneur of the Year™. Additionally, KLDiscovery is a Relativity Certified Partner and maintains ISO/IEC 27001 Certified data centers around the world. Visit www.kldiscovery.com to learn more.

This press release includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the United States Private Securities Litigation Reform Act of 1995. All statements contained in this press release other than statements of historical facts, including, without limitation, statements regarding KLDiscovery’s expected release of new features and the potential upside of Client Portal for KLDiscovery’s revenue are forward-looking statements. When used in this press release, the words “estimates,” “projected,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “should,” “future,” “propose” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements.

These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside KLDiscovery’s management’s control, that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. Important factors, among others, that may affect actual results or outcomes include: consequences of KLDiscovery’s substantial levels of indebtedness, including the pending maturity and potential acceleration thereof in June 2024, and its ability to repay its debt obligations as they become due or to secure alternative sources of financing; KLDiscovery’s potential failure to comply with privacy and information security regulations governing the client datasets it processes and stores; KLDiscovery’s ability to operate in highly competitive markets, and potential adverse effects of this competition; risk of decreased revenues if KLDiscovery does not adapt its pricing models; the ability to attract, motivate and retain qualified employees, including members of KLDiscovery’s senior management team; the ability to maintain a high level of client service and expand operations; potential issues with KLDiscovery’s product offerings that could cause legal exposure, reputational damage and an inability to deliver services; KLDiscovery’s ability to develop and successfully grow revenues from new products such as Nebula, improve existing products and adapt its business model to keep pace with industry trends; risk that KLDiscovery’s products and services fail to interoperate with third-party systems; potential unavailability of third-party technology that KLDiscovery uses in its products and services; potential disruption of KLDiscovery’s products, offerings, website and networks; difficulties resulting from KLDiscovery’s implementation of new consolidated business systems; the ability to deliver products and services following a disaster or business continuity event; disease or similar public health threat, such as COVID-19; potential unauthorized use of our products and technology by third parties and/or data security breaches and other incidents; potential intellectual property infringement claims; and the ability to comply with various trade restrictions, such as sanctions and export controls, resulting from KLDiscovery’s international operations.

These risks and other factors discussed in the “Risk Factors” section of KLDiscovery’s Annual Report on Form 10-K filed with the Securities Exchange Commission (“SEC”) and any other reports KLDiscovery files with the SEC, could cause actual results to differ materially from those expressed or implied by forward-looking statements made by KLDiscovery or on our behalf.

Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All statements speak only as of the date made, and unless legally required, KLDiscovery undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

We prepare financial statements in accordance with U.S. GAAP. We also disclose and discuss other non-U.S. GAAP financial measures such as EBITDA and adjusted EBITDA. Our management believes that these measures are relevant and provide useful supplemental information to investors by providing a baseline for evaluating and comparing our operating performance against that of other companies in our industry.

Our management believes EBITDA and Adjusted EBITDA reflect our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest, income taxes, equity compensation, acquisition and transaction costs, restructuring costs, systems establishment and costs associated with strategic initiatives which are incurred outside the ordinary course of our business, provides information about our cost structure and helps us to track our operating progress. We encourage investors and potential investors to carefully review our U.S. GAAP financial measures and compare them with our EBITDA and adjusted EBITDA. The non-U.S. GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies and in the future, we may disclose different non-U.S. GAAP financial measures in order to help our investors meaningfully evaluate and compare our results of operations to our previously reported results of operations or to those of other companies in our industry.

EBITDA and Adjusted EBITDA

We define EBITDA as net income (loss) plus interest (income) expense, income tax expense (benefit), extinguishment of debt, impairment losses, and depreciation and amortization. We view adjusted EBITDA as an operating performance measure and as such, we believe that the most directly comparable U.S. GAAP financial measure is net loss. In calculating adjusted EBITDA, we exclude from net loss certain items that we believe are not reflective of our ongoing business as the exclusion of these items allows us to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions:

Acquisition, financing and transaction costs generally represent earn-out payments, rating agency fees and letter of credit and revolving facility fees, as well as professional service fees and direct expenses related to acquisitions and public offerings. Because we do not acquire businesses or effect financings on a regular or predictable cycle, we do not consider the amount of these costs to be a representative component of the day-to-day operating performance of our business.
Stock compensation and other primarily represent portions of compensation paid to our employees and executives through stock-based instruments. Determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expenses recorded may not align with the actual value realized upon the future exercise or termination of the related stock-based awards. Additionally, stock compensation is a non-cash expense. Therefore, we believe it is useful to exclude stock-based compensation to better understand the long-term performance of our core business.
Change in fair value of Private Warrants relates to changes in the fair market value of the Private Warrants issued in conjunction with the Business Combination. We do not consider the amount to be representative of a component of the day-to-day operating performance of our business.
Restructuring costs generally represent non-ordinary course costs incurred in connection with a change in a contract or a change in the makeup of our personnel often related to an acquisition, such as severance payments, recruiting fees and retention charges. We do not consider the amount of restructuring costs to be a representative component of the day-to-day operating performance of our business.
Systems establishment costs relate to non-ordinary course expenses incurred to develop our IT infrastructure, including system automation and enterprise resource planning system implementation. We do not consider the amount to be representative of a component of the day-to-day operating performance of our business.

Contacts

Investor Contact:
Dawn Wilson
(703) 520-1498
dawn.wilson@kldiscovery.com

Media Contact:
Krystina Jones
(888) 811-3789
krystina.jones@kldiscovery.com

First published on Thu, Aug 10, 2023

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KLDiscovery Inc. Announces Second Quarter 2023 Financial Results

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