| Organization, business and summary of significant accounting policies | Note 1 – Organization, business and summary of significant accounting policies Organization KLDiscovery Inc. (the “Company,” “we” or “us”) is a leading global provider of eDiscovery, information governance and data recovery solutions to corporations, law firms, insurance companies and individuals in 17 countries around the world. We provide technology soluti ons to help our clients solve complex data challenges. The Company’s headquarters are located in Eden Prairie, Minnesota. The Company has 26 locations in 17 countries, as well as 9 data centers and 13 data recovery labs globally. The Company was originally incorporated under the name Pivotal Acquisition Corp. (“Pivotal”) as a blank check company on August 2, 2018 under the laws of the State of Delaware for the purpose of entering into a merger, capital stock exchange, stock purchase, reorganization or similar business combination with one or more businesses or entities. On December 19, 2019 (the “Closing Date”), Pivotal acquired the outstanding shares of LD Topco, Inc. via a reverse capitalization (the “Business Combination”) and was renamed KLDiscovery Inc. Principles of consolidation The accompanying condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of KLDiscovery and all its subsidiaries. All significant intercompany accounts and transactions were eliminated upon consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the financial and risk factor information included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 , which we previously filed with the Securities and Exchange Commission (the “SEC”). Liquidity and going concern evaluation Under Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 205-40, Going Concern , the Company is required to evaluate each reporting period, including interim periods, whether there is substantial doubt regarding its ability to meet its obligations when they come due within one year from the financial statement issuance date. On February 8, 2021, certain subsidiaries of the Company (the “Loan Parties”), entered into a new secured credit agreement (the “2021 Credit Agreement”) and on March 3, 2023, the Loan Parties entered into the First Amendment to the 2021 Credit Agreement. On March 8, 2024, the Loan Parties entered into the Second Amendment to the Amended 2021 Credit Agreement (as amended, the “Amended 2021 Credit Agreement”) which provides that the Loan Parties may deliver to the administrative agent annual, audited financial statements of the Company accompanied by a report and opinion of the Company's independent certified public accountant that is subject to a “going concern” qualification if such qualification results from an upcoming maturity date under any Indebtedness (as defined in the Amended 2021 Credit Agreement). In addition, on December 19, 2019, the Company issued Convertible Debentures, which mature in 2024, in an aggregate principal amount of $ 200 million (the “Debentures” or the “Convertible Debentures”). The Amended 2021 Credit Agreement provides for (i) initial term loans in an aggregate principal amount of $ 300 million (the “Initial Term Loans”), (ii) delayed draw term loans in an aggregate principal amount of $ 50 million (the “Delayed Draw Term Loans”), and (iii) revolving credit loans in an aggregate principal amount of $ 40 million, with a letter of credit sublimit of $ 10 million (the "Revolving Credit Loans”). The Delayed Draw Term Loans were available to the Loan Parties at any time prior to February 8, 2023 and are no longer available under the Amended 2021 Credit Agreement. The Initial Term Loans and Revolving Credit Loans are each scheduled to mature on February 8, 2026, unless the Convertible Debentures are outstanding six months prior to the December 19, 2024 maturity date thereof, in which case the Amended 2021 Credit Agreement matures on June 19, 2024. The Company has historically incurred losses and in certain years cash flows have been negative. As of March 31, 2024, the Company’s cash balance was $ 18.4 million and the Company’s debt balance was $ 569.6 million, including a balance of $ 263.6 million under the Convertible Debentures, a balance of $ 291.0 million in Initial Term Loans under the Amended 2021 Credit Agreement and a balance of $ 15.0 million in Revolving Credit Loans. As of March 31, 2024, the Company does not have the cash on hand, nor does it expect to generate sufficient liquidity from future cash flows, to repay the Convertible Debentures by June 19, 2024 and as such, the Initial Term Loans debt of $ 291.0 million, the Convertible Debentures debt of $ 263.6 million and the Revolving Credit Loans debt of $ 15.0 million are included in the current portion of long-term debt in the Condensed Consolidated Balance Sheet at March 31, 2024. As of March 31, 2024, the Company does not have sufficient cash on hand, and does not expect to generate sufficient liquidity from forecasted future cash flows to repay its current obligations at their respective maturity dates. The Company is reviewing potential alternatives, including renegotiating the terms of the Convertible Debentures and/or the Amended 2021 Credit Agreement and identifying alternative sources for cash or additional financing. The Company's current debt structure, however, raises substantial doubt regarding the Company’s ability to continue as a going concern because other alternatives may not be achievable on favorable terms and conditions or at all. The Company’s condensed financial statements do not include any adjustments that may result from the outcome of this uncertainty and have been prepared assuming the Company will continue as a going concern. Use of estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements. Although