10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-38789

KLDiscovery Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	61-1898603
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
9023 Columbine Road Eden Prairie, MN	55347
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (703) 288-3380

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 9, 2023 there were 43,086,267 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

Table of Contents

	Page
Part I. Financial Information	1
Item 1. Financial Statements	1
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Comprehensive Loss	2
Condensed Consolidated Statements of Changes in Stockholders’ Equity	3
Condensed Consolidated Statements of Cash Flows	4
Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk	28
Item 4. Controls and Procedures	28
Part II. Other Information	29
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 6. Exhibits	29
Signatures	31

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

KLDiscovery Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	September 30, 2023			December 31, 2022
	(unaudited)
Current assets
Cash and cash equivalents	$	25,435		$	32,629
Accounts receivable, net of allowance
for doubtful accounts of $2,875 and $5,403, respectively		98,114			95,727
Prepaid expenses		17,781			10,726
Other current assets		1,341			1,175
Total current assets		142,671			140,257
Property and equipment
Computer software and hardware		74,904			71,720
Leasehold improvements		25,842			25,869
Furniture, fixtures, and other equipment		2,204			2,209
Accumulated depreciation		(86,028	)		(79,958	)
Property and equipment, net		16,922			19,840
Operating lease right of use assets, net		9,646			12,412
Intangible assets, net		41,479			46,862
Goodwill		389,559			391,114
Other assets		8,910			8,957
Total assets	$	609,187		$	619,442
Current liabilities
Current portion of long-term debt, net	$	289,715		$	3,000
Accounts payable and accrued expense		32,249			25,009
Operating lease liabilities		6,185			7,850
Deferred revenue		2,682			4,536
Total current liabilities		330,831			40,395
Long-term debt, net		247,388			524,529
Deferred tax liabilities		8,414			7,793
Long term operating lease liabilities		7,015			10,340
Other liabilities		1,511			2,694
Total liabilities		595,159			585,751
Commitments and contingencies
Stockholders' equity
Common stock
$0.0001 par value, shares authorized - 200,000,000 shares authorized;
43,086,267 and 42,920,136 issued and outstanding as of
September 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 September 30, 2023 and December 31, 2022		—			—
Additional paid-in capital		394,615			391,977
Accumulated deficit		(379,687	)		(359,141	)
Accumulated other comprehensive income		(904	)		851
Total stockholders' equity		14,028			33,691
Total liabilities and stockholders' equity	$	609,187		$	619,442

See Notes to Condensed Consolidated Financial Statements.

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KLDiscovery Inc.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands, except share and per share amounts)

	Three Months Ended September 30, 2023			Three Months Ended September 30, 2022			Nine Months Ended September 30, 2023			Nine Months Ended September 30, 2022
Revenues	$	79,336		$	74,544		$	260,002		$	231,633
Cost of revenues		39,643			40,830			128,225			123,728
Gross profit		39,693			33,714			131,777			107,905
Operating expenses
General and administrative		14,932			16,768			46,832			48,703
Research and development		3,294			3,597			9,751			10,303
Sales and marketing		9,518			11,333			30,765			32,486
Depreciation and amortization		5,068			4,944			14,807			14,749
Total operating expenses		32,812			36,642			102,155			106,241
Income (loss) from operations		6,881			(2,928	)		29,622			1,664
Other expenses
Other (expense) income		(6	)		7			(8	)		(7	)
Change in fair value of Private Warrants		(51	)		(140	)		(559	)		(826	)
Interest expense		17,235			13,960			49,197			39,527
Loss before income taxes		(10,297	)		(16,755	)		(19,008	)		(37,030	)
Income tax provision		1,061			644			1,538			1,161
Net loss	$	(11,358	)	$	(17,399	)	$	(20,546	)	$	(38,191	)
Other comprehensive loss, net of tax
Foreign currency translation		(2,403	)		(4,715	)		(1,755	)		(12,537	)
Total other comprehensive loss, net of tax		(2,403	)		(4,715	)		(1,755	)		(12,537	)
Comprehensive loss	$	(13,761	)	$	(22,114	)	$	(22,301	)	$	(50,728	)
Net loss per share - basic and diluted	$	(0.26	)	$	(0.41	)	$	(0.48	)	$	(0.89	)
Weighted average shares outstanding - basic and diluted		43,086,267			42,791,540			42,989,413			42,732,003

See Notes to Condensed Consolidated Financial Statements.

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KLDiscovery Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(in thousands, except for share amounts)

	Common Stock Issued				Additional paid-in		Accumulated			Accumulated other comprehensive
	Shares		Amount		capital		deficit			(loss) income			Total
Balance as of December 31, 2022		42,920,136	$	4	$	391,977	$	(359,141	)	$	851		$	33,691
Share-based compensation		—		—		877		—			—			877
Stock issued in exchange for vested units		16,667		—		—		—			—			—
Cumulative translation adjustment		—		—		—		—			825			825
Net loss		—		—		—		(4,508	)		—			(4,508	)
Balance as of March 31, 2023		42,936,803	$	4	$	392,854	$	(363,649	)	$	1,676		$	30,885
Share-based compensation		—		—		893		—			—			893
Stock issued in exchanges for vested units		149,464		—		—		—			—			—
Foreign exchange translation		—		—		—		—			(177	)		(177	)
Net loss		—		—		—		(4,680	)		—			(4,680	)
Balance as of June 30, 2023		43,086,267	$	4	$	393,747	$	(368,329	)	$	1,499		$	26,921
Share-based compensation		—		—		868		—			—			868
Foreign exchange translation		—		—		—		—			(2,403	)		(2,403	)
Net loss		—		—		—		(11,358	)		—			(11,358	)
Balance as of September 30, 2023		43,086,267	$	4	$	394,615	$	(379,687	)	$	(904	)	$	14,028

	Common Stock Issued				Additional paid-in		Accumulated			Accumulated other comprehensive
	Shares		Amount		capital		deficit			(loss) income			Total
Balance as of December 31, 2021		42,684,549	$	4	$	386,028	$	(315,967	)	$	7,789		$	77,854
Share-based compensation		—		—		1,098		—			—			1,098
Stock issued in exchange for vested units		16,667		—		—		—			—			—
Foreign exchange translation		—		—		—		—			(2,140	)		(2,140	)
Net loss		—		—		—		(9,580	)		—			(9,580	)
Balance as of March 31, 2022		42,701,216	$	4	$	387,126	$	(325,547	)	$	5,649		$	67,232
Share-based compensation		—		—		1,347		—			—			1,347
Stock issued in exchanges for vested units		90,324		—		—		—			—			—
Foreign exchange translation		—		—		—		—			(5,683	)		(5,683	)
Net loss		—		—		—		(11,212	)		—			(11,212	)
Balance as of June 30, 2022		42,791,540	$	4	$	388,473	$	(336,759	)	$	(34	)	$	51,684
Share-based compensation		—		—		1,320		—			—			1,320
Foreign exchange translation		—		—		—		—			(4,715	)		(4,715	)
Net loss		—		—		—		(17,399	)		—			(17,399	)
Balance as of September 30, 2022		42,791,540	$	4	$	389,793	$	(354,158	)	$	(4,749	)	$	30,890

See Notes to Condensed Consolidated Financial Statements.

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KLDiscovery Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended September 30, 2023			Nine Months Ended September 30, 2022
Operating activities
Net loss	$	(20,546	)	$	(38,191	)
Adjustments to reconcile net loss to net cash used in operating    activities:
Depreciation and amortization		20,372			23,585
Paid in kind and non-cash interest		16,390			14,874
Stock-based compensation		2,550			3,656
Provision for losses on accounts receivable		2,167			1,736
Deferred income taxes		629			728
Change in fair value of contingent consideration		—			21
Change in fair value of Private Warrants		(559	)		(826	)
Changes in operating assets and liabilities:
Accounts receivable		(4,622	)		(3,828	)
Prepaid expenses and other assets		(8,277	)		(5,464	)
Accounts payable and accrued expenses		(691	)		6,791
Deferred revenue		(1,847	)		(1,033	)
Net cash provided by operating activities		5,566			2,049
Investing activities
Purchases of property and equipment		(8,534	)		(10,498	)
Net cash used in investing activities		(8,534	)		(10,498	)
Financing activities
Payments for capital lease obligations		(1,874	)		(1,592	)
Payments on long-term debt		(2,250	)		(2,250	)
Net cash used in financing activities		(4,124	)		(3,842	)
Effect of foreign exchange rates		(102	)		(1,304	)
Net decrease in cash		(7,194	)		(13,595	)
Cash and cash equivalents at beginning of period		32,629			46,468
Cash and cash equivalents at end of period	$	25,435		$	32,873
Supplemental disclosure:
Cash paid for interest	$	33,216		$	24,871
Net income taxes paid	$	788		$	486
Significant noncash investing and financing activities
Purchases of property and equipment in accounts payable    and accrued expenses on the condensed consolidated balance sheets	$	133		$	115

See Notes to Condensed Consolidated Financial Statements.

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KLDiscovery Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the three and nine months ended September 30, 2023 and 2022

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 16 countries around the world. We provide technology solutions to help our clients solve complex data challenges. The Company’s headquarters are located in Eden Prairie, Minnesota. The Company has 25 locations in 16 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, 2022, which we previously filed with the Securities and Exchange Commission (the “SEC”).

Liquidity and going concern evaluation

Under 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 (as amended, 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 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 September 30, 2023, the Company’s cash balance was $25.4 million and the Company’s debt balance was $544.8 million, including a balance of $252.3 million under the Convertible Debentures and a balance of $292.5 million in Initial Term Loans under the Amended 2021 Credit Agreement (no amounts were outstanding under the Delayed Draw Term Loans or Revolving Credit Loans). As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Initial Term Loans debt of $292.5 million is included in the current portion of long-term debt in the Condensed Consolidated Balance Sheet at September 30, 2023. As of September 30, 2023, 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 including the Initial Term Loans, at the accelerated maturity date.

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 these or other alternatives may not be achievable on favorable terms and conditions or at all. The Company’s condensed financial statements do

5

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 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, and stock option awards.

Segments, concentration of credit risk and major customers

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 and nine months ended September 30, 2023 and 2022, the Company did not have any single customer that represented five percent (5%) or more of its consolidated revenues or 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 concentrations of credit risk. The Company’s foreign revenues, principally from businesses in the UK and Germany, totaled approximately $11.5 million and $10.5 million for the three months ended September 30, 2023 and 2022, respectively; and $40.6 million and $36.7 million for the nine months ended September 30, 2023, and 2022, respectively. The Company’s long-lived assets in foreign countries, principally in the UK and Germany, totaled approximately $25.8 million and $25.9 million as of September 30, 2023, and December 31, 2022, respectively.

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

Accounts receivable are recorded at the original invoice amount less an estimate for doubtful receivables based on a review of outstanding amounts monthly. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables, considering a customer’s financial condition, and evaluating historical experience and management's expectations of future losses. Accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.

6

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 $2.5 million and $2.4 million for the three months ended September 30, 2023 and 2022, respectively, and includes amortization of assets recorded under finance leases. Depreciation expense totaled $7.2 million and $7.3 million for the nine months ended September 30, 2023 and 2022, 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 $19.5 million and $17.5 million, net of accumulated amortization, as of September 30, 2023 and December 31, 2022, respectively.

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 $4.0 million and $5.1 million for the three months ended September 30, 2023 and 2022, respectively; $1.5 million and $2.5 million of which, respectively, was classified as part of the “Cost of revenues” line in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Amortization expense totaled $11.9 million and $15.1 million for the nine months ended September 30, 2023 and 2022, respectively; $4.2 million and $7.6 million of which, respectively, was classified as part of the “Cost of revenues” line in the Company’s Condensed Consolidated Statements of Comprehensive Loss.

The Company allocates the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The Company recognizes as goodwill the amount by which the purchase price of an acquired entity exceeds the net of the fair values assigned to the assets acquired and liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, the Company uses various recognized valuation methods including the income and market approaches. Further, the Company makes assumptions within certain valuation techniques, including discount rates, royalty rates, and the amount and timing of future cash flows. The Company records the net assets and results of operations of an acquired entity in the financial statements from the acquisition date. The Company initially performs these valuations based upon preliminary estimates and assumptions by management or independent valuation specialists under its supervision, where appropriate, and make revisions as estimates and assumptions are finalized. The Company expenses acquisition-related costs as they are incurred.

Goodwill

Goodwill represents the excess of the total consideration paid over identified intangible and tangible assets of the Company and its acquisitions. 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, 2022 testing date, the Company determined there is one reporting unit.

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Management concluded that there are no triggering events in impairment of goodwill and intangible assets during the nine months ended September 30, 2023. Our goodwill balance is subject 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 tables summarize revenue from contracts with customers for the three and nine months ended September 30, 2023 and 2022 (in thousands):

	2023 Q23						2022 Q3
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	58,077	$	12,982	$	71,059	$	59,966	$	6,478	$	66,444
Data Recovery		8,277		—		8,277		8,100		—		8,100
Total revenue	$	66,354	$	12,982	$	79,336	$	68,066	$	6,478	$	74,544
	2023 YTD						2022 YTD
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	202,619	$	32,011	$	234,630	$	185,105	$	20,346	$	205,451
Data Recovery		25,372		—		25,372		26,182		—		26,182
Total revenue	$	227,991	$	32,011	$	260,002	$	211,287	$	20,346	$	231,633

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.

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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.

Recently Adopted Accounting Standards

The Company is an Emerging Growth Company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and has elected to take advantage of the extended transition period of delaying the adoption of new or revised accounting standards until such time as those standards apply to private companies. This may make the comparison of the Company’s condensed consolidated financial statements to other public companies not meaningful due to the differences in accounting standards being applied.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. On January 1, 2023, the Company adopted ASU 2016-13 using a modified retrospective approach. The adoption did not have a material impact on the Company's condensed consolidated financial statements.

Note 2 – Fair value measurements

The Company accounts for recurring and non-recurring fair value measurements in accordance with ASC 820, Fair Value Measurements. ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosures about fair value measurements. The ASC 820 hierarchy ranks the quality of reliability of inputs, or assumptions, used in the determination of fair value, and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

Level 1 – Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

Level 2 – Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data.

Level 3 – Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by a reporting entity – e.g., determining an appropriate adjustment to a discount factor for illiquidity associated with a given security.

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The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires significant judgments to be made by the Company.

The Company believes that the fair values of its current assets and current liabilities (cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts.

The Company has determined that the 6,350,000 warrants to purchase Common Stock (the “Private Warrants”) issued in connection with the consummation of the Business Combination in December 2019 should be accounted for as liabilities in accordance with ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of Private Warrants in the Condensed Consolidated Statements of Comprehensive Loss. The fair value of the Private Warrants was $0.1 million and $0.6 million as of September 30, 2023 and December 31, 2022, respectively.

Management estimates the carrying amount of the Company’s long-term debt approximates its fair value because the interest rates on these instruments are subject to changes in market interest rates or are consistent with prevailing interest rates.

Note 3 – Leases

The Company’s operating leases are primarily for office space and certain equipment, expiring in various years through 2029. Certain leases contain annual rent escalation clauses. The Company’s finance leases are primarily for data center equipment. As part of the Company’s efforts to optimize its real estate footprint, the Company shortened the lease terms in two locations in 2022. In 2023, the Company partially abandoned two locations and shortened one lease term.

