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KLDiscovery Inc. Announces Third Quarter 2022 Financial Results

11/09/2022

Company Continues to Implement Strategic Initiatives and Drive Operating Efficiencies

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 third quarter ended September 30, 2022 was $74.5 million versus $81.1 million in the third quarter of 2021. Net loss for the third quarter of 2022 was $(17.4) million compared to $(29.5) million in the third quarter of 2021.

EBITDA1 for the third quarter of 2022 was $5.1 million compared to $14.7 million in the third quarter of 2021. Adjusted EBITDA1 (which excludes stock-based compensation, acquisition financing and transaction costs and other items as described below) for the third quarter of 2022 was $11.3 million compared to $16.8 million in the third quarter of 2021, reflecting planned investments in research and development and sales and marketing.

“In spite of the macroeconomic headwinds from a declining global economy in the third quarter of 2022, we continue to make tremendous progress in implementing strategic initiatives that we believe are strengthening the Company,” said Christopher Weiler, CEO of KLDiscovery Inc. “We remain laser-focused on the things we can control during these difficult economic times.”

Mr. Weiler continued, “While we are projecting a greater net loss for the full year, Adjusted EBITDA1 is anticipated to be in-line with our expectations, despite lower revenue resulting from this challenging market environment. Year-to-date Nebula revenue continued to grow year-over-year as we gain more traction with this powerful offering. Client feedback on our innovative Client Portal has been very positive as we remain committed to delivering world-class customer service to our clients combined with our fully integrated technology offering.”

Mr. Weiler added, “We continue to look for and implement efficiencies throughout the Company which allow us to redeploy capital to invest for the future. For example, our now well-established ability to work from home has allowed us to reduce occupancy cost by consolidating office space, which included closing our McLean, VA headquarters and moving to Eden Prairie, MN. We also closed offices in Spain, Sweden, Chicago, and Richmond to consolidate further. For Data Recovery, we optimized our personnel and expanded our sales strategy to target global companies and technology partners as we seek larger contracts with stronger margins in that business.”

2021-2022 Quarterly Results
(in millions except per share data)
 
2021 (unaudited) 2022 (unaudited)
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Revenue

 

75.5

 

 

81.7

 

 

81.1

 

 

82.3

 

 

81.9

 

 

75.2

 

 

74.5

 

Net loss

 

(14.9

)

 

(8.9

)

 

(29.5

)

 

(7.3

)

 

(9.6

)

 

(11.2

)

 

(17.4

)

Net loss per share (basic and diluted)

$

(0.35

)

$

(0.21

)

$

(0.69

)

$

(0.17

)

$

(0.22

)

$

(0.26

)

$

(0.41

)

Weighted average outstanding shares (basic and diluted)

 

42.6

 

 

42.6

 

 

42.6

 

 

42.7

 

 

42.7

 

 

42.7

 

 

42.8

 

EBITDA (Non-GAAP)

 

15.1

 

 

13.7

 

 

14.7

 

 

13.8

 

 

11.3

 

 

9.7

 

 

5.1

 

Adjusted EBITDA (Non-GAAP)

 

15.4

 

 

17.7

 

 

16.8

 

 

15.3

 

 

14.1

 

 

12.4

 

 

11.3

 

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, November 10, 2022, to discuss financial results for the third quarter of 2022. 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

(in thousands, except share and per share amounts)

(Unaudited)

 

Three Months
Ended
September 30,
2022
Three Months
Ended
September 30,
2021
Nine Months
Ended
September 30,
2022
Nine Months
Ended
September 30,
2021
 
Revenues

$

74,544

 

$

81,122

 

$

231,633

 

$

238,222

 

Cost of revenues

 

40,830

 

 

41,852

 

 

123,728

 

 

120,161

 

Gross profit

 

33,714

 

 

39,270

 

 

107,905

 

 

118,061

 

Operating expenses
General and administrative

 

16,768

 

 

14,353

 

 

48,703

 

 

46,366

 

Research and development

 

3,597

 

 

2,770

 

 

10,303

 

 

7,341

 

Sales and marketing

 

11,333

 

 

9,765

 

 

32,486

 

 

29,338

 

Impairment of intangible asset

 

 

 

22,529

 

 

 

 

22,529

 

Depreciation and amortization

 

4,944

 

 

7,512

 

 

14,749

 

 

22,636

 

Total operating expenses

 

36,642

 

 

56,929

 

 

106,241

 

 

128,210

 

(Loss) income from operations

 

(2,928

)

 

(17,659

)

 

1,664

 

 

(10,149

)

Other expenses
Other income (expense)

 

7

 

 

(15

)

 

(7

)

 

10

 

Change in fair value of Private Warrants

 

(140

)

 

64

 

 

(826

)

 

(1,651

)

Interest expense

 

13,960

 

 

12,792

 

 

39,527

 

 

37,584

 

Loss on debt extinguishment

 

 

 

 

 

 

 

7,257

 

Loss before income taxes

 

(16,755

)

 

(30,500

)

 

(37,030

)