actual results could differ from those estimates, management does not believe that such differences would be material. Significant estimates include, but are not limited to, the allowance for doubtful accounts, determining the fair values of assets acquired and liabilities assumed, including the fair value of Private Warrants (as defined in Note 2), the determination of the incremental borrowing rate used to measure right-of-use assets and liabilities, the recoverability and useful lives of property and equipment, intangible assets, and other long-lived assets, the evaluation of goodwill for impairment, the valuation and realization of deferred income taxes, the fair value of the Company’s common stock, stock based compensation equity awards and acquisition related contingent consideration. Segments, concentration of credit risk, major customers and liquidity The Company operates in one business segment, providing technology-based litigation support solutions and services. Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of cash and accounts receivable. The Company places its cash with a banking institution where the balances, at times, exceed federally insured limits. Management believes the risks associated with these deposits are limited. With respect to accounts receivable, the Company performs ongoing evaluations of its customers, generally grants uncollateralized credit terms to its customers, and maintains an allowance for doubtful accounts based on historical experience and management’s expectations of future losses. As of and for the three months ended March 31, 2024 and 2023 , the Company did no t have any single customer that represented five percent (5%) or more of its consolidated revenues or seven percent (7%) of its accounts receivable. The Company believes that the geographic and industry diversity of the Company’s customer base throughout the U.S. and internationally minimizes the risk of incurring material losses due to co ncentrations of credit risk. The Company’s foreign revenues, principally from businesses in the UK and Germany, totaled approximately $ 12.9 million and $ 12.6 million for the three months ended March 31, 2024 and 2023, respectively. The Company’s long-lived assets in foreign countries, principally in the UK and Germany, totaled approxima tely $ 26.4 million and $ 27.0 million a s of March 31, 2024 and December 31, 2023 , respectively. As disclosed in Note 4, the Company has significant outstanding debt that comes due in 2024. While the Company is exploring various options to refinance the debt, new financings may not be available to the Company on commercially acceptable terms, or at all. Foreign currency Results of operations for the Company’s non-U.S. subsidiaries are translated from the designated functional currency to the reporting currency of the U.S. dollar. Revenues and expenses are translated at average exchange rates for each month, while assets and liabilities are translated at balance sheet date exchange rates. Resulting net translation adjustments are recorded as a component of stockholders’ equity in “Accumulated other comprehensive income” in the Company’s Condensed Consolidated Balance Sheets. Transaction gains and losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in “Other (income) expense” in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Such transaction gains and losses may be realized or unrealized depending upon whether the transaction settled during the period or remains outstanding at the balance sheet date. Cash and cash equivalents The Company considers all highly liquid financial instruments with an original maturity of three months or less when purchased to be cash equivalents. Accounts receivable and allowance for credit losses The Company’s accounts receivable are recorded at amortized cost less an allowance for credit losses not expected to be recovered. The measurement and recognition of credit losses involves the use of judgment and represents management’s estimate of expected lifetime credit losses based on historical experience and trends, current conditions and reasonable and supportable forecasts. Management’s assessment of expected credit losses includes consideration of current and expected economic, market and industry factors affecting the Company’s customers, including their financial condition; the aging of account balances; historical credit loss experience; customer concentrations; customer credit-worthiness; and other sources of payment, among other factors. Expected credit losses are recorded as "General and administrative" expenses in the Condensed Consolidated Statements of Comprehensive Loss. A rollforward of the allowance for credit losses is presented below (in thousands):
Three Months Ended March 31, 2024 Three Months Ended March 31, 2023
Beginning balance $ 3,642 $ 5,403
Provision for credit losses 1,110 797
Write-offs, net of recoveries (1) ( 1,721 ) ( 1,953 )
Ending balance 3,031 4,247 _______________________ (1) Recoveries were not material for the periods presented. As such, the Company presented write-offs, net of recoveries. Fixed Assets Computer software, property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives of the assets:
Computer software and hardware 3 to 5 years
Leasehold improvements Shorter of lease term or useful life