Maturities of lease liabilities as of September 30, 2023 were as follows:

	Finance Leases			Operating Leases
Remainder of 2023	$	430		$	2,075
2024		164			6,680
2025		—			3,456
2026		—			1,802
2027		—			403
Thereafter		—			346
Total undiscounted lease payments	$	594		$	14,762
Less: Interest		(6	)		(1,562	)
Present value of lease liabilities	$	588		$	13,200

Note 4 – Long term debt

The table below summarizes the components of the Company’s long-term debt (in thousands):

	September 30, 2023			December 31, 2022
Convertible Debenture notes due 2024	$	252,337		$	244,808
Amended 2021 Credit Agreement due 2026 (1) (2)		292,500			294,750
Total debt		544,837			539,558
Less: unamortized original issue discount		(6,917	)		(10,751	)
Less: unamortized debt issuance costs		(817	)		(1,278	)
Total debt, net		537,103			527,529
Current portion of debt		292,500			3,000
Less: current portion of unamortized original    issue discount		(2,292	)		—
Less: current portion of unamortized debt    issuance costs		(493	)		—
Total current portion of debt, net		289,715			3,000
Total long-term debt, net	$	247,388		$	524,529

_______________________________

(1)The 2021 Credit Agreement was amended on March 3, 2023.

(2)The Amended 2021 Credit Agreement matures 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. As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Term Loan debt of $292.5 million is included in the current portion of long-term debt.

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Amended 2021 Credit Agreement

On February 8, 2021, the Loan Parties entered into the 2021 Credit Agreement, a new secured credit agreement. Proceeds were used to pay in full all outstanding loans and terminate all lending commitments under the previously outstanding 2016 Credit Agreement.

On March 3, 2023, the Loan Parties entered into the First Amendment to the 2021 Credit Agreement. The First Amendment to the 2021 Credit Agreement provides for the revision of the benchmark interest rate from LIBOR to the secured overnight financing rate, (“SOFR”). At March 31, 2023, all outstanding indebtedness under the Amended 2021 Credit Agreement automatically converted from a LIBOR based loan to the new SOFR based loan at the end of the then-current applicable Interest Period. Additionally, the First Amendment to the 2021 Credit Agreement provides for the addition of the Term SOFR Adjustment of 0.10%, based on the term of the applicable Interest Period, to be added to the Applicable Rate for both SOFR Loans and Base Rate Loans (capitalized terms as defined in the Amended 2021 Credit Agreement).

The Amended 2021 Credit Agreement provides for (i) Initial Term Loans in an aggregate principal amount of $300 million, (ii) Delayed Draw Term Loans in an aggregate principal amount of $50 million, and (iii) Revolving Credit Loans in an aggregate principal amount of $40 million, with a letter of credit sublimit of $10 million. The Delayed Draw Term Loans were available to the Loan Parties at any time prior to February 8, 2023, subject to certain conditions. As of September 30, 2023, there were no outstanding Delayed Draw Term Loans and they are no longer available under the Amended 2021 Credit Agreement.

The Initial Term Loans bear, and while they were available, the Delayed Draw Term Loans bore, interest, at the Loan Parties’ option, at the rate of (x) with respect to SOFR Rate Loans, the Term SOFR Rate with a 1.00% floor, plus 6.50% per annum, plus the Term SOFR Adjustment of 0.10% or (y) with respect to Base Rate Loans, the Base Rate plus 5.50% per annum, plus the Term SOFR Adjustment of 0.10%.

The Revolving Credit Loans bear interest, at our option, at the rate of (x) with respect to SOFR Rate Loans, the Term SOFR Rate plus 4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus 3.00% per annum. The Initial Term Loans amortize at a rate of 1.00% of the aggregate principal amount of Initial Term Loans outstanding, payable in consecutive quarterly installments of $0.8 million, beginning on June 30, 2021. On September 30, 2023, the balance due was $292.5 million with a Term SOFR Rate of 5.39008% plus the Term SOFR Adjustment of 0.10%, plus 6.50% per annum.

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 Initial Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the Amended 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the Amended 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.

The obligations under the Amended 2021 Credit Agreement are secured by substantially all of the Loan Parties’ assets. The Amended 2021 Credit Agreement contains customary affirmative and negative covenants as well as a financial maintenance covenant that requires the Loan Parties to maintain a First Lien Net Leverage Ratio (as defined in the Amended 2021 Credit Agreement) of less than or equal to 7.00 to 1.00, tested at the end of each fiscal quarter. The Company was in compliance with all Amended 2021 Credit Agreement covenants as of September 30, 2023.

The Company incurred closing fees of $8.0 million in connection with the original entry into the 2021 Credit Agreement. These fees will be amortized over the full term of the Amended 2021 Credit Agreement.

Revolving Credit Loans

The Amended 2021 Credit Agreement also provides for an unfunded revolver commitment for borrowing up to $40.0 million. As of September 30, 2023, there was $39.4 million available capacity for borrowing under the Revolving Credit Loan commitment due to the $0.6 million of letters of credit outstanding (See Note 8 – Commitments and Contingencies).

Convertible Debentures

On December 19, 2019, the Company issued Convertible Debentures, which mature in 2024, in an aggregate principal amount of $200 million. At September 30, 2023 and December 31, 2022, the balance due under the Convertible Debentures was $252.3 million and $244.8 million, respectively.

The Convertible Debentures will mature on December 19, 2024 unless earlier converted, redeemed or repurchased, and bear interest at an annual rate of 4.00% in cash, payable quarterly, and 4.00% in kind, accrued quarterly, on the last business day of March, June, September and December. In addition, on each anniversary of the Closing Date, the Company will increase the principal amount of the Debentures by an amount equal to 3.00% of the original aggregate principal amount of the Debentures outstanding (subject to reduction for any principal amount repaid). The additional payment will accrue from the last payment date for the additional payment (or the Closing Date if no prior payment has been made), and will also be payable at maturity, upon conversion and upon an optional redemption.

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At any time, upon notice as set forth in the Debentures, the Debentures will be redeemable at the Company’s option, in whole or in part, at a price equal to 100% of the principal amount of the Debentures redeemed, plus accrued and unpaid interest thereon. The Debentures are convertible into shares of common stock at the option of the Debenture holders at any time and from time to time at a price of $18 per share, subject to certain adjustments. However, in the event the Company elects to redeem any Debentures, the holders have a right to purchase common stock from the Company in an amount equal to the amount redeemed at the conversion price.

The Debentures contain covenants that limit the Company’s ability to, among other things: (i) incur additional debt; (ii) create liens on assets; (iii) engage in certain transactions with affiliates; or (iv) designate the Company’s subsidiaries as unrestricted subsidiaries. The Debentures provide for customary events of default, including non-payment, failure to comply with covenants or other agreements in the Debentures and certain events of bankruptcy or insolvency. If an event of default occurs and continues, the holders of at least 25% in aggregate principal amount of the outstanding Debentures may declare the entire principal amount of all the Debentures to be due and payable immediately. As of September 30, 2023, the Company was in compliance with all Debenture covenants.

Note 5 – Equity incentive plan

On December 19, 2019, the Company adopted the 2019 Incentive Award Plan (the “2019 Plan”) under which eligible employees, officers, directors and consultants of the Company may be granted incentive or non-qualified stock options, restricted stock, restricted stock units (“RSUs”), or other stock-based awards, including shares of Common Stock. Pursuant to the 2019 Plan, the number of shares of Common Stock available for issuance under the 2019 Plan automatically increases on each January 1 (commencing with January 1, 2021) until and including January 1, 2029, by an amount equal to the lesser of: (a) 5% of the shares of Common Stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by our Board of Directors (the “Board”). The Compensation Committee of the Board approved an increase to the share reserve as set out in the 2019 Plan in the amount of 2,146,006 shares in April 2023. As of September 30, 2023, 13,906,684 shares of Common Stock were reserved under the 2019 Plan, of which 2,512,708 shares of Common Stock remained available for issuance.

Stock option activity

The following table summarizes the Company’s stock option activity under the 2019 Plan:

Description	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (1)
Options outstanding, December 31, 2022		5,757,779		$	7.92		7.60
Granted		990,296			1.05			$	1,330,150
Exercised		—			—
Forfeited		(25,190	)		5.58
Expired		(160,942	)		8.08
Options outstanding, September 30, 2023		6,561,943		$	9.88		7.33	$	1,330,150
Options vested and exercisable, September 30, 2023		4,509,168		$	8.22		6.67	$	—
Options vested and expected to vest, September 30, 2023		6,561,943		$	9.88		7.33	$	1,330,150

_______________________________

(1)Aggregate intrinsic value (in thousands) represents the difference between the estimated fair value of the underlying Common Stock and the exercise price of outstanding in-the-money options.

The following table summarizes additional information on stock option grants and vesting (in thousands):

	2019 Plan
	Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022
Total fair value of stock options granted	$	941	$	2,898
Total fair value of options vested		1,784		944

Time-based vesting stock options

Time-based vesting stock options generally vest over a three-year period, are subject to graded vesting schedules, and expire ten years from the date of grant or within 90 days of termination of employment. The weighted-average fair value per share of time-based vesting stock options granted by the Company was $0.95 and $2.55, during the nine months ended September 30, 2023 and 2022, respectively.

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For the three months ended September 30, 2023 and 2022, the Company recognized $0.8 million and $1.3 million of stock-based compensation expense, respectively, in connection with time-based vesting stock options. For the nine months ended September 30, 2023 and 2022, the Company recognized $2.6 million and $3.7 million of stock-based compensation expense, respectively, in connection with time-based vesting stock options. As of September 30, 2023 and 2022, there was $2.3 million and $3.9 million of unrecognized stock-based compensation expense, respectively, related to unvested time-based vesting stock options that is expected to be recognized over a weighted-average period of 1.7 and 2.0 years, respectively.

Stock Option Valuation

The Company used valuation models to value the time based vesting stock options granted during the nine months ended September 30, 2023 and 2022. The following table summarizes the assumptions used in the valuation models to determine the fair value of awards granted to employees and non-employee directors under the 2019 Plan:

	Nine Months Ended September 30, 2023			Nine Months Ended September 30, 2022
Expected volatility		41.2	%	42.78% - 42.90	%
Expected term (in years)		6.00		6.00
Dividend yield		0.00	%	0.00	%
Risk-free interest rate		3.61	%	1.62% - 2.71	%

A discussion of management’s methodology for developing each of the assumptions used in the valuation model follows:

•Expected volatility – Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses an estimated volatility based on the historical and implied volatilities of comparable companies.

•Expected term – This is the period that the options granted are expected to remain unexercised. For options granted during the three and nine months ended September 30, 2023 and 2022, the Company derived the expected life of the option based on the average midpoint between vesting and the contractual term as there is little exercise history.

•Dividend yield – The Company has never declared or paid dividends and have no plans to do so in the foreseeable future.

•Risk-free interest rate – This is the U.S. Treasury rate for securities with similar terms that most closely resembles the expected life of the option.

•Forfeiture rate – Forfeitures are included in compensation cost as they occur.

Stock-based compensation expense

Stock-based compensation expense is included in the Company’s Condensed Consolidated Statements of Comprehensive Loss within the following line items (in thousands):

	Three Months Ended September 30, 2023		Three Months Ended September 30, 2022		Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022
Cost of revenues	$	228	$	396	$	699	$	1,158
General and administrative		422		556		1,319		1,475
Research and development		103		159		273		396
Sales and marketing		88		185		260		626
Total	$	841	$	1,296	$	2,551	$	3,655

Performance-based restricted stock units

Periodically, the Company granted RSUs to certain employees which are subject to certain vesting criteria. These RSUs become eligible to begin vesting upon a liquidity event (as defined in the award agreements governing the RSUs). The amount and timing of the vesting of the RSUs depends on the type and timing of the liquidity event as it relates to the Closing Date. Generally, a portion of the RSUs were scheduled to first vest upon the occurrence of the liquidity event and the remainder were scheduled to vest in up to three annual installments thereafter. Because no liquidity event occurred before the third anniversary of the Closing Date, all RSUs are scheduled to vest immediately upon a future liquidity event.

The Company determined the achievement of a liquidity event was not probable and therefore no expense has been recorded related to the RSU awards that vest solely upon a liquidity event.

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During the first nine months of 2023 and 2022, the Company granted 369,056 and 463,000 performance-based RSUs, respectively, to certain employees, 50% of which vest based on the achievement of annual consolidated revenue targets and 50% of which vest based on the achievement of certain annual Nebula revenue targets. These units will vest over three annual installments based on the achievement of the annual consolidated revenue and Nebula revenue performance conditions and are not subject to any liquidity event vesting condition. In the event that the performance conditions are not met in the first or second year, all units granted will vest in the third year if the cumulative performance conditions are met at that time. The grant of awards with performance conditions supports the Company’s goal of aligning executive incentives with long-term stockholder value and ensuring that executive officers have a continuing stake in the long-term success of the Company.

The Company determined the three-year achievement of the overall Company revenue and Nebula revenue targets was probable and incurred $0.2 million and $0.1 million of stock-based compensation expense for the three months ended September 30, 2023 and 2022, respectively, with respect to the performance-based RSUs granted in the second quarter of 2023 and 2022.

The vesting of the RSUs held by a grantee is generally subject to his or her continued employment with the Company.

During the second quarter of 2023, the Company’s Board of Directors approved the vesting of 73,726 performance-based RSUs previously granted to certain employees. The shares issued upon the vesting of the RSUs were distributed to the employees during the second quarter.

Time-based restricted stock units

The Company grants certain non-employee directors time-based RSUs in satisfaction of their annual retainer payments. These RSUs vest over a one-year or three-year period. During the three months ended September 30, 2023 and 2022, the Company recognized the grant-date fair value of the RSUs granted to non-employee directors of $0.2 million and $0.2 million as stock-based compensation expense, respectively. During the nine months ended September 30, 2023 and 2022, the Company recognized as stock-based compensation expense the grant-date fair value of the RSUs granted to non-employee directors of $0.6 million and $0.5 million, respectively.

The following table summarizes the Company’s RSU activity for performance based RSUs awarded to employees and for time-based RSUs granted to non-employee directors under the 2019 Plan:

Description	RSUs Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
RSUs non-vested, December 31, 2022		1,876,669		$	6.45		6.10
Granted		788,120			2.03		—
Vested		(190,059	)		6.52		—
Forfeited		(27,642	)		6.44		—
Expired		—			—		—
RSUs non-vested, September 30, 2023		2,447,088		$	5.99		5.78

Note 6 – Equity

The Company is authorized to issue up to 200,000,000 shares of Common Stock and 1,000,000 shares of preferred stock, $0.0001 par value per share. Each holder of Common Stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. The holders of the Common Stock are entitled to receive dividends out of assets legally available at the times and in the amounts as the Company's Board of Directors may from time to time determine. In the event of any liquidation, dissolution or winding up of the Company, the assets of the Company shall be distributed ratably among the holders of the then outstanding Common Stock.

There were no stock issuances during the three months ended September 30, 2023 and 2022, respectively, other than pursuant to stock option exercises, vesting of certain performance based RSUs and vesting of non-employee director RSUs.

Warrants

On the Closing Date, in connection with the consummation of the Business Combination, the Company assumed (i) 23,000,000 warrants (the “Public Warrants”) to purchase shares of Common Stock and (ii) 6,350,000 Private Warrants (together with the Public Warrants, the “Warrants”). The Public Warrants qualify for equity accounting as these warrants do not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The Private Warrants qualify for liability accounting as these warrants fall within the scope of ASC 480.