 

(53,349

)

Income tax provision (benefit)

 

644

 

 

(969

)

 

1,161

 

 

(97

)

Net loss

$

(17,399

)

$

(29,531

)

$

(38,191

)

$

(53,252

)

Other comprehensive income, net of tax
Foreign currency translation

 

(4,715

)

 

(1,812

)

 

(12,537

)

 

(3,559

)

Total other comprehensive loss, net of tax

 

(4,715

)

 

(1,812

)

 

(12,537

)

 

(3,559

)

Comprehensive loss

$

(22,114

)

$

(31,343

)

$

(50,728

)

$

(56,811

)

Net loss per share - basic and diluted

$

(0.41

)

$

(0.69

)

$

(0.89

)

$

(1.25

)

Weighted average shares outstanding - basic and diluted

 

42,791,540

 

 

42,637,315

 

 

42,732,003

 

 

42,577,128

 

  • In Q1 2021, the Company determined that the 6,350,000 Private Warrants issued in connection with the consummation of the business combination in December 2019 between Pivotal Acquisition Corp. and LD Topco, Inc. (the “Business Combination”) which were originally accounted for using equity accounting, should be accounted for using liability accounting in accordance with Accounting Standard Codification ASC 815-40, Derivatives and Hedging: Contracts on an Entity's Own Equity. The Company corrected this error in Q1 2021 and now measures these warrant liabilities at fair value on a recurring basis, with changes in fair value presented within change in fair value of Private Warrants in the Condensed Consolidated Statement of Comprehensive Loss.
  • In Q4 2021, the Company adopted Accounting Standards Update (“ASU”) No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. As a result, the amortization costs for capitalized implementation costs related to cloud computing arrangements are now included in general and administrative expense in the Company's Consolidated Statement of Comprehensive Loss and totaled $0.4 million and $1.2 million for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2021 these costs were included in depreciation and amortization expense in the Company's Condensed Consolidated Statement of Comprehensive Income and totaled $0.2 million and $0.5 million, respectively.

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.

Reconciliation of Non-GAAP Financial Matters
(In thousands)
(Unaudited)
 
Three Months Ended
September 30,
Nine Months Ended
September 30,

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net loss

$

(17,399

)

$

(29,531

)

$

(38,191

)

$

(53,252

)

Interest expense

 

13,960

 

 

12,792

 

 

39,527

 

 

37,584

 

Income tax provision

 

644

 

 

(969

)

 

1,161

 

 

(97

)

Extinguishment of debt

 

 

 

 

 

 

 

7,257

 

Impairment of intangible asset

 

 

 

22,529

 

 

 

 

22,529

 

Depreciation and amortization expense

 

7,904

 

 

9,850

 

 

23,585

 

 

29,400

 

EBITDA

$

5,109

 

$

14,671

 

$

26,082

 

$

43,421

 

Acquisition, financing and transaction costs

 

2,638

 

 

528

 

 

5,561

 

 

2,545

 

Stock compensation and other

 

1,352

 

 

1,058

 

 

3,823

 

 

3,165

 

Change in fair value of Private Warrants

 

(140

)

 

64

 

 

(826

)

 

(1,651

)

Restructuring costs

 

2,186

 

 

(14

)

 

2,264

 

 

1,019

 

Systems establishment

 

189

 

 

453

 

 

839

 

 

1,370

 

Adjusted EBITDA

$

11,334

 

$

16,760

 

$

37,743

 

$

49,869

 

Note:

  • Acquisition, financing and transaction costs include earnout payments, rating agency, letter of credit and revolving facility fees, and transaction costs relating to the Business Combination.
  • Stock compensation and other includes expenses related to the Company’s stock compensation plan, business insurance and other expenses.
  • 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.
  • Restructuring costs include severance payments, recruiting fees and retention charges.
  • Systems establishment costs include expenses related to IT infrastructure build-out, system automation and ERP implementation.

KLDiscovery Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

September 30, 2022 December 31, 2021
(unaudited)
Current assets
Cash and cash equivalents

$

32,873

 

$

46,468

 

Accounts receivable, net of allowance
for doubtful accounts of $5,663 and $9,774, respectively

 

92,845

 

 

93,273

 

Prepaid expenses

 

14,344

 

 

9,669

 

Other current assets

 

1,035

 

 

1,133

 

Total current assets

 

141,097

 

 

150,543

 

Property and equipment

Computer software and hardware

 

69,581

 

 

73,677

 

Leasehold improvements

 

25,565

 

 

26,796

 

Furniture, fixtures and other equipment

 

2,633

 

 

3,064

 

Accumulated depreciation

 

(80,094

)

 

(81,261

)

Property and equipment, net

 

17,685

 

 

22,276

 

Intangible assets, net

 

49,567

 

 

59,291

 

Goodwill

 

387,154

 

 

395,759

 

Other assets

 

8,306

 

 

8,535

 

Total assets

$

603,809

 

$

636,404

 

Current liabilities
Current portion of long-term debt, net

$

3,000

 

$

3,000

 