Furniture, fixtures and other equipment 3 to 5 years Gains or losses on disposals are included in results of operations at amounts equal to the difference between the net book value of the disposed assets and the proceeds received upon disposal. Costs for replacements and betterments are capitalized, while the costs of maintenance and repairs are expensed as incurred. Finance leases right of use assets are included in Property and equipment and are stated at the present value of minimum lease payments and subsequently amortized using the straight-line method over the earlier of the end of the asset's useful life or the end of the lease term. Depreciation expense totaled $ 2.7 million and $ 2.3 million for the three months ended March 31, 2024 and 2023, respectively, and includes amortization of assets recorded under finance leases. For additional information on leases, refer to Note 3 – Leases . Internal-use software development costs The Company capitalizes certain internal computer software costs incurred during the application development stage. The application development stage generally includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditure will result in additional functionality. Capitalized software costs are amortized over the estimated useful life of the underlying project on a straight-line basis. The Company’s estimated useful life of capitalized software costs varies between three and five years , depending on management’s expectation of the economic life of various software. Capitalized software amortization costs are recorded as a component of cost of revenue. Capitalized software costs are reflected as part of “Intangible assets, net” in the Company’s Condensed Consolidated Balance Sheets and totaled $20 .0 million and $ 18.1 million, net of accumulated amortization, as of March 31, 2024 and December 31, 2023, respectively. The Company also enters into certain cloud-based software hosting arrangements that are accounted for as service contracts. For internal use software obtained through a hosting arrangement that is in the nature of a service contract, the Company incurs certain implementation costs such as integrating, configuring, and software customization, which are consistent with costs incurred during the application development stage for on-premise software. The Company applies the same guidance to determine costs that are eligible for capitalization. For these arrangements, the Company amortizes the capitalized development costs straight-line over the fixed, non-cancellable term of the associated hosting arrangement plus any reasonably certain renewal periods. The Company also applies the same impairment model to both internal-use software and capitalized implementation costs in a software hosting arrangement that is in the nature of a service contract. Capitalized implementation costs of cloud-based hosting arrangements are classified as part of Prepaid Expenses and Other Assets, totaling $ 2.5 million and $ 4.9 million net of accumulated amortization, respectively, as of March 31, 2024, and $ 1.8 million and $ 5.5 million net of accumulated amortization, respectively, as of December 31, 2023. Amortization of capitalized implementation costs related to hosting arrangements totaled $ 0.5 million for the periods ended March 31, 2024 and 2023. Intangible assets and other long-lived assets The Company evaluates the recoverability of its long-lived assets, including finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of any asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the difference between the fair value of the asset compared to its carrying amount. Amortization expense totaled $ 3.3 million and $ 3.9 million for the three months ended March 31, 2024 and 2023, respectively; $ 1.6 million and $1 .4 million of w hich, respectively, was classified as part of the “Cost of revenues” line in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Goodwill Goodwill represents the excess of the total consideration paid over identified intangible and tangible assets of the Company and its acquired businesses. The Company tests its goodwill for impairment at the reporting unit level on an annual basis on October 1, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. As of the October 1, 2023 testing date, the Company determined there is one reporting unit. Management concluded that there was no impairment of goodwill and intangible assets during the three months ended March 31, 2024 . Our goodwill balance is subject to change due to fluctuations in foreign exchange rates. Debt issuance costs Debt issuance costs are stated at cost, net of accumulated amortization, and are amortized over the term of the debt using both the straight-line and the effective yield methods. U.S. GAAP requires that the effective yield method be used to amortize debt acquisition costs; however, if the effect of using the straight-line method is not materially different from the results that would have been obtained under the effective yield method, the straight-line method may be used. The amortization for funded term debt is calculated according to the effective yield method and revolving and unfunded term debt is calculated according to the straight-line method. Debt issuance costs related to funded term debt are presented in the Condensed Consolidated Balance Sheets as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. Debt issuance costs related to revolving and unfunded term debt are presented in the Condensed Consolidated Balance Sheets within “Other assets.” Revenue recognition Revenues are recognized when the Company satisfies a performance obligation by transferring goods or services promised in a contract to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. Performance obligations in the Company's contracts represent distinct or separate service streams that the Company provides to its customers. The Company evaluates its revenue contracts with customers based on the five-step model under ASC 606, Revenue Recognition : (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenues when (or as) each performance obligation is satisfied. The Company provides Legal Technology services to its clients through several technology solutions including Nebula Ecosystem (“Nebula”) its internally developed end-to-end fully integrated proprietary solution. The Company also provides Data Recovery solutions. The following table summarizes revenue from contracts with customers for the three months ended March 31, 2024 and 2023 (in thousands):
2024 Q1 2023 Q1
Technology Solutions Nebula Consolidated Technology Solutions Nebula Consolidated
Legal Technology $ 58,152 $ 14,834 $ 72,986 $ 73,834 $ 8,172 $ 82,006
Data Recovery 7,186 — 7,186 8,653 — 8,653
Total revenue $ 65,338 $ 14,834 $ 80,172 $ 82,487 $ 8,172 $ 90,659
Performance Obligations and Timing of Revenue Recognition The Company primarily sells services and products that fall into the categories discussed below. Each category contains one or more performance obligations that are either (1) capable of being distinct (i.e., the customer can benefit from the product or service on its own or together with readily available resources, including those purchased separately from us) and distinct within the context of the contract (i.e., separately identified from other promises in the contract) or (2) a series of distinct products or services that are substantially the same and have the same pattern of transfer to the customer. (1) Legal Technology, including Nebula and the Company's expansive suite of technology solutions, such as its end-to-end eDiscovery technology solutions, managed review solutions, collections, processing, analytics, hosting, production and professional services, and (2) Data Recovery solutions, which provides data restoration, data erasure and data management services. The Company generates the majority of its revenues by providing Legal Technology services to its clients. Most of the Company’s eDiscovery service contracts are time and materials types of arrangements. Time and materials arrangements are based on units of data stored or processed. Unit-based revenues are recognized as services are provided, based on either the amount of data stored or processed, the number of concurrent users accessing the information, or the number of pages or images processed for a client, at agreed upon per unit rates. We recognize revenues for these arrangements at a point in time utilizing a right-to-invoice practical expedient because we have a right to consideration for services completed to date. Certain other eDiscovery contracts are subscription-based, fixed-fee arrangements, which have tiered pricing based on the quantity of data hosted. For a fixed monthly fee, our clients receive a variety of optional eDiscovery services, which are included in addition to the data hosting. The Company recognizes revenues for these arrangements at a point in time based on predetermined monthly fees as determined in our contractual agreements, utilizing a right-to-invoice practical expedient because the Company has a right to consideration for services completed to date. Other eDiscovery agreements are time and material arrangements that require the client to pay us based on the number of hours worked at contractually agreed-upon rates. The Company recognizes revenues for these arrangements at a point in time based on hours incurred and contracted rates utilizing a right-to-invoice practical expedient because it has a contractual right to consideration for services completed to date. Data recovery services are mainly fixed fee arrangements requiring the client to pay a pre-established fee in exchange for the successful completion of a data recovery on a predetermined device. For the recovery services performed by the Company’s technicians, the revenue is recognized at a point in time, when the recovered data is sent to the customer. Data erasure services are fixed fee arrangements for which revenue is recognized at a point in time, when the certificate of erasure is sent to the customer. The Company offers term license subscriptions to Ontrack PowerControls software to customers with on-premises installations of the software pursuant to contracts that are historically one to four years in length. The term license subscriptions include maintenance and support, as well as access to future software upgrades and patches. The license and the additional support services are deemed to be one performance obligation, and thus revenue for these arrangements is recognized ratably over the term of the agreement. Net loss per common share Basic net loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period, plus the dilutive effect of common stock equivalents, including stock options and restricted shares. Common stock and common stock equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options and release of restricted shares, except when the effect of their inclusion would be antidilutive. Accounting standards not yet adopted In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). This ASU requires enhanced disclosures about significant segment expenses and other segment items and requires companies to disclose all annual disclosures about segments in interim periods. This ASU also requires public entities with a single reportable segment to provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280. The amendments in this ASU are intended to improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted and the amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance on the Company's consolidated financial statements and related disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09), to enhance the transparency and decision usefulness of income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. This ASU is effective for the Company for annual periods beginning after December 15, 2025. The Company does not expect ASU 2023-09 to have a material impact on the Company’s consolidated financial statements. |