Each warrant entitles the holder to purchase one share of Common Stock for $11.50 per share. If exercised by the initial purchaser of the Private Warrant or certain permitted transferees, the purchase can occur on a cashless basis. The Warrants will expire on December 19, 2024 or earlier upon redemption or liquidation.

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If the reported last sale price of the Company's common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending three business days before the Company sends the notice of redemption to the warrant holders, the Company may redeem all the Public Warrants at a price of $0.01 per warrant upon not less than 30 days’ prior written notice.

If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a cashless basis. The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. The warrants will not be adjusted for the issuance of common stock at a price below its exercise price. The Company will not be required to net cash settle the warrants.

The Private Warrants are identical to the Public Warrants except that the Private Warrants will be exercisable on a cashless basis and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

Shares Subject to Forfeiture

On December 19, 2019, in connection with the consummation of the Business Combination, 550,000 shares of common stock held by Pivotal Acquisition Holdings LLC and its permitted transferees were subjected to an additional lockup that will be released only if the last reported sale price of the common stock equals or exceeds $15.00 for a period of 20 consecutive trading days during the five-year period following the Closing Date. If the last reported sale price of common stock does not equal or exceed $15.00 within five years from the Closing Date, such shares will be forfeited to the Company for no consideration. These shares are reported as outstanding in the Company’s financial statements and continue to be subject to the additional lockup as of September 30, 2023.

Note 7 – Income taxes

A valuation allowance has been established against the Company’s net U.S. federal and state deferred tax assets, including net operating loss (“NOL”) carryforwards. As a result, the Company’s income tax provision is primarily related to foreign tax activity and U.S. deferred taxes for tax deductible goodwill and other indefinite-lived liabilities. During the three months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $1.1 million and $0.6 million, respectively, resulting in an effective tax rate of (10.7)% and (3.6)%, respectively. During the nine months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $1.5 million and $1.2 million, respectively, resulting in an effective tax rate of (7.9)% and (3.2)%, respectively. These effective tax rates differ from the U.S. federal statutory rate primarily due to the effects of foreign tax rate differences, U.S. state and local income taxes and the valuation allowance against our domestic deferred tax assets.

The Inflation Reduction Act of 2022 (“IRA”) was signed into law on August 16, 2022. The bill was meant to address the high inflation rate in the U.S. through various climate, energy, healthcare, and other incentives. These incentives are meant to be paid for by the tax provisions included in the IRA that became effective on January 1, 2023, such as a new 15% corporate minimum tax, a 1% new excise tax on stock buybacks, additional IRS funding to improve taxpayer compliance, and others. At this time, none of the IRA tax provisions are expected to have a material impact to the Company's tax provision. The Company will continue to monitor for updates to the Company's business along with guidance issued with respect to the IRA to determine whether any adjustments are needed to the Company's tax provision in future periods.

Note 8 – Commitments and contingencies

The Company is involved in various legal proceedings, which arise occasionally in the normal course of business. While the ultimate results of such matters generally cannot be predicted with certainty, management does not expect such matters to have a material effect on the financial position and results of operations as of September 30, 2023.

The Company has two letters of credit totaling $0.6 million as of September 30, 2023 as additional security for lease guarantees related to leased properties.

Note 9 – Related parties

As of September 30, 2023, $126.2 million including paid-in kind interest of the Company's Convertible Debentures was owed to affiliates of MGG Investment Group, which is an affiliate of a director of the Company. For the three months ended September 30, 2023 and 2022, the Company recognized $3.7 million and $3.5 million in interest expense, respectively, and for the nine months ended September 30, 2023 and 2022, the Company recognized $11.0 million and $10.3 million in interest expense, respectively, related to the Convertible Debentures owned by affiliates of the MGG Investment Group.

Note 10 – Subsequent events

The Company has evaluated subsequent events since the date on which these financial statements were issued through the date on which this Quarterly Report on Form 10-Q was filed and did not identify any additional items for disclosure.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including information incorporated herein by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Exchange Act of 1934, as amended, that are not historical facts. This includes, without limitation, statements regarding our financial position, business strategy and management’s plans and objectives for future operations. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Quarterly Report on Form 10-Q, words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “strive,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. When we discuss our strategies or plans, we are making projections, forecasts or forward-looking statements. Such statements are based on the beliefs of, as well as assumptions made by and information currently available to, our management.

All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect, including:

•consequences of our substantial levels of indebtedness, including the pending maturity and potential acceleration thereof in June 2024, and our ability to repay our debt obligations as they become due or to secure alternative sources of cash or additional financing;

•potential failure to comply with privacy and information security regulations governing the client datasets that we process and store;

•the ability to operate in highly competitive markets, and potential adverse effects of this competition;

•
risk of decreased revenues if we do not adapt our pricing models to compete successfully;

•the ability to attract, motivate and retain qualified employees, including members of our senior management team;
 

•the ability to maintain a high level of client service and expand operations;

•potential issues with our product offerings that could cause legal exposure, reputational damage and an inability to deliver services;

•the ability to develop and successfully grow revenues from new products such as Nebula, improve existing products and adapt our business model to keep pace with industry trends;

•risk that our products and services fail to interoperate successfully with third-party systems;

•potential unavailability of third-party technology that we use in our products and services;

•potential disruption of our products, offerings, website and networks;

•difficulties resulting from our implementation of new consolidated business systems;

•the ability to deliver products and services following a disaster or business continuity event;

•the outbreak of 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;

•the ability to comply with various trade restrictions, such as sanctions and export controls, resulting from our international operations;

•potential impairment charges related to goodwill, identified intangible assets and fixed assets;

•impacts of laws and regulations on our business;

•macroeconomic conditions, including inflationary pressures, rising interest rates, exchange rate volatility, and recessionary fears;

•potential litigation and regulatory proceedings involving us;

•expectations regarding the time during which we will be an emerging growth company or smaller reporting company;

•the potential liquidity and trading volume of our public securities;

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•political unrest, international hostilities, military actions, including, without limitation, the wars in Ukraine and Gaza, terrorist or cyber-terrorist activities and other geopolitical events; and

•other risks and uncertainties indicated in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q.

The forward-looking statements contained in this Quarterly Report on Form 10-Q and in any document incorporated by reference are based on current expectations and beliefs, which we believe to be reasonable, concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (many of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2022. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

In addition, statements that include phrases such as “we believe” and similar phrases reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for these statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

Throughout this section, unless otherwise specified or where the context requires otherwise, references to “we,” “us,” “our,” “Company,” “KLDiscovery,” “KLD,” or “KLDiscovery Inc.” refer to KLDiscovery Inc. and its consolidated subsidiaries. The following overview provides a summary of the sections included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations:

•Overview and Key Components of Our Results of Operations — a general description of our business and components of our financial statements and key highlights for the three and nine months ended September 30, 2023.

•Results of Operations — an analysis of our results of operations in our condensed consolidated financial statements.

•Liquidity and Capital Resources — an analysis of our cash flows, sources and uses of cash, and commitments and contingencies.

OVERVIEW

KLD is a leading global provider of eDiscovery, information governance and data recovery solutions to corporations, law firms, insurance agencies and individuals. We provide technology solutions to help our clients solve complex legal, regulatory and data challenges. We have broad geographical coverage in the eDiscovery and data recovery industries with 25 locations in 16 countries, as well as 9 data centers and 13 data recovery labs globally. Our integrated proprietary technology solutions enable the efficient and accurate collection, processing, transmission, review and/or recovery of complex and large-scale enterprise data. In conjunction with proprietary technology, we provide immediate expert consultation and 24/7/365 support wherever a customer is located worldwide, which empowers us to become a “first-call” partner for mission-critical, time-sensitive, or nuanced eDiscovery and data recovery challenges. We are continuously innovating to provide a more reliable, secure and seamless experience when tackling various “big data” volume, velocity, and veracity challenges. A key example of our purpose-built innovation is Nebula, our flagship, end-to-end artificial intelligence/machine learning, or AI/ML, powered solution that serves as a singular platform of engagement for legal data.

Key factors affecting our performance

Our operating results, financial performance and future growth will depend on a variety of factors, including, among others, maintaining our history of product innovation, increasing adoption of Nebula, maintaining and growing our client base while driving greater penetration, growth in the number of our matters, particularly large matters and establishing our partner channel for Nebula. Some of the more important factors are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on March 16, 2023 (our “Annual Report”), as supplemented by the additional discussion below.

Key business metrics

The following are among the key operational and financial metrics we use to measure and evaluate our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

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Clients

We have a strong track record of growing our client base, and we believe that our ability to increase the number of clients utilizing our Legal Technology solutions, including Nebula, is an important indicator of our market penetration, our business growth, and our future opportunities.

We define Legal Technology clients as each primary law firm and corporation to which we provided services in a litigation matter that we billed during the past two years. We define Nebula clients, each of which is included in the number of Legal Technology clients, as the total number of primary law firm, corporation, insurance company and service provider clients to which we provided legal technology solutions for a matter that we billed for use of our Nebula solution during the two years prior to the applicable date.

The following table sets forth the number of Legal Technology clients and Nebula clients as of the dates shown:

	September 30,
	2023		2022
Legal Technology clients		6,255		5,815
Nebula clients		1,682		1,514

Number and size of matters

We believe our ability to continuously grow the number of matters on our platform over time is an important measure of scale for our business and is indicative of our future growth prospects.

We define Legal Technology matters as the total number of matters on which our Legal Technology solutions were used in the twelve months preceding the applicable date. Matters refer to a range of activities that include collecting, tracking, analyzing, and exchanging relevant data. Legal Technology solutions currently drive the majority of our revenue, and provide the foundation for additional adoption of our proprietary technology solutions and other offerings. We define Nebula matters, which are included in the number of Legal Technology matters, as the total number of matters on which our Nebula solution was used in the twelve months preceding the applicable date. Nebula is our ecosystem of proprietary technology solutions that enables clients to collect, process, store, analyze, and govern their data on a single platform. Nebula comprises a steadily growing component of our revenue and we expect Nebula adoption to increase and the number of Nebula matters to grow in the long term as we continue to introduce new product capabilities and cross-sell Nebula to our existing clients.

The following table sets forth the number of Legal Technology matters and Nebula matters as of the dates shown:

	September 30,
	2023		2022
Legal Technology matters		8,086		7,928
Nebula matters		1,338		1,163

Our comprehensive product offerings, technology-enabled service offerings and reputation as a trusted partner to our clients enable us to capture matters of large size and complexity. For the three and nine months ended September 30, 2023 and 2022, 53% and 46% of Legal Technology revenue, respectively, was produced by matters that generated revenues of greater than $500,000, and 79% and 76% of our Legal Technology revenue, respectively, was produced by matters that generated revenues of greater than $100,000 during the relevant period.

Legal Technology net revenue retention

We calculate our Legal Technology net revenue retention rate by dividing (1) total Legal Technology revenue in the twelve-month period from accounts that generated Legal Technology revenue during the corresponding immediately preceding twelve-month period by (2) total Legal Technology revenue in the immediately preceding twelve-month period generated from those same accounts. Our Legal Technology net revenue retention rate includes revenue from use of Nebula.

	Twelve Months Ended September 30,
	2023	2022
Legal Technology net revenue retention	104%	95%

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For the three months ended September 30, 2023 and 2022, our Legal Technology revenue was $71.1 million and $66.4 million, respectively, and our data recovery revenue was $8.3 million and $8.1 million, respectively. For the nine months ended September 30, 2023 and 2022, our Legal Technology revenue was $234.6 million and $205.5 million, respectively, and our data recovery revenue was $25.4 million and $26.2 million, respectively.

Our Legal Technology net revenue retention rate is impacted by our usage-based pricing model, and revenue could fluctuate in any given period due to timing and volume of matters, client upsell, cross-sell, and churn. We believe global macroeconomic challenges, including inflation and the war in Ukraine, had a significant adverse impact on the Company and the overall market in 2022. Large jobs were delayed and significant revenue opportunities that we typically rely on were not as abundant as we expected. Our revenues increased during the first nine months of this year as we saw an uptick in large jobs. In the long-term, we plan to increase our net revenue retention rate by increasing the number of solutions that we sell on a subscription-basis, as well as broadening the scope of our Nebula offerings, to promote strong product adoption. As we expand our products beyond eDiscovery to other information governance solutions such as big data hosting and processing, including through Nebula, we expect clients to leverage our technology earlier in the data lifecycle, providing further opportunity for us to increase our product and service penetration and client retention. Furthermore, we plan to establish and broaden our channel partnerships over time and leverage these strong relationships to further our awareness of our products and overall usage within the industry.

KEY COMPONENTS OF OUR RESULTS OF OPERATIONS

Revenue

The Company primarily generates revenue from selling solutions that fall into the following categories:

(1)Legal Technology, including Nebula and our expansive suite of technology solutions, such as our 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 solutions to our clients. Most of the Company’s eDiscovery contracts are time and materials types of arrangements, while others are subscription-based, fixed-fee 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. The Company recognizes revenues for these arrangements utilizing a right-to-invoice practical expedient because it has a contractual right to consideration for services completed to date.

Certain of the Company’s eDiscovery contracts are subscription-based, fixed fee arrangements, which have tiered pricing based on the quantity of data hosted. For a fixed monthly fee, the Company’s clients receive a variety of optional eDiscovery solutions, which are included in addition to the data hosting. The Company recognizes revenues for these arrangements based on predetermined monthly fees as determined in its contractual agreements, utilizing a right-to-invoice practical expedient because the Company has a contractual 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 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 engagements are mainly fixed fee arrangements requiring the client to pay a pre-established fee in exchange for the successful completion of such engagement on a predetermined device. For the recovery 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 engagements are also 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.

For the three months ended September 30, 2023 and 2022, our Legal Technology revenue was $71.1 million and $66.4 million, respectively, and our data recovery revenue was $8.3 million and $8.1 million, respectively. For the nine months ended September 30, 2023 and 2022, our Legal Technology revenue was $234.6 million and $205.5 million, respectively, and our data

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recovery revenue was $25.4 million and $26.2 million, respectively. For the three months ended September 30, 2023 and 2022, Legal Technology revenue from our technology solutions other than Nebula was $58.1 million and $60.0 million respectively, and revenue from Nebula was $13.0 million and $6.5 million, respectively. For the nine months ended September 30, 2023 and 2022, Legal Technology revenue from our technology solutions other than Nebula was $202.6 million and $185.1 million respectively, and revenue from Nebula was $32.0 million and $20.3 million, respectively.

We currently expect that Nebula revenue will continue to accelerate, with Nebula growing as a larger percentage of the mix of total revenue over time.

Cost of Revenues

Cost of revenue consists primarily of technology infrastructure costs, personnel costs and amortization of capitalized developed technology costs. Infrastructure costs include hardware, software, occupancy and cloud costs to support our legal technology and data recovery solutions. Personnel costs include salaries, benefits, bonuses, and stock-based compensation as well as costs associated with document reviewers which are variable based on managed review revenue. We intend to continue to invest additional resources in our infrastructure to expand the capability of solutions and enable our customers to realize the full benefit of our solutions. The level, timing and relative investment in our cloud infrastructure could affect our cost of revenue in the future. Additionally, cost of revenue in future periods could be impacted by fluctuations in document reviewer costs associated with managed review revenue.