Accounts payable and accrued expense

 

34,733

 

 

27,067

 

Current portion of contingent consideration

 

667

 

 

646

 

Deferred revenue

 

3,638

 

 

4,800

 

Total current liabilities

 

42,038

 

 

35,513

 

Long-term debt, net

 

515,734

 

 

507,706

 

Deferred tax liabilities

 

7,500

 

 

6,772

 

Other liabilities

 

7,647

 

 

8,559

 

Total liabilities

 

572,919

 

 

558,550

 

Commitments and contingencies
Stockholders' equity
Common stock
$0.0001 par value, 200,000,000 shares authorized,
42,791,540 and 42,684,549 issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

 

4

 

 

4

 

Preferred Stock
$0.0001 par value, 1,000,000 shares authorized, zero issued
and outstanding as of September 30, 2022 and December 31, 2021, respectively

 

 

 

 

Additional paid-in capital

 

389,793

 

 

386,028

 

Accumulated deficit

 

(354,158

)

 

(315,967

)

Accumulated other comprehensive (loss) income

 

(4,749

)

 

7,789

 

Total stockholders' equity

 

30,890

 

 

77,854

 

Total liabilities and stockholders' equity

$

603,809

 

$

636,404

 

KLDiscovery Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

Nine Months
Ended
September 30,
2022
Nine Months
Ended
September 30,
2021
Operating activities
Net loss

$

(38,191

)

$

(53,252

)

Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization

 

23,585

 

 

29,400

 

Non-cash interest

 

14,874

 

 

14,240

 

Loss on extinguishment of debt

 

 

 

7,257

 

Stock-based compensation

 

3,656

 

 

2,998

 

Provision for losses on accounts receivable

 

1,736

 

 

2,640

 

Deferred income taxes

 

728

 

 

(567

)

Change in fair value of contingent consideration

 

21

 

 

49

 

Change in fair value of Private Warrants

 

(826

)

 

(1,651

)

Impairment of intangible asset

 

 

 

22,529

 

Changes in operating assets and liabilities:
Accounts receivable

 

(3,828

)

 

(16,477

)

Prepaid expenses and other assets

 

(5,464

)

 

(6,464

)

Accounts payable and accrued expenses

 

6,791

 

 

(668

)

Deferred revenue

 

(1,033

)

 

(27

)

Net cash provided by operating activities

 

2,049

 

 

7

 

Investing activities
Acquisitions, net of cash acquired

 

 

 

 

Purchases of property and equipment

 

(10,498

)

 

(9,708

)

Net cash used in investing activities

 

(10,498

)

 

(9,708

)

Financing activities
Proceeds for exercise of stock options

 

 

 

38

 

Payments for capital lease obligations

 

(1,592

)

 

(846

)

Debt acquisition costs

 

 

 

(2,031

)

Proceeds long-term debt, net of original issue discount

 

 

 

294,000

 

Retirement of debt

 

 

 

(289,000

)

Payments on long-term debt

 

(2,250

)

 

(1,500

)

Net cash (used in) provided by financing activities

 

(3,842

)

 

661

 

Effect of foreign exchange rates

 

(1,304

)

 

(375

)

Net decrease in cash

 

(13,595

)

 

(9,415

)

Cash at beginning of period

 

46,468

 

 

51,201

 

Cash at end of period

$

32,873

 

$

41,786

 

Supplemental disclosure:
Cash paid for interest

$

24,871

 

$

21,184

 

Net income taxes paid

$

486

 

$

157

 

Significant non-cash investing and financing activities
Purchases of property and equipment in accounts payable
and accrued expenses on the condensed consolidated balance sheets

$

115

 

$

297

 

  • In Q4 2021, the Company adopted Accounting Standards Update (“ASU”) No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. As a result, the amortization costs for capitalized implementation costs related to cloud computing arrangements are now included in operating activities in the Company's Condensed Consolidated Statements of Cash Flows and totaled $1.5 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2021 these costs were included in investing activities in the Company's Condensed Consolidated Statements of Cash Flows and totaled $1.9 million.

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 Nebula, KLDiscovery’s focus and commitment to delivery of world-class customer service, KLDiscovery’s plans to continue to look for and implement efficiencies and to seek larger Data Recovery contracts with stronger margins, 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: KLDiscovery’s potential failure to comply with privacy and information security regulations governing the client datasets it processes and stores; disease or similar public health threat, such as COVID-19; 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; KLDiscovery’s ability to develop and successfully grow revenues from new products such as Nebula; the ability to deliver products and services following a disaster or business continuity event; potential disruption of KLDiscovery’s products, offerings, website and networks; 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 new products, 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; difficulties resulting from KLDiscovery’s implementation of new consolidated business systems; the ability to comply with various trade restrictions, such as sanctions and export controls, resulting from KLDiscovery’s international operations; potential intellectual property infringement claims; and KLDiscovery’s substantial indebtedness. 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, financing and transaction costs, restructuring costs, and systems establishment costs 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.

 

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

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

Source: KLDiscovery Inc.

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