Operating expenses

Our operating expenses consist of research and development, sales and marketing, general and administrative and amortization and depreciation expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, share-based compensation and sales commissions. Operating expenses also include occupancy, software expense and professional services. We intend to continue to increase our investment in research and development to further develop our proprietary technology and support further penetration and adoption of our offerings, including our end-to-end Nebula platform, including through hiring additional personnel. We expect these investments to cause research and development expense to slightly increase over the prior year, while staying fairly consistent as a percentage of revenue in 2023 and thereafter. We expect sales and marketing expense to decline in the next year as we realize the full year benefits of the optimization of data recovery personnel as we unified our inbound and business development teams. The optimization of personnel combined with anticipated increased revenue will result in slightly decreasing sales and marketing expense as a percentage of revenue in the next year and normalizing as a percentage of revenues thereafter. We also expect general and administrative expense to decrease in the next year due to savings associated with the consolidation of our real estate footprint, as well as vacated lease costs and public offering costs that are not expected to recur in 2023 or future periods. General and administrative expense as a percentage of revenue is expected to decline over time due to our ability to scale as revenues increase and as a result of historical cost-cutting measures.

Interest Expense

Interest expense consists primarily of interest payments and accruals relating to outstanding borrowings. We expect interest expense to vary each reporting period depending on the amount of outstanding borrowings and prevailing interest rates.

Income Tax Provision

The income tax provision is primarily related to foreign tax activity and U.S. deferred taxes for tax deductible goodwill and other indefinite-lived liabilities. We maintain a valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be utilized.

Non-U.S. 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 costs 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.

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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.

Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by any of these adjustments, or that our projections and estimates will be realized in their entirety or at all. In addition, because of these limitations, adjusted EBITDA should not be considered as a measure of liquidity or discretionary cash available to us to fund our cash needs, including investing in the growth of our business and meeting our obligations.

The use of EBITDA and adjusted EBITDA instead of U.S. GAAP measures has limitations as an analytical tool, and adjusted EBITDA should not be considered in isolation, or as a substitute for analysis of our results of operations and operating cash flows as reported under U.S. GAAP. For example, EBITDA and adjusted EBITDA do not reflect:

•our cash expenditures or future requirements for capital expenditures;

•changes in, or cash requirements for, our working capital needs;

•interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

•any cash income taxes that we may be required to pay;

•any cash requirements for replacements of assets that are depreciated or amortized over their estimated useful lives and may have to be replaced in the future; or

•all non-cash income or expense items that are reflected in our statements of cash flows.

See “—Results of Operations” below for reconciliations of adjusted EBITDA to net loss.

RESULTS OF OPERATIONS

For the three months ended September 30, 2023 compared with the three months ended September 30, 2022

The results for the periods shown below should be reviewed in conjunction with our unaudited condensed consolidated financial statements included in “Item 1. Financial Statements.”

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The following table sets forth statements of operations data for each of the periods indicated:

	For the Three Months Ended September 30,
(in millions)	2023			2022
Revenues	$	79.3		$	74.5
Cost of revenues		39.6			40.8
Gross profit		39.7			33.7
Operating expenses		32.8			36.6
Income (Loss) from operations		6.9			(2.9	)
Interest expense		17.2			14.0
Change in fair value of Private Warrants		(0.1	)		(0.1	)
Loss before income taxes		(10.3	)		(16.8	)
Income tax provision		1.1			0.6
Net loss		(11.4	)		(17.4	)
Total other comprehensive loss, net of tax		(2.4	)		(4.7	)
Comprehensive loss		(13.8	)		(22.1	)

Adjusted EBITDA

	For the Three Months Ended September 30,
(in millions)	2023			2022
Net Loss	$	(11.4	)	$	(17.4	)
Interest expense		17.2			14.0
Income tax provision		1.1			0.6
Depreciation and amortization expense		7.0			7.9
EBITDA (1)	$	13.9		$	5.1
Acquisition, financing and transaction costs		0.6			2.6
Stock compensation and other		0.9			1.3
Change in fair value of Private Warrants		(0.1	)		(0.1	)
Restructuring costs		0.5			2.2
Systems establishment costs		0.1			0.2
Adjusted EBITDA (1)	$	15.9		$	11.3

_______________________________

(1)EBITDA and adjusted EBITDA are non-GAAP measures. See “—Non-U.S. GAAP Financial Measures.”

Revenues

Revenues increased by $4.8 million, or 6.4%, to $79.3 million for the three months ended September 30, 2023 as compared to $74.5 million for the three months ended September 30, 2022. This is due to an increase in Legal Technology revenue of $4.6 million resulting from an increase of $6.5 million from Nebula which included processing revenue which, starting in May 2023, is being performed for the majority of our clients using the Nebula platform partially offset by a decrease of $1.9 million from our technology solutions other than Nebula, due to lower volume of jobs.

Cost of Revenues

Cost of revenues decreased by $1.2 million, or 2.9%, to $39.6 million for the three months ended September 30, 2023 as compared to $40.8 million for the three months ended September 30, 2022. This decrease is primarily due to decreased amortization of $1.1 million associated with acquired intangibles that have fully amortized and decreased personnel expenses of $0.7 million primarily due to decreased managed review wages, partially offset by increased software expense of $0.9 million. As a percentage of revenue, our cost of revenues for the three months ended September 30, 2023 decreased to 49.9% as compared to 54.8% for the three months ended September 30, 2022, and was primarily due to the higher revenue combined with the decrease in amortization expense.

Gross Profit

Gross profit increased by $6.0 million, or 17.8%, to $39.7 million for the three months ended September 30, 2023 as compared to $33.7 million for the three months ended September 30, 2022. Gross profit increased primarily due to the factors noted above. As a percentage of revenue, our gross profit for the three months ended September 30, 2023 increased to 50.1% as compared to 45.2% for the three months ended September 30, 2022, and was due to the increase in revenue, coupled with a decrease in cost of revenues.

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Operating Expenses

Operating expenses decreased by $3.8 million, or 10.4%, to $32.8 million for the three months ended September 30, 2023 as compared to $36.6 million for the three months ended September 30, 2022. This decrease is primarily the result of a $2.6 million decrease in occupancy expense associated with the consolidation of our real estate footprint, and a $1.3 million decrease in severance costs related to the integration of our data storage and technology business. As a percentage of revenue, our operating expenses for the three months ended September 30, 2023 decreased to 41.4% as compared to 49.1% for three months ended September 30, 2022.

Interest Expense

Interest expense increased by $3.2 million, or 22.9%, to $17.2 million for the three months ended September 30, 2023 as compared to $14.0 million for the three months ended September 30, 2022. The increase is primarily due to an increase in the variable interest rate on borrowings under the Amended 2021 Credit Agreement, which resulted in a $2.2 million increase in expense, a $0.6 million increase due to the acceleration of debt issuance costs related to the reclassification of the Amended 2021 Credit Agreement to short term debt as it will now likely mature in June 2024, and an increase in the debt balance due to the quarterly accruals of Paid in Kind (“PIK”) interest on the Convertible Debentures issued by the Company, which resulted in a $0.2 million increase in interest expense.

Change in Fair Value of Private Warrants

For the three months ended September 30, 2023 the Company recorded a decrease to the Private Warrant liability of $0.1 million and for the three months ended September 30, 2022 the Company recorded a decrease to the Private Warrant liability of $0.1 million.

Income Tax Provision

During the three months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $1.1 million and $0.6 million, respectively, resulting in an effective tax rate of (10.7)% and (3.6)%, respectively. These effective tax rates differ from the U.S. federal statutory rate primarily due to the effects of foreign tax rate differences, U.S. state and local income taxes and the valuation allowance against our domestic deferred tax assets. The effective rate for the three months ended September 30, 2023 changed from the three months ended September 30, 2022 primarily due to a change in the allocation of our pre-tax earnings and losses among countries with differing statutory tax rates.

A valuation allowance has been established against our net U.S. federal and state deferred tax assets, including net operating loss carryforwards. As a result, our income tax provision is primarily related to foreign taxes and U.S. deferred taxes for tax deductible goodwill and other indefinite-lived liabilities.

Net Loss

Net loss for the three months ended September 30, 2023 was $(11.4) million compared to $(17.4) million for the three months ended September 30, 2022. Net loss decreased $6.0 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due to the factors noted above.

For the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022

The results for the periods shown below should be reviewed in conjunction with our unaudited condensed consolidated financial statements included in “Item 1. Financial Statements.”

The following table sets forth statements of operations data for each of the periods indicated:
 

	For the Nine Months Ended September 30,
(in millions)	2023			2022
Revenues	$	260.0		$	231.6
Cost of revenues		128.2			123.7
Gross profit		131.8			107.9
Operating expenses		102.2			106.2
Income from operations		29.6			1.7
Interest expense		49.2			39.5
Change in fair value of Private Warrants		(0.6	)		(0.8	)
Loss before income taxes		(19.0	)		(37.0	)
Income tax provision		1.5			1.2
Net loss		(20.5	)		(38.2	)
Total other comprehensive loss, net of tax		(1.8	)		(12.5	)
Comprehensive loss		(22.3	)		(50.7	)

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Adjusted EBITDA

	For the Nine Months Ended September 30,
(in millions)	2023			2022
Net Loss	$	(20.5	)	$	(38.2	)
Interest expense		49.2			39.5
Income tax provision		1.5			1.2
Depreciation and amortization expense		20.4			23.6
EBITDA (1)	$	50.6		$	26.1
Acquisition, financing and transaction costs		2.7			5.6
Stock compensation and other		2.6			3.8
Change in fair value of Private Warrants		(0.6	)		(0.8	)
Restructuring costs		1.2			2.3
Systems establishment costs		0.5			0.8
Adjusted EBITDA (1)	$	57.0		$	37.8

_______________________________

(1)EBITDA and adjusted EBITDA are non-GAAP measures. See “—Non-U.S. GAAP Financial Measures.”

Revenues

Revenues increased by $28.4 million, or 12.3%, to $260.0 million for the nine months ended September 30, 2023 as compared to $231.6 million for the nine months ended September 30, 2022. This is due to an increase in Legal Technology revenue of $29.2 million resulting from an increase of $17.5 million from our technology solutions other than Nebula and an increase of $11.7 million from Nebula due to higher volume, partially offset by a decrease in data recovery revenue of $0.8 million as a result of a lower volume of large jobs.

Cost of Revenues

Cost of revenues increased by $4.5 million, or 3.6%, to $128.2 million for the nine months ended September 30, 2023 as compared to $123.7 million for the nine months ended September 30, 2022. This increase is primarily due to increased personnel expenses of $4.5 million primarily due to increased managed review wages, increased software expense of approximately $2.7 million and increased professional services of $1.0 million, partially offset by decreased amortization of $3.4 million associated with acquired intangibles that have fully amortized and decreased facilities-related communication expense of $0.3 million primarily resulting from the reduced real estate footprint. As a percentage of revenue, our cost of revenues for the nine months ended September 30, 2023 decreased to 49.3% as compared to 53.4% for the nine months ended September 30, 2022, and was primarily due to the higher revenue combined with the decrease in amortization expense.

Gross Profit

Gross profit increased by $23.9 million, or 22.2%, to $131.8 million for the nine months ended September 30, 2023 as compared to $107.9 million for the nine months ended September 30, 2022. Gross profit increased primarily due to the factors noted above. As a percentage of revenue, our gross profit for the nine months ended September 30, 2023 increased to 50.7% as compared to 46.6% for the nine months ended September 30, 2022, and was due to the increase in revenue noted above that was greater than the comparable percentage increase in cost of revenues.

Operating Expenses

Operating expenses decreased by $4.0 million, or 3.8%, to $102.2 million for the nine months ended September 30, 2023 as compared to $106.2 million for the nine months ended September 30, 2022. This decrease is primarily the result of a $2.6 million decrease in occupancy expense associated with the consolidation of our real estate footprint and a $1.3 million decrease in severance costs related to the integration of our data storage and technology business. As a percentage of revenue, our operating expenses for the nine months ended September 30, 2023 decreased to 39.3% as compared to 45.9% for the nine months ended September 30, 2022.

Interest Expense

Interest expense increased by $9.7 million, or 24.6%, to $49.2 million for the nine months ended September 30, 2023 as compared to $39.5 million for the nine months ended September 30, 2022. The increase is primarily due to an increase in the variable interest rate on borrowings under the Amended 2021 Credit Agreement, which resulted in a $7.8 million increase in expense, a $0.6 million increase due to the acceleration of debt issuance costs related to the reclassification of the Amended 2021 Credit Agreement to short term debt as it will now likely mature in June 2024, and an increase in the debt balance due to the quarterly accruals of PIK interest on the Convertible Debentures issued by the Company, which resulted in a $1.3 million increase in interest expense.

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Change in Fair Value of Private Warrants

For the nine months ended September 30, 2023 the Company recorded a gain to the Private Warrants liability of $0.6 million and for the nine months ended September 30, 2022 the Company recorded a gain of $0.8 million.

Income Tax Provision

During the nine months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $1.5 million and $1.2 million, respectively, resulting in an effective tax rate of (7.9)% and (3.2)%, respectively. These effective tax rates differ from the U.S. federal statutory rate primarily due to the effects of foreign tax rate differences, U.S. state and local income taxes and the valuation allowance against our domestic deferred tax assets. The effective rate for the nine months ended September 30, 2023 changed from the nine months ended September 30, 2022 primarily due to a change in the allocation of our pre-tax earnings and losses among countries with differing statutory tax rates.

A valuation allowance has been established against our net U.S. federal and state deferred tax assets, including net operating loss carryforwards. As a result, our income tax provision is primarily related to foreign taxes and U.S. deferred taxes for tax deductible goodwill and other indefinite-lived liabilities.

Net Loss

Net loss for the nine months ended September 30, 2023 was ($20.5) million compared to $(38.2) million for the nine months ended September 30, 2022. Net loss decreased $17.7 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 due to the factors noted above.

Liquidity and Capital Resources

Our primary cash needs are and have been to meet debt service requirements and to fund working capital and capital expenditures. We fund these requirements from cash generated by our operations, as well as funds available under our revolving credit facility discussed below. We may also seek to access the capital markets opportunistically from time-to-time depending on, among other things, financial market conditions. Although our eDiscovery solutions and information archiving services are billed on a monthly basis in arrears with amounts typically due within 30 to 45 days, the eDiscovery industry tends towards longer collectability trends. As a result, we have typically collected the majority of our eDiscovery accounts receivable within 90 to 120 days, which is consistent within the industry. With respect to our data recovery services, they are billed as the services are provided, with payments due within 30 days of billing. We typically collect our data recovery services accounts receivables within 30 to 45 days. Lastly, the majority of our data recovery software is billed monthly in advance with amounts typically due within 30 to 45 days; however, depending on the client contract, billing can occur annually, quarterly or monthly. Long outstanding receivables are not uncommon due to the nature of our Legal Technology services as litigation cases can continue for years, and in certain instances, our collections are delayed until the customer has received payment for their services in connection with a legal matter or the case has been settled. These long-outstanding invoices are a function of the industry in which we operate, rather than indicative of an inability to collect. We have experienced no material seasonality trends as it relates to collection of our accounts receivable. As of September 30, 2023, we had $25.4 million in cash compared to $32.6 million as of December 31, 2022. We expect to finance our operations over the next 12 months primarily through existing cash balances and cash flow from operating activities. The satisfaction of debt servicing requirements is discussed below.

Our Convertible Debentures mature in December 2024 and our Amended 2021 Credit Agreement matures on February 8, 2026, unless the Debentures are outstanding six months prior to the December 19, 2024 maturity date thereof, in which case the loans outstanding under the Amended 2021 Credit Agreement mature on June 19, 2024. The Company has historically incurred losses and in certain years cash flows have been negative. As of September 30, 2023, the Company’s cash balance was $25.4 million and the Company’s debt balance was $544.8 million, including a balance of $252.3 million under the Convertible Debentures and a balance of $292.5 million in Initial Term Loans under the Amended 2021 Credit Agreement (no amounts were outstanding under Delayed Draw Term Loans or Revolving Credit Loans). As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures solely from existing cash or future cash flows by June 19, 2024 and as such, the Amended 2021 Credit Agreement Initial Term Loans debt of $292.5 million is included in the current portion of long-term debt in the Condensed Consolidated Balance Sheet at September 30, 2023. 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, including the Initial Term Loans, at the accelerated maturity date. The Company is reviewing potential alternatives regarding the Debentures and the Initial Term Loans. The Company’s current debt structure, however, raises substantial doubt regarding the Company’s ability to continue as a going concern because such alternatives may not be achievable on favorable terms and conditions or at all. Furthermore, uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing. Our ability to refinance and/or replace our outstanding debt on acceptable terms, or at all, will depend on, among other things, our financial performance and credit ratings, general economic factors, including inflation and then-current interest rates, the condition of the credit and capital markets and other events, many of which are beyond our control. We cannot provide any assurance that we will be able to renegotiate, refinance or repay some or all of our indebtedness and continue as a going concern.

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Amended 2021 Credit Agreement

On February 8, 2021, certain subsidiaries of the Company (the “Loan Parties”), entered into a new secured credit agreement, or the 2021 Credit Agreement. Proceeds were used to pay in full all outstanding loans and terminate all lending commitments under the previously outstanding 2016 credit agreement.

On March 3, 2023, the Loan Parties entered into the First Amendment to the 2021 Credit Agreement. The First Amendment to the 2021 Credit Agreement provides for the revision of the benchmark interest rate from LIBOR to the secured overnight financing rate, (“SOFR”). At March 31, 2023, all outstanding indebtedness under the Amended 2021 Credit Agreement automatically converted from a LIBOR based loan to the new SOFR based loan at the end of the then-current applicable Interest Period. Additionally, the First Amendment to the 2021 Credit Agreement provides for the addition of the Term SOFR Adjustment of 0.10%, based on the term of the applicable Interest Period, to be added to the Applicable Rate for both SOFR Loans and Base Rate Loans (capitalized terms as defined in the Amended 2021 Credit Agreement).

The Amended 2021 Credit Agreement provides for (i) Initial Term Loans in an aggregate principal amount of $300 million, (ii) Delayed Draw Term Loans in an aggregate principal amount of $50 million, and (iii) Revolving Credit Loans in an aggregate principal amount of $40 million, with a letter of credit sublimit of $10 million. The Delayed Draw Term Loans were available to the Loan Parties at any time prior to February 8, 2023, subject to certain conditions. As of September 30, 2023, there were no outstanding Delayed Draw Term Loans and they are no longer available to the Loan Parties under the Amended 2021 Credit Agreement.

The Initial Term Loans bear, and while they were available, the Delayed Draw Term Loans bore, interest, at the Loan Parties’ option, at the rate of (x) with respect to SOFR Rate Loans, the Term SOFR Rate with a 1.00% floor, plus 6.50% per annum, plus the Term SOFR Adjustment of 0.10% or (y) with respect to Base Rate Loans, the Base Rate plus 5.50% per annum, plus the Term SOFR Adjustment of 0.10%.

The Revolving Credit Loans bear interest, at our option, at the rate of (x) with respect to SOFR Rate Loans, the Term SOFR Rate plus 4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus 3.00% per annum. The Initial Term Loans amortize at a rate of 1.00% of the aggregate principal amount of Initial Term Loans outstanding, payable in consecutive quarterly installments of $0.8 million, beginning on June 30, 2021. On September 30, 2023, the balance due was $292.5 million with a Term SOFR Rate of 5.39008% plus the Term SOFR Adjustment of 0.10%, plus 6.50% per annum.

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 Initial Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the Amended 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the Amended 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.

The obligations under the Amended 2021 Credit Agreement are secured by substantially all of the Loan Parties’ assets. The Amended 2021 Credit Agreement contains customary affirmative and negative covenants as well as a financial maintenance covenant that requires the Loan Parties to maintain a First Lien Net Leverage Ratio (as defined in the Amended 2021 Credit Agreement) of less than or equal to 7.00 to 1.00, tested at the end of each fiscal quarter. The Company was in compliance with all Amended 2021 Credit Agreement covenants as of September 30, 2023.

Revolving Credit Loans

The Amended 2021 Credit Agreement also provides for an unfunded revolver commitment for borrowing up to $40.0 million. As of September 30, 2023, there was $39.4 million available capacity for borrowing under the revolving loan commitment due to the $0.6 million of letters of credit outstanding (See Note 8 – Commitments and Contingencies).

Convertible Debentures

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”). At September 30, 2023 and December 31, 2022, the balance due under the Convertible Debentures was $252.3 million and $244.8 million, respectively.

The Convertible Debentures will mature on December 19, 2024 unless earlier converted, redeemed or repurchased, and bear interest at an annual rate of 4.00% in cash, payable quarterly, and 4.00% in kind, accrued quarterly, on the last business day of March, June, September and December. In addition, on each anniversary of December 19, 2019 (“Closing Date”), the Company will increase the principal amount of the Debentures by an amount equal to 3.00% of the original aggregate principal amount of the Debentures outstanding (subject to reduction for any principal amount repaid). The additional payment will accrue from the last payment date for the additional payment (or the Closing Date if no prior payment has been made), and will also be payable at maturity, upon conversion and upon an optional redemption.

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At any time, upon notice as set forth in the Debentures, the Debentures will be redeemable at the Company’s option, in whole or in part, at a price equal to 100% of the principal amount of the Debentures redeemed, plus accrued and unpaid interest thereon. The Debentures are convertible into shares of common stock at the option of the Debenture holders at any time and from time to time at a price of $18 per share, subject to certain adjustments. However, in the event the Company elects to redeem any Debentures, the holders have a right to purchase common stock from the Company in an amount equal to the amount redeemed at the conversion price.

The Convertible Debentures contain covenants that limit the Company’s ability to, among other things: (i) incur additional debt; (ii) create liens on assets; (iii) engage in certain transactions with affiliates; or (iv) designate the Company’s subsidiaries as unrestricted subsidiaries. The Debentures provide for customary events of default, including non-payment, failure to comply with covenants or other agreements in the Debentures and certain events of bankruptcy or insolvency. If an event of default occurs and continues, the holders of at least 25% in aggregate principal amount of the outstanding Debentures may declare the entire principal amount of all the Debentures to be due and payable immediately. As of September 30, 2023, the Company was in compliance with all Debenture covenants.

Cash Flows

Our net cash flows from operating, investing and financing activities for the nine months ended September 30, 2023 and 2022 were as follows:

(in thousands)	Nine Months Ended September 30, 2023			Nine Months Ended September 30, 2022
Net cash (used in) provided by:
Operating activities	$	5,566		$	2,049
Investing activities	$	(8,534	)	$	(10,498	)
Financing activities	$	(4,124	)	$	(3,842	)
Effect of foreign exchange rates	$	(102	)	$	(1,304	)
Net decrease in cash	$	(7,194	)	$	(13,595	)

Cash Flows Provided by Operating Activities

Net cash provided by operating activities was $5.6 million compared to net cash provided by operating activities of $2.0 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in net cash provided by operating activities of $3.5 million is primarily due to a decrease in cash related to changes in operating assets and liabilities of $11.9 million, and a decrease in non-cash items of $2.8 million, partially offset by a decrease in net loss of $18.3 million, which includes an increase in cash paid for interest of $6.1 million. The $11.9 million in cash related to changes in operating assets and liabilities is primarily due to a $0.8 million decrease for changes in accounts receivable, a $2.8 million decrease for changes in prepaid expenses and other assets, $7.5 million decrease due to changes in accounts payable and accrued expenses, and $0.8 million decrease for changes in deferred revenue. Accounts receivable and accounts payable fluctuate from period-to-period depending on the timing.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $8.5 million for the nine months ended September 30, 2023 as compared to net cash used in investing activities of $10.5 million for the nine months ended September 30, 2022. The decrease in cash used is due to a $2.0 million decrease in purchases of property and equipment.

Cash Flows Used in Financing Activities

Net cash used in financing activities was $4.1 million for the nine months ended September 30, 2023 as compared to net cash used in financing activities of $3.8 million for the nine months ended September 30, 2022. The increase in cash used is due to a $0.3 million increase in the repayments of capital lease obligations.

Capital Resources and Material Cash Requirements

A summary of our capital resources and material cash requirements is presented in Part II, Item 7 of our Annual Report. Other than as described above, there were no other material changes to our capital resources and material cash requirements during the nine months ended September 30, 2023.

Recent Accounting Pronouncements

There were no changes to our recent accounting pronouncements from those described in our Annual Report.

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Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. In applying accounting principles, it is often required to use estimates. These estimates consider the facts, circumstances and information available, and may be based on subjective inputs, assumptions and information known and unknown to us. Material changes in certain of the estimates that we use could potentially affect, by a material amount, our consolidated financial position and results of operations. Although results may vary, we believe our estimates are reasonable and appropriate. There were no changes to our critical accounting policies from those described in our Annual Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We are subject to interest rate market risk in connection with our long-term indebtedness. Our principal interest rate exposure relates to outstanding amounts under the Amended 2021 Credit Agreement for the $300 million Initial Term Loans and the Revolving Credit Loans of up to $40 million. Interest rate changes may impact the amount of our interest payments and, therefore, our future net income and cash flows, assuming other factors are held constant. Assuming the amounts outstanding at September 30, 2023 are fully drawn, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our annualized interest expense by approximately $0.4 million. We do not currently hedge our interest rate exposure.

Exchange Rate Risk

Results of operations for our 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. The resulting net translation adjustments are recorded as a component of stockholders’ equity in “Accumulated other comprehensive (loss) income” in our Condensed Consolidated Balance Sheets included elsewhere in this Quarterly Report on Form 10-Q.

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 expense” in our Condensed Consolidated Statements of Comprehensive Loss included elsewhere in this Quarterly Report on Form 10-Q. 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.

During the three months ended September 30, 2023 and 2022, we generated the equivalent of $11.5 million and $10.5 million, respectively, of U.S. dollar-denominated revenues in non-U.S. subsidiaries. Each 100-basis point increase or decrease in the average foreign currency rate to U.S. dollar exchange rate for the three-month period would have correspondingly changed our revenues by approximately $0.1 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2023 and 2022, we generated the equivalent of $40.6 million and $36.7 million, respectively, of U.S. dollar-denominated revenues in non-U.S. subsidiaries. Each 100-basis point increase or decrease in the average foreign currency rate to U.S. dollar exchange rate for the nine-month period would have correspondingly changed our revenues by approximately $0.4 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively.

We do not currently hedge our foreign exchange rate exposure.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures

We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act ), as of the end of the period covered by this Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in this Form 10-Q was (a) reported within the time periods specified by SEC rules and regulations and (b) communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding any required disclosure.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings.

In the ordinary conduct of our business, we are subject to lawsuits, arbitrations and administrative proceedings from time to time. We vigorously defend these claims; however, no assurances can be given as to the outcome of any pending legal proceedings. We believe, based on currently available information, that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect on our business, financial condition, liquidity or results of operations.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, Item 1A under the caption “Risk Factors” of our Annual Report and Part II, Item 1A under the caption “Risk Factors” of our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (the “Second Quarter Quarterly Report”), which risks could materially and adversely affect our business, results of operations, financial condition and liquidity. Such risk factors do not identify all risks that we face because our business operations could also be affected by additional factors not presently known to us or that we currently consider to be immaterial to our operations. Our business operations could also be affected by additional factors that apply to all companies operating in the U.S. and globally. There have been no material changes to the risk factors as set forth in our Annual Report and the Second Quarter Quarterly Report.

Item 6. Exhibits.

a)Exhibits

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Exhibit Index

Exhibit Number	Description
3.1	Second Amended and Restated Certificate of Incorporation of KLDiscovery Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed December 26, 2019).
3.2	Amended and Restated Bylaws of KLDiscovery Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed December 26, 2019).
10.1#	Eighth Amendment to the Software License Agreement dated as of July 1, 2023 by and between KLDiscovery Ontrack, LLC (successor-in-interest to LDiscovery LLC) and Relativity ODA LLC (filed as exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 filed on August 9, 2023.
31.1*	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101

* Filed herewith.

** Furnished herewith.

# Certain information contained in this agreement has been omitted in reliance on Item 601(b)(10)(iv) because the omitted information is both (1) private or confidential and (2) not material.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KLDiscovery Inc.
By:	/s/ Christopher J. Weiler
	Christopher J. Weiler
	Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer)

Date: November 9, 2023

31

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christopher J. Weiler, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of KLDiscovery Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 9, 2023	By:	/s/ Christopher J. Weiler
		Christopher J. Weiler
		Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dawn Wilson, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of KLDiscovery Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 9, 2023	By:	/s/ Dawn Wilson
		Dawn Wilson
		Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of KLDiscovery Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 9, 2023	By:	/s/ Christopher J. Weiler
		Christopher J. Weiler
		Chief Executive Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of KLDiscovery Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 9, 2023	By:	/s/ Dawn Wilson
		Dawn Wilson
		Chief Financial Officer (Principal Financial Officer)

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Cover Page - shares	9 Months Ended
	Sep. 30, 2023	Nov. 09, 2023
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2023
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2023
Entity Registrant Name	KLDiscovery Inc.
Entity Central Index Key	0001752474
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Emerging Growth Company	true
Entity Ex Transition Period	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Current Reporting Status	Yes
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		43,086,267
Entity File Number	001-38789
Entity Tax Identification Number	61-1898603
Entity Address, Address Line One	9023 Columbine Road
Entity Address, City or Town	Eden Prairie
Entity Address, State or Province	MN
Entity Address, Postal Zip Code	55347
City Area Code	703
Local Phone Number	288-3380
Entity Incorporation, State or Country Code	DE
Document Quarterly Report	true
Document Transition Report	false

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Current assets
Cash and cash equivalents	$ 25,435	$ 32,629
Accounts receivable, net of allowance for doubtful accounts of $2,875 and $5,403, respectively	98,114	95,727
Prepaid expenses	17,781	10,726
Other current assets	1,341	1,175
Total current assets	142,671	140,257
Property and equipment
Accumulated depreciation	(86,028)	(79,958)
Property and equipment, net	16,922	19,840
Operating lease right of use assets, net	9,646	12,412
Intangible assets, net	41,479	46,862
Goodwill	389,559	391,114
Other assets	8,910	8,957
Total assets	609,187	619,442
Current liabilities
Current portion of long-term debt, net	289,715	3,000
Accounts payable and accrued expense	32,249	25,009
Operating lease liabilities	6,185	7,850
Deferred revenue	2,682	4,536
Total current liabilities	330,831	40,395
Long-term debt, net	247,388	524,529
Deferred tax liabilities	8,414	7,793
Long term operating lease liabilities	7,015	10,340
Other liabilities	1,511	2,694
Total liabilities	595,159	585,751
Commitments and contingencies
Stockholders' equity
$0.0001 par value, shares authorized - 200,000,000 shares authorized; 43,086,267 and 42,920,136 issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	4	4
$0.0001 par value, 1,000,000 shares authorized, zero issued and outstanding as of September 30, 2023 and December 31, 2022
Additional paid-in capital	394,615	391,977
Accumulated deficit	(379,687)	(359,141)
Accumulated other comprehensive income	(904)	851
Total stockholders' equity	14,028	33,691
Total liabilities and stockholders' equity	609,187	619,442
Computer software and hardware
Property and equipment
Property and equipment, gross	74,904	71,720
Leasehold improvements
Property and equipment
Property and equipment, gross	25,842	25,869
Furniture, fixtures and other equipment
Property and equipment
Property and equipment, gross	$ 2,204	$ 2,209

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Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Statement of Financial Position [Abstract]
Allowance for doubtful accounts	$ 2,875	$ 5,403
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	43,086,267	42,920,136
Common stock, shares outstanding	43,086,267	42,920,136
Preferred Stock, per share	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0

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Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Income Statement [Abstract]
Revenues	$ 79,336	$ 74,544	$ 260,002	$ 231,633
Cost of revenues	39,643	40,830	128,225	123,728
Gross profit	39,693	33,714	131,777	107,905
Operating expenses
General and administrative	14,932	16,768	46,832	48,703
Research and development	3,294	3,597	9,751	10,303
Sales and marketing	9,518	11,333	30,765	32,486
Depreciation and amortization	5,068	4,944	14,807	14,749
Total operating expenses	32,812	36,642	102,155	106,241
Income (loss) from operations	6,881	(2,928)	29,622	1,664
Other expenses
Other (expense) income	(6)	7	(8)	(7)
Change in fair value of Private Warrants	(51)	(140)	(559)	(826)
Interest expense	17,235	13,960	49,197	39,527
Loss before income taxes	(10,297)	(16,755)	(19,008)	(37,030)
Income tax provision	1,061	644	1,538	1,161
Net loss	(11,358)	(17,399)	(20,546)	(38,191)
Other comprehensive loss, net of tax
Foreign currency translation	(2,403)	(4,715)	(1,755)	(12,537)
Total other comprehensive loss, net of tax	(2,403)	(4,715)	(1,755)	(12,537)
Comprehensive loss	$ (13,761)	$ (22,114)	$ (22,301)	$ (50,728)
Net loss per share - basic	$ (0.26)	$ (0.41)	$ (0.48)	$ (0.89)
Net loss per share - diluted	$ (0.26)	$ (0.41)	$ (0.48)	$ (0.89)
Weighted average shares outstanding - basic	43,086,267	42,791,540	42,989,413	42,732,003
Weighted average shares outstanding - diluted	43,086,267	42,791,540	42,989,413	42,732,003

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Condensed Consolidated Statements of Stockholders' Equity - USD ($) $ in Thousands	Total	Common stock	Additional Paid-In Capital	Accumulated Deficit	Accumulated Other Comprehensive (Loss) Income
Balance at Dec. 31, 2021	$ 77,854	$ 4	$ 386,028	$ (315,967)	$ 7,789
Balance (in shares) at Dec. 31, 2021		42,684,549
Share-based compensation	1,098		1,098
Stock issued in exchange for vested units (in Shares)		16,667
Foreign exchange translation	(2,140)				(2,140)
Net loss	(9,580)			(9,580)
Balance at Mar. 31, 2022	67,232	$ 4	387,126	(325,547)	5,649
Balance (in shares) at Mar. 31, 2022		42,701,216
Balance at Dec. 31, 2021	77,854	$ 4	386,028	(315,967)	7,789
Balance (in shares) at Dec. 31, 2021		42,684,549
Net loss	(38,191)
Balance at Sep. 30, 2022	30,890	$ 4	389,793	(354,158)	(4,749)
Balance (in shares) at Sep. 30, 2022		42,791,540
Balance at Mar. 31, 2022	67,232	$ 4	387,126	(325,547)	5,649
Balance (in shares) at Mar. 31, 2022		42,701,216
Share-based compensation	1,347		1,347
Stock issued in exchange for vested units (in Shares)		90,324
Foreign exchange translation	(5,683)				(5,683)
Net loss	(11,212)			(11,212)
Balance at Jun. 30, 2022	51,684	$ 4	388,473	(336,759)	(34)
Balance (in shares) at Jun. 30, 2022		42,791,540
Share-based compensation	1,320		1,320
Foreign exchange translation	(4,715)				(4,715)
Net loss	(17,399)			(17,399)
Balance at Sep. 30, 2022	30,890	$ 4	389,793	(354,158)	(4,749)
Balance (in shares) at Sep. 30, 2022		42,791,540
Balance at Dec. 31, 2022	33,691	$ 4	391,977	(359,141)	851
Balance (in shares) at Dec. 31, 2022		42,920,136
Share-based compensation	877		877
Stock issued in exchange for vested units (in Shares)		16,667
Cumulative translation adjustment	825				825
Net loss	(4,508)			(4,508)
Balance at Mar. 31, 2023	30,885	$ 4	392,854	(363,649)	1,676
Balance (in shares) at Mar. 31, 2023		42,936,803
Balance at Dec. 31, 2022	33,691	$ 4	391,977	(359,141)	851
Balance (in shares) at Dec. 31, 2022		42,920,136
Net loss	(20,546)
Balance at Sep. 30, 2023	14,028	$ 4	394,615	(379,687)	904
Balance (in shares) at Sep. 30, 2023		43,086,267
Balance at Mar. 31, 2023	30,885	$ 4	392,854	(363,649)	1,676
Balance (in shares) at Mar. 31, 2023		42,936,803
Share-based compensation	893		893
Stock issued in exchanges for vested units	0
Stock issued in exchange for vested units (in Shares)		149,464
Foreign exchange translation	(177)				(177)
Net loss	(4,680)			(4,680)
Balance at Jun. 30, 2023	$ 26,921	$ 4	393,747	(368,329)	1,499
Balance (in shares) at Jun. 30, 2023	43,086,267
Share-based compensation	$ 868		868
Foreign exchange translation	(2,403)				(2,403)
Net loss	(11,358)			(11,358)
Balance at Sep. 30, 2023	$ 14,028	$ 4	$ 394,615	$ (379,687)	$ 904
Balance (in shares) at Sep. 30, 2023		43,086,267

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Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Operating activities
Net loss	$ (20,546)	$ (38,191)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	20,372	23,585
Paid in kind and non-cash interest	16,390	14,874
Stock-based compensation	2,550	3,656
Provision for losses on accounts receivable	2,167	1,736
Deferred income taxes	629	728
Change in fair value of contingent consideration		21
Change in fair value of Private Warrants	(559)	(826)
Changes in operating assets and liabilities:
Accounts receivable	(4,622)	(3,828)
Prepaid expenses and other assets	(8,277)	(5,464)
Accounts payable and accrued expenses	(691)	6,791
Deferred revenue	(1,847)	(1,033)
Net cash provided by operating activities	5,566	2,049
Investing activities
Purchases of property and equipment	(8,534)	(10,498)
Net cash used in investing activities	(8,534)	(10,498)
Financing activities
Payments for capital lease obligations	(1,874)	(1,592)
Payments on long-term debt	(2,250)	(2,250)
Net cash used in by financing activities	(4,124)	(3,842)
Effect of foreign exchange rates	(102)	(1,304)
Net decrease in cash	(7,194)	(13,595)
Cash and cash equivalents at beginning of period	32,629	46,468
Cash and cash equivalents at end of period	25,435	32,873
Supplemental disclosure:
Cash paid for interest	33,216	24,871
Net income taxes paid	788	486
Significant noncash investing and financing activities
Purchases of property and equipment in accounts payable and accrued expenses on the condensed consolidated balance sheets	$ 133	$ 115

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Organization, Business and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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 16 countries around the world. We provide technology solutions to help our clients solve complex data challenges. The Company’s headquarters are located in Eden Prairie, Minnesota. The Company has 25 locations in 16 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, 2022, which we previously filed with the Securities and Exchange Commission (the “SEC”).

Liquidity and going concern evaluation

Under 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 (as amended, 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 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 September 30, 2023, the Company’s cash balance was $25.4 million and the Company’s debt balance was $544.8 million, including a balance of $252.3 million under the Convertible Debentures and a balance of $292.5 million in Initial Term Loans under the Amended 2021 Credit Agreement (no amounts were outstanding under the Delayed Draw Term Loans or Revolving Credit Loans). As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Initial Term Loans debt of $292.5 million is included in the current portion of long-term debt in the Condensed Consolidated Balance Sheet at September 30, 2023. As of September 30, 2023, 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 including the Initial Term Loans, at the accelerated maturity date.

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 these or 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 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, and stock option awards.

Segments, concentration of credit risk and major customers

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 and nine months ended September 30, 2023 and 2022, the Company did not have any single customer that represented five percent (5%) or more of its consolidated revenues or 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 concentrations of credit risk. The Company’s foreign revenues, principally from businesses in the UK and Germany, totaled approximately $11.5 million and $10.5 million for the three months ended September 30, 2023 and 2022, respectively; and $40.6 million and $36.7 million for the nine months ended September 30, 2023, and 2022, respectively. The Company’s long-lived assets in foreign countries, principally in the UK and Germany, totaled approximately $25.8 million and $25.9 million as of September 30, 2023, and December 31, 2022, respectively.

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

Accounts receivable are recorded at the original invoice amount less an estimate for doubtful receivables based on a review of outstanding amounts monthly. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables, considering a customer’s financial condition, and evaluating historical experience and management's expectations of future losses. Accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.

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 $2.5 million and $2.4 million for the three months ended September 30, 2023 and 2022, respectively, and includes amortization of assets recorded under finance leases. Depreciation expense totaled $7.2 million and $7.3 million for the nine months ended September 30, 2023 and 2022, 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 $19.5 million and $17.5 million, net of accumulated amortization, as of September 30, 2023 and December 31, 2022, respectively.

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 $4.0 million and $5.1 million for the three months ended September 30, 2023 and 2022, respectively; $1.5 million and $2.5 million of which, respectively, was classified as part of the “Cost of revenues” line in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Amortization expense totaled $11.9 million and $15.1 million for the nine months ended September 30, 2023 and 2022, respectively; $4.2 million and $7.6 million of which, respectively, was classified as part of the “Cost of revenues” line in the Company’s Condensed Consolidated Statements of Comprehensive Loss.

The Company allocates the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The Company recognizes as goodwill the amount by which the purchase price of an acquired entity exceeds the net of the fair values assigned to the assets acquired and liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, the Company uses various recognized valuation methods including the income and market approaches. Further, the Company makes assumptions within certain valuation techniques, including discount rates, royalty rates, and the amount and timing of future cash flows. The Company records the net assets and results of operations of an acquired entity in the financial statements from the acquisition date. The Company initially performs these valuations based upon preliminary estimates and assumptions by management or independent valuation specialists under its supervision, where appropriate, and make revisions as estimates and assumptions are finalized. The Company expenses acquisition-related costs as they are incurred.

Goodwill

Goodwill represents the excess of the total consideration paid over identified intangible and tangible assets of the Company and its acquisitions. 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, 2022 testing date, the Company determined there is one reporting unit.

Management concluded that there are no triggering events in impairment of goodwill and intangible assets during the nine months ended September 30, 2023. Our goodwill balance is subject 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 tables summarize revenue from contracts with customers for the three and nine months ended September 30, 2023 and 2022 (in thousands):

	2023 Q23						2022 Q3
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	58,077	$	12,982	$	71,059	$	59,966	$	6,478	$	66,444
Data Recovery		8,277		—		8,277		8,100		—		8,100
Total revenue	$	66,354	$	12,982	$	79,336	$	68,066	$	6,478	$	74,544
	2023 YTD						2022 YTD
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	202,619	$	32,011	$	234,630	$	185,105	$	20,346	$	205,451
Data Recovery		25,372		—		25,372		26,182		—		26,182
Total revenue	$	227,991	$	32,011	$	260,002	$	211,287	$	20,346	$	231,633

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.

Recently Adopted Accounting Standards

The Company is an Emerging Growth Company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and has elected to take advantage of the extended transition period of delaying the adoption of new or revised accounting standards until such time as those standards apply to private companies. This may make the comparison of the Company’s condensed consolidated financial statements to other public companies not meaningful due to the differences in accounting standards being applied.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. On January 1, 2023, the Company adopted ASU 2016-13 using a modified retrospective approach. The adoption did not have a material impact on the Company's condensed consolidated financial statements.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

Fair value measurements

Note 2 – Fair value measurements

The Company accounts for recurring and non-recurring fair value measurements in accordance with ASC 820, Fair Value Measurements. ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosures about fair value measurements. The ASC 820 hierarchy ranks the quality of reliability of inputs, or assumptions, used in the determination of fair value, and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

Level 1 – Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

Level 2 – Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data.

Level 3 – Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by a reporting entity – e.g., determining an appropriate adjustment to a discount factor for illiquidity associated with a given security.

The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires significant judgments to be made by the Company.

The Company believes that the fair values of its current assets and current liabilities (cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts.

The Company has determined that the 6,350,000 warrants to purchase Common Stock (the “Private Warrants”) issued in connection with the consummation of the Business Combination in December 2019 should be accounted for as liabilities in accordance with ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of Private Warrants in the Condensed Consolidated Statements of Comprehensive Loss. The fair value of the Private Warrants was $0.1 million and $0.6 million as of September 30, 2023 and December 31, 2022, respectively.

Management estimates the carrying amount of the Company’s long-term debt approximates its fair value because the interest rates on these instruments are subject to changes in market interest rates or are consistent with prevailing interest rates.

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Leases

9 Months Ended

Sep. 30, 2023

Leases [Abstract]

Leases

Note 3 – Leases

The Company’s operating leases are primarily for office space and certain equipment, expiring in various years through 2029. Certain leases contain annual rent escalation clauses. The Company’s finance leases are primarily for data center equipment. As part of the Company’s efforts to optimize its real estate footprint, the Company shortened the lease terms in two locations in 2022. In 2023, the Company partially abandoned two locations and shortened one lease term.

Maturities of lease liabilities as of September 30, 2023 were as follows:

	Finance Leases			Operating Leases
Remainder of 2023	$	430		$	2,075
2024		164			6,680
2025		—			3,456
2026		—			1,802
2027		—			403
Thereafter		—			346
Total undiscounted lease payments	$	594		$	14,762
Less: Interest		(6	)		(1,562	)
Present value of lease liabilities	$	588		$	13,200

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Long Term Debt

9 Months Ended

Sep. 30, 2023

Long-Term Debt, Unclassified [Abstract]

Long Term Debt

Note 4 – Long term debt

The table below summarizes the components of the Company’s long-term debt (in thousands):

	September 30, 2023			December 31, 2022
Convertible Debenture notes due 2024	$	252,337		$	244,808
Amended 2021 Credit Agreement due 2026 (1) (2)		292,500			294,750
Total debt		544,837			539,558
Less: unamortized original issue discount		(6,917	)		(10,751	)
Less: unamortized debt issuance costs		(817	)		(1,278	)
Total debt, net		537,103			527,529
Current portion of debt		292,500			3,000
Less: current portion of unamortized original    issue discount		(2,292	)		—
Less: current portion of unamortized debt    issuance costs		(493	)		—
Total current portion of debt, net		289,715			3,000
Total long-term debt, net	$	247,388		$	524,529

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(1)The 2021 Credit Agreement was amended on March 3, 2023.

(2)The Amended 2021 Credit Agreement matures 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. As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Term Loan debt of $292.5 million is included in the current portion of long-term debt.

Amended 2021 Credit Agreement

On February 8, 2021, the Loan Parties entered into the 2021 Credit Agreement, a new secured credit agreement. Proceeds were used to pay in full all outstanding loans and terminate all lending commitments under the previously outstanding 2016 Credit Agreement.

On March 3, 2023, the Loan Parties entered into the First Amendment to the 2021 Credit Agreement. The First Amendment to the 2021 Credit Agreement provides for the revision of the benchmark interest rate from LIBOR to the secured overnight financing rate, (“SOFR”). At March 31, 2023, all outstanding indebtedness under the Amended 2021 Credit Agreement automatically converted from a LIBOR based loan to the new SOFR based loan at the end of the then-current applicable Interest Period. Additionally, the First Amendment to the 2021 Credit Agreement provides for the addition of the Term SOFR Adjustment of 0.10%, based on the term of the applicable Interest Period, to be added to the Applicable Rate for both SOFR Loans and Base Rate Loans (capitalized terms as defined in the Amended 2021 Credit Agreement).

The Amended 2021 Credit Agreement provides for (i) Initial Term Loans in an aggregate principal amount of $300 million, (ii) Delayed Draw Term Loans in an aggregate principal amount of $50 million, and (iii) Revolving Credit Loans in an aggregate principal amount of $40 million, with a letter of credit sublimit of $10 million. The Delayed Draw Term Loans were available to the Loan Parties at any time prior to February 8, 2023, subject to certain conditions. As of September 30, 2023, there were no outstanding Delayed Draw Term Loans and they are no longer available under the Amended 2021 Credit Agreement.

The Initial Term Loans bear, and while they were available, the Delayed Draw Term Loans bore, interest, at the Loan Parties’ option, at the rate of (x) with respect to SOFR Rate Loans, the Term SOFR Rate with a 1.00% floor, plus 6.50% per annum, plus the Term SOFR Adjustment of 0.10% or (y) with respect to Base Rate Loans, the Base Rate plus 5.50% per annum, plus the Term SOFR Adjustment of 0.10%.

The Revolving Credit Loans bear interest, at our option, at the rate of (x) with respect to SOFR Rate Loans, the Term SOFR Rate plus 4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus 3.00% per annum. The Initial Term Loans amortize at a rate of 1.00% of the aggregate principal amount of Initial Term Loans outstanding, payable in consecutive quarterly installments of $0.8 million, beginning on June 30, 2021. On September 30, 2023, the balance due was $292.5 million with a Term SOFR Rate of 5.39008% plus the Term SOFR Adjustment of 0.10%, plus 6.50% per annum.

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 Initial Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the Amended 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the Amended 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.

The obligations under the Amended 2021 Credit Agreement are secured by substantially all of the Loan Parties’ assets. The Amended 2021 Credit Agreement contains customary affirmative and negative covenants as well as a financial maintenance covenant that requires the Loan Parties to maintain a First Lien Net Leverage Ratio (as defined in the Amended 2021 Credit Agreement) of less than or equal to 7.00 to 1.00, tested at the end of each fiscal quarter. The Company was in compliance with all Amended 2021 Credit Agreement covenants as of September 30, 2023.

The Company incurred closing fees of $8.0 million in connection with the original entry into the 2021 Credit Agreement. These fees will be amortized over the full term of the Amended 2021 Credit Agreement.

Revolving Credit Loans

The Amended 2021 Credit Agreement also provides for an unfunded revolver commitment for borrowing up to $40.0 million. As of September 30, 2023, there was $39.4 million available capacity for borrowing under the Revolving Credit Loan commitment due to the $0.6 million of letters of credit outstanding (See Note 8 – Commitments and Contingencies).

Convertible Debentures

On December 19, 2019, the Company issued Convertible Debentures, which mature in 2024, in an aggregate principal amount of $200 million. At September 30, 2023 and December 31, 2022, the balance due under the Convertible Debentures was $252.3 million and $244.8 million, respectively.

The Convertible Debentures will mature on December 19, 2024 unless earlier converted, redeemed or repurchased, and bear interest at an annual rate of 4.00% in cash, payable quarterly, and 4.00% in kind, accrued quarterly, on the last business day of March, June, September and December. In addition, on each anniversary of the Closing Date, the Company will increase the principal amount of the Debentures by an amount equal to 3.00% of the original aggregate principal amount of the Debentures outstanding (subject to reduction for any principal amount repaid). The additional payment will accrue from the last payment date for the additional payment (or the Closing Date if no prior payment has been made), and will also be payable at maturity, upon conversion and upon an optional redemption.

At any time, upon notice as set forth in the Debentures, the Debentures will be redeemable at the Company’s option, in whole or in part, at a price equal to 100% of the principal amount of the Debentures redeemed, plus accrued and unpaid interest thereon. The Debentures are convertible into shares of common stock at the option of the Debenture holders at any time and from time to time at a price of $18 per share, subject to certain adjustments. However, in the event the Company elects to redeem any Debentures, the holders have a right to purchase common stock from the Company in an amount equal to the amount redeemed at the conversion price.

The Debentures contain covenants that limit the Company’s ability to, among other things: (i) incur additional debt; (ii) create liens on assets; (iii) engage in certain transactions with affiliates; or (iv) designate the Company’s subsidiaries as unrestricted subsidiaries. The Debentures provide for customary events of default, including non-payment, failure to comply with covenants or other agreements in the Debentures and certain events of bankruptcy or insolvency. If an event of default occurs and continues, the holders of at least 25% in aggregate principal amount of the outstanding Debentures may declare the entire principal amount of all the Debentures to be due and payable immediately. As of September 30, 2023, the Company was in compliance with all Debenture covenants.

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Equity Incentive Plan

9 Months Ended

Sep. 30, 2023

Share-Based Payment Arrangement [Abstract]

Equity Incentive Plan

Note 5 – Equity incentive plan

On December 19, 2019, the Company adopted the 2019 Incentive Award Plan (the “2019 Plan”) under which eligible employees, officers, directors and consultants of the Company may be granted incentive or non-qualified stock options, restricted stock, restricted stock units (“RSUs”), or other stock-based awards, including shares of Common Stock. Pursuant to the 2019 Plan, the number of shares of Common Stock available for issuance under the 2019 Plan automatically increases on each January 1 (commencing with January 1, 2021) until and including January 1, 2029, by an amount equal to the lesser of: (a) 5% of the shares of Common Stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by our Board of Directors (the “Board”). The Compensation Committee of the Board approved an increase to the share reserve as set out in the 2019 Plan in the amount of 2,146,006 shares in April 2023. As of September 30, 2023, 13,906,684 shares of Common Stock were reserved under the 2019 Plan, of which 2,512,708 shares of Common Stock remained available for issuance.

Stock option activity

The following table summarizes the Company’s stock option activity under the 2019 Plan:

Description	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (1)
Options outstanding, December 31, 2022		5,757,779		$	7.92		7.60
Granted		990,296			1.05			$	1,330,150
Exercised		—			—
Forfeited		(25,190	)		5.58
Expired		(160,942	)		8.08
Options outstanding, September 30, 2023		6,561,943		$	9.88		7.33	$	1,330,150
Options vested and exercisable, September 30, 2023		4,509,168		$	8.22		6.67	$	—
Options vested and expected to vest, September 30, 2023		6,561,943		$	9.88		7.33	$	1,330,150

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(1)Aggregate intrinsic value (in thousands) represents the difference between the estimated fair value of the underlying Common Stock and the exercise price of outstanding in-the-money options.

The following table summarizes additional information on stock option grants and vesting (in thousands):

	2019 Plan
	Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022
Total fair value of stock options granted	$	941	$	2,898
Total fair value of options vested		1,784		944

Time-based vesting stock options

Time-based vesting stock options generally vest over a three-year period, are subject to graded vesting schedules, and expire ten years from the date of grant or within 90 days of termination of employment. The weighted-average fair value per share of time-based vesting stock options granted by the Company was $0.95 and $2.55, during the nine months ended September 30, 2023 and 2022, respectively.

For the three months ended September 30, 2023 and 2022, the Company recognized $0.8 million and $1.3 million of stock-based compensation expense, respectively, in connection with time-based vesting stock options. For the nine months ended September 30, 2023 and 2022, the Company recognized $2.6 million and $3.7 million of stock-based compensation expense, respectively, in connection with time-based vesting stock options. As of September 30, 2023 and 2022, there was $2.3 million and $3.9 million of unrecognized stock-based compensation expense, respectively, related to unvested time-based vesting stock options that is expected to be recognized over a weighted-average period of 1.7 and 2.0 years, respectively.

Stock Option Valuation

The Company used valuation models to value the time based vesting stock options granted during the nine months ended September 30, 2023 and 2022. The following table summarizes the assumptions used in the valuation models to determine the fair value of awards granted to employees and non-employee directors under the 2019 Plan:

	Nine Months Ended September 30, 2023			Nine Months Ended September 30, 2022
Expected volatility		41.2	%	42.78% - 42.90	%
Expected term (in years)		6.00		6.00
Dividend yield		0.00	%	0.00	%
Risk-free interest rate		3.61	%	1.62% - 2.71	%

A discussion of management’s methodology for developing each of the assumptions used in the valuation model follows:

•Expected volatility – Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses an estimated volatility based on the historical and implied volatilities of comparable companies.

•Expected term – This is the period that the options granted are expected to remain unexercised. For options granted during the three and nine months ended September 30, 2023 and 2022, the Company derived the expected life of the option based on the average midpoint between vesting and the contractual term as there is little exercise history.

•Dividend yield – The Company has never declared or paid dividends and have no plans to do so in the foreseeable future.

•Risk-free interest rate – This is the U.S. Treasury rate for securities with similar terms that most closely resembles the expected life of the option.

•Forfeiture rate – Forfeitures are included in compensation cost as they occur.

Stock-based compensation expense

Stock-based compensation expense is included in the Company’s Condensed Consolidated Statements of Comprehensive Loss within the following line items (in thousands):

	Three Months Ended September 30, 2023		Three Months Ended September 30, 2022		Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022
Cost of revenues	$	228	$	396	$	699	$	1,158
General and administrative		422		556		1,319		1,475
Research and development		103		159		273		396
Sales and marketing		88		185		260		626
Total	$	841	$	1,296	$	2,551	$	3,655

Performance-based restricted stock units

Periodically, the Company granted RSUs to certain employees which are subject to certain vesting criteria. These RSUs become eligible to begin vesting upon a liquidity event (as defined in the award agreements governing the RSUs). The amount and timing of the vesting of the RSUs depends on the type and timing of the liquidity event as it relates to the Closing Date. Generally, a portion of the RSUs were scheduled to first vest upon the occurrence of the liquidity event and the remainder were scheduled to vest in up to three annual installments thereafter. Because no liquidity event occurred before the third anniversary of the Closing Date, all RSUs are scheduled to vest immediately upon a future liquidity event.

The Company determined the achievement of a liquidity event was not probable and therefore no expense has been recorded related to the RSU awards that vest solely upon a liquidity event.

During the first nine months of 2023 and 2022, the Company granted 369,056 and 463,000 performance-based RSUs, respectively, to certain employees, 50% of which vest based on the achievement of annual consolidated revenue targets and 50% of which vest based on the achievement of certain annual Nebula revenue targets. These units will vest over three annual installments based on the achievement of the annual consolidated revenue and Nebula revenue performance conditions and are not subject to any liquidity event vesting condition. In the event that the performance conditions are not met in the first or second year, all units granted will vest in the third year if the cumulative performance conditions are met at that time. The grant of awards with performance conditions supports the Company’s goal of aligning executive incentives with long-term stockholder value and ensuring that executive officers have a continuing stake in the long-term success of the Company.

The Company determined the three-year achievement of the overall Company revenue and Nebula revenue targets was probable and incurred $0.2 million and $0.1 million of stock-based compensation expense for the three months ended September 30, 2023 and 2022, respectively, with respect to the performance-based RSUs granted in the second quarter of 2023 and 2022.

The vesting of the RSUs held by a grantee is generally subject to his or her continued employment with the Company.

During the second quarter of 2023, the Company’s Board of Directors approved the vesting of 73,726 performance-based RSUs previously granted to certain employees. The shares issued upon the vesting of the RSUs were distributed to the employees during the second quarter.

Time-based restricted stock units

The Company grants certain non-employee directors time-based RSUs in satisfaction of their annual retainer payments. These RSUs vest over a one-year or three-year period. During the three months ended September 30, 2023 and 2022, the Company recognized the grant-date fair value of the RSUs granted to non-employee directors of $0.2 million and $0.2 million as stock-based compensation expense, respectively. During the nine months ended September 30, 2023 and 2022, the Company recognized as stock-based compensation expense the grant-date fair value of the RSUs granted to non-employee directors of $0.6 million and $0.5 million, respectively.

The following table summarizes the Company’s RSU activity for performance based RSUs awarded to employees and for time-based RSUs granted to non-employee directors under the 2019 Plan:

Description	RSUs Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
RSUs non-vested, December 31, 2022		1,876,669		$	6.45		6.10
Granted		788,120			2.03		—
Vested		(190,059	)		6.52		—
Forfeited		(27,642	)		6.44		—
Expired		—			—		—
RSUs non-vested, September 30, 2023		2,447,088		$	5.99		5.78

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Equity

9 Months Ended

Sep. 30, 2023

Equity [Abstract]

Equity

Note 6 – Equity

The Company is authorized to issue up to 200,000,000 shares of Common Stock and 1,000,000 shares of preferred stock, $0.0001 par value per share. Each holder of Common Stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. The holders of the Common Stock are entitled to receive dividends out of assets legally available at the times and in the amounts as the Company's Board of Directors may from time to time determine. In the event of any liquidation, dissolution or winding up of the Company, the assets of the Company shall be distributed ratably among the holders of the then outstanding Common Stock.

There were no stock issuances during the three months ended September 30, 2023 and 2022, respectively, other than pursuant to stock option exercises, vesting of certain performance based RSUs and vesting of non-employee director RSUs.

Warrants

On the Closing Date, in connection with the consummation of the Business Combination, the Company assumed (i) 23,000,000 warrants (the “Public Warrants”) to purchase shares of Common Stock and (ii) 6,350,000 Private Warrants (together with the Public Warrants, the “Warrants”). The Public Warrants qualify for equity accounting as these warrants do not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The Private Warrants qualify for liability accounting as these warrants fall within the scope of ASC 480.

Each warrant entitles the holder to purchase one share of Common Stock for $11.50 per share. If exercised by the initial purchaser of the Private Warrant or certain permitted transferees, the purchase can occur on a cashless basis. The Warrants will expire on December 19, 2024 or earlier upon redemption or liquidation.

If the reported last sale price of the Company's common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending three business days before the Company sends the notice of redemption to the warrant holders, the Company may redeem all the Public Warrants at a price of $0.01 per warrant upon not less than 30 days’ prior written notice.

If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a cashless basis. The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. The warrants will not be adjusted for the issuance of common stock at a price below its exercise price. The Company will not be required to net cash settle the warrants.

The Private Warrants are identical to the Public Warrants except that the Private Warrants will be exercisable on a cashless basis and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

Shares Subject to Forfeiture

On December 19, 2019, in connection with the consummation of the Business Combination, 550,000 shares of common stock held by Pivotal Acquisition Holdings LLC and its permitted transferees were subjected to an additional lockup that will be released only if the last reported sale price of the common stock equals or exceeds $15.00 for a period of 20 consecutive trading days during the five-year period following the Closing Date. If the last reported sale price of common stock does not equal or exceed $15.00 within five years from the Closing Date, such shares will be forfeited to the Company for no consideration. These shares are reported as outstanding in the Company’s financial statements and continue to be subject to the additional lockup as of September 30, 2023.

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Income Taxes

9 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Note 7 – Income taxes

A valuation allowance has been established against the Company’s net U.S. federal and state deferred tax assets, including net operating loss (“NOL”) carryforwards. As a result, the Company’s income tax provision is primarily related to foreign tax activity and U.S. deferred taxes for tax deductible goodwill and other indefinite-lived liabilities. During the three months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $1.1 million and $0.6 million, respectively, resulting in an effective tax rate of (10.7)% and (3.6)%, respectively. During the nine months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $1.5 million and $1.2 million, respectively, resulting in an effective tax rate of (7.9)% and (3.2)%, respectively. These effective tax rates differ from the U.S. federal statutory rate primarily due to the effects of foreign tax rate differences, U.S. state and local income taxes and the valuation allowance against our domestic deferred tax assets.

The Inflation Reduction Act of 2022 (“IRA”) was signed into law on August 16, 2022. The bill was meant to address the high inflation rate in the U.S. through various climate, energy, healthcare, and other incentives. These incentives are meant to be paid for by the tax provisions included in the IRA that became effective on January 1, 2023, such as a new 15% corporate minimum tax, a 1% new excise tax on stock buybacks, additional IRS funding to improve taxpayer compliance, and others. At this time, none of the IRA tax provisions are expected to have a material impact to the Company's tax provision. The Company will continue to monitor for updates to the Company's business along with guidance issued with respect to the IRA to determine whether any adjustments are needed to the Company's tax provision in future periods.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2023

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 8 – Commitments and contingencies

The Company is involved in various legal proceedings, which arise occasionally in the normal course of business. While the ultimate results of such matters generally cannot be predicted with certainty, management does not expect such matters to have a material effect on the financial position and results of operations as of September 30, 2023.

The Company has two letters of credit totaling $0.6 million as of September 30, 2023 as additional security for lease guarantees related to leased properties.

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Related Parties

9 Months Ended

Sep. 30, 2023

Related Party Transactions [Abstract]

Related parties

Note 9 – Related parties

As of September 30, 2023, $126.2 million including paid-in kind interest of the Company's Convertible Debentures was owed to affiliates of MGG Investment Group, which is an affiliate of a director of the Company. For the three months ended September 30, 2023 and 2022, the Company recognized $3.7 million and $3.5 million in interest expense, respectively, and for the nine months ended September 30, 2023 and 2022, the Company recognized $11.0 million and $10.3 million in interest expense, respectively, related to the Convertible Debentures owned by affiliates of the MGG Investment Group.

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Subsequent Events

9 Months Ended

Sep. 30, 2023

Subsequent Events [Abstract]

Subsequent events

Note 10 – Subsequent events

The Company has evaluated subsequent events since the date on which these financial statements were issued through the date on which this Quarterly Report on Form 10-Q was filed and did not identify any additional items for disclosure.

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Organization, Business and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization

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 16 countries around the world. We provide technology solutions to help our clients solve complex data challenges. The Company’s headquarters are located in Eden Prairie, Minnesota. The Company has 25 locations in 16 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

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, 2022, which we previously filed with the Securities and Exchange Commission (the “SEC”).

Liquidity and going concern evaluation

Liquidity and going concern evaluation

Under 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 (as amended, 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 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 September 30, 2023, the Company’s cash balance was $25.4 million and the Company’s debt balance was $544.8 million, including a balance of $252.3 million under the Convertible Debentures and a balance of $292.5 million in Initial Term Loans under the Amended 2021 Credit Agreement (no amounts were outstanding under the Delayed Draw Term Loans or Revolving Credit Loans). As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Initial Term Loans debt of $292.5 million is included in the current portion of long-term debt in the Condensed Consolidated Balance Sheet at September 30, 2023. As of September 30, 2023, 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 including the Initial Term Loans, at the accelerated maturity date.

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 these or 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

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 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, and stock option awards.

Segments, concentration of credit risk and major customers

Segments, concentration of credit risk and major customers

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 and nine months ended September 30, 2023 and 2022, the Company did not have any single customer that represented five percent (5%) or more of its consolidated revenues or 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 concentrations of credit risk. The Company’s foreign revenues, principally from businesses in the UK and Germany, totaled approximately $11.5 million and $10.5 million for the three months ended September 30, 2023 and 2022, respectively; and $40.6 million and $36.7 million for the nine months ended September 30, 2023, and 2022, respectively. The Company’s long-lived assets in foreign countries, principally in the UK and Germany, totaled approximately $25.8 million and $25.9 million as of September 30, 2023, and December 31, 2022, respectively.

Foreign currency

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

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

Accounts receivable

Accounts receivable are recorded at the original invoice amount less an estimate for doubtful receivables based on a review of outstanding amounts monthly. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables, considering a customer’s financial condition, and evaluating historical experience and management's expectations of future losses. Accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.

Fixed Assets

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 $2.5 million and $2.4 million for the three months ended September 30, 2023 and 2022, respectively, and includes amortization of assets recorded under finance leases. Depreciation expense totaled $7.2 million and $7.3 million for the nine months ended September 30, 2023 and 2022, 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

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 $19.5 million and $17.5 million, net of accumulated amortization, as of September 30, 2023 and December 31, 2022, respectively.

Intangible assets and other long-lived assets

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 $4.0 million and $5.1 million for the three months ended September 30, 2023 and 2022, respectively; $1.5 million and $2.5 million of which, respectively, was classified as part of the “Cost of revenues” line in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Amortization expense totaled $11.9 million and $15.1 million for the nine months ended September 30, 2023 and 2022, respectively; $4.2 million and $7.6 million of which, respectively, was classified as part of the “Cost of revenues” line in the Company’s Condensed Consolidated Statements of Comprehensive Loss.

The Company allocates the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The Company recognizes as goodwill the amount by which the purchase price of an acquired entity exceeds the net of the fair values assigned to the assets acquired and liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, the Company uses various recognized valuation methods including the income and market approaches. Further, the Company makes assumptions within certain valuation techniques, including discount rates, royalty rates, and the amount and timing of future cash flows. The Company records the net assets and results of operations of an acquired entity in the financial statements from the acquisition date. The Company initially performs these valuations based upon preliminary estimates and assumptions by management or independent valuation specialists under its supervision, where appropriate, and make revisions as estimates and assumptions are finalized. The Company expenses acquisition-related costs as they are incurred.

Goodwill

Goodwill

Goodwill represents the excess of the total consideration paid over identified intangible and tangible assets of the Company and its acquisitions. 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, 2022 testing date, the Company determined there is one reporting unit.

Management concluded that there are no triggering events in impairment of goodwill and intangible assets during the nine months ended September 30, 2023. Our goodwill balance is subject to fluctuations in foreign exchange rates.

Debt issuance costs

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

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 tables summarize revenue from contracts with customers for the three and nine months ended September 30, 2023 and 2022 (in thousands):

	2023 Q23						2022 Q3
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	58,077	$	12,982	$	71,059	$	59,966	$	6,478	$	66,444
Data Recovery		8,277		—		8,277		8,100		—		8,100
Total revenue	$	66,354	$	12,982	$	79,336	$	68,066	$	6,478	$	74,544
	2023 YTD						2022 YTD
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	202,619	$	32,011	$	234,630	$	185,105	$	20,346	$	205,451
Data Recovery		25,372		—		25,372		26,182		—		26,182
Total revenue	$	227,991	$	32,011	$	260,002	$	211,287	$	20,346	$	231,633

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

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.

Recently Adopted Accounting Standards

Recently Adopted Accounting Standards

The Company is an Emerging Growth Company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and has elected to take advantage of the extended transition period of delaying the adoption of new or revised accounting standards until such time as those standards apply to private companies. This may make the comparison of the Company’s condensed consolidated financial statements to other public companies not meaningful due to the differences in accounting standards being applied.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. On January 1, 2023, the Company adopted ASU 2016-13 using a modified retrospective approach. The adoption did not have a material impact on the Company's condensed consolidated financial statements.

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Organization, Business and Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Estimated Useful Lives of Assets

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

Summary of Revenue from Contracts with Customers

The following tables summarize revenue from contracts with customers for the three and nine months ended September 30, 2023 and 2022 (in thousands):

	2023 Q23						2022 Q3
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	58,077	$	12,982	$	71,059	$	59,966	$	6,478	$	66,444
Data Recovery		8,277		—		8,277		8,100		—		8,100
Total revenue	$	66,354	$	12,982	$	79,336	$	68,066	$	6,478	$	74,544
	2023 YTD						2022 YTD
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	202,619	$	32,011	$	234,630	$	185,105	$	20,346	$	205,451
Data Recovery		25,372		—		25,372		26,182		—		26,182
Total revenue	$	227,991	$	32,011	$	260,002	$	211,287	$	20,346	$	231,633

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Leases (Tables)

9 Months Ended

Sep. 30, 2023

Leases [Abstract]

Schedule of Future Minimum Payments for Finance and Operating Lease Obligations

Maturities of lease liabilities as of September 30, 2023 were as follows:

	Finance Leases			Operating Leases
Remainder of 2023	$	430		$	2,075
2024		164			6,680
2025		—			3,456
2026		—			1,802
2027		—			403
Thereafter		—			346
Total undiscounted lease payments	$	594		$	14,762
Less: Interest		(6	)		(1,562	)
Present value of lease liabilities	$	588		$	13,200

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Long Term Debt (Tables)

9 Months Ended

Sep. 30, 2023

Long-Term Debt, Unclassified [Abstract]

Summary of Components of Long-term Debt

The table below summarizes the components of the Company’s long-term debt (in thousands):

	September 30, 2023			December 31, 2022
Convertible Debenture notes due 2024	$	252,337		$	244,808
Amended 2021 Credit Agreement due 2026 (1) (2)		292,500			294,750
Total debt		544,837			539,558
Less: unamortized original issue discount		(6,917	)		(10,751	)
Less: unamortized debt issuance costs		(817	)		(1,278	)
Total debt, net		537,103			527,529
Current portion of debt		292,500			3,000
Less: current portion of unamortized original    issue discount		(2,292	)		—
Less: current portion of unamortized debt    issuance costs		(493	)		—
Total current portion of debt, net		289,715			3,000
Total long-term debt, net	$	247,388		$	524,529

_______________________________

(1)The 2021 Credit Agreement was amended on March 3, 2023.

(2)The Amended 2021 Credit Agreement matures 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. As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Term Loan debt of $292.5 million is included in the current portion of long-term debt.

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Equity Incentive Plan (Tables)

9 Months Ended

Sep. 30, 2023

Schedule of Additional Information on Stock Option Grants And Vesting

The following table summarizes additional information on stock option grants and vesting (in thousands):

	2019 Plan
	Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022
Total fair value of stock options granted	$	941	$	2,898
Total fair value of options vested		1,784		944

Schedule of Black Scholes model for the Private Warrants

The following table summarizes the assumptions used in the valuation models to determine the fair value of awards granted to employees and non-employee directors under the 2019 Plan:

	Nine Months Ended September 30, 2023			Nine Months Ended September 30, 2022
Expected volatility		41.2	%	42.78% - 42.90	%
Expected term (in years)		6.00		6.00
Dividend yield		0.00	%	0.00	%
Risk-free interest rate		3.61	%	1.62% - 2.71	%

Stock Based Compensation Expense Included In Condensed Consolidated Statements of Comprehensive Loss

Stock-based compensation expense is included in the Company’s Condensed Consolidated Statements of Comprehensive Loss within the following line items (in thousands):

	Three Months Ended September 30, 2023		Three Months Ended September 30, 2022		Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022
Cost of revenues	$	228	$	396	$	699	$	1,158
General and administrative		422		556		1,319		1,475
Research and development		103		159		273		396
Sales and marketing		88		185		260		626
Total	$	841	$	1,296	$	2,551	$	3,655

Restricted Stock Units [Member]

Schedule of RSUs Activity Under 2019 Plan

The following table summarizes the Company’s RSU activity for performance based RSUs awarded to employees and for time-based RSUs granted to non-employee directors under the 2019 Plan:

Description	RSUs Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
RSUs non-vested, December 31, 2022		1,876,669		$	6.45		6.10
Granted		788,120			2.03		—
Vested		(190,059	)		6.52		—
Forfeited		(27,642	)		6.44		—
Expired		—			—		—
RSUs non-vested, September 30, 2023		2,447,088		$	5.99		5.78

2019 Plan [Member]

Schedule of Stock Option Activity Under 2019 Plan

The following table summarizes the Company’s stock option activity under the 2019 Plan:

Description	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (1)
Options outstanding, December 31, 2022		5,757,779		$	7.92		7.60
Granted		990,296			1.05			$	1,330,150
Exercised		—			—
Forfeited		(25,190	)		5.58
Expired		(160,942	)		8.08
Options outstanding, September 30, 2023		6,561,943		$	9.88		7.33	$	1,330,150
Options vested and exercisable, September 30, 2023		4,509,168		$	8.22		6.67	$	—
Options vested and expected to vest, September 30, 2023		6,561,943		$	9.88		7.33	$	1,330,150

_______________________________

(1)Aggregate intrinsic value (in thousands) represents the difference between the estimated fair value of the underlying Common Stock and the exercise price of outstanding in-the-money options.

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Organization, Business and Summary of Significant Accounting Policies - Additional Information (Detail)		3 Months Ended		9 Months Ended
	Oct. 01, 2021 ReportingUnit	Sep. 30, 2023 USD ($) Datacenter Customer Country Lab Location $ / shares	Sep. 30, 2022 USD ($) Customer	Sep. 30, 2023 USD ($) Datacenter Customer Country Lab Location Segment $ / shares	Sep. 30, 2022 USD ($) Customer	Mar. 03, 2023 USD ($)	Dec. 31, 2022 USD ($) $ / shares	Dec. 19, 2019 USD ($)
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Number of countries | Country		16		16
Number of data centers | Datacenter		9		9
Number of data recovery labs | Lab		13		13
Date of incorporation				Aug. 02, 2018
Common stock, par value | $ / shares		$ 0.0001		$ 0.0001			$ 0.0001
Cash balance		$ 25,400,000		$ 25,400,000
Debt amount, balance due		544,837,000		544,837,000			$ 539,558,000
Current portion of long-term debt		289,715,000		$ 289,715,000			3,000,000
Number of business segment | Segment				1
Revenues		79,336,000	$ 74,544,000	$ 260,002,000	$ 231,633,000
Depreciation expense		2,500,000	2,400,000	7,200,000	7,300,000
Amortization expense		4,000,000	5,100,000	11,900,000	15,100,000
Number of reporting unit | ReportingUnit	1
Amended 2021 Credit Agreement [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Debt principal amount						$ 300,000,000
Delayed draw term loans		0		0		50,000,000
Debt amount, balance due		292,500,000		292,500,000
Current portion of long-term debt		292,500,000		292,500,000
Amended 2021 Credit Agreement [Member] | Revolving Credit Facility [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Line Of Credit		0		0		40,000,000
Amended 2021 Credit Agreement [Member] | Letter of Credit [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Line Of Credit		600,000		600,000		$ 10,000,000
Convertible Debentures Due 2024 [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Debt principal amount								$ 200,000,000
Debt amount, balance due		252,337,000		252,337,000			244,808,000
Cost of Revenues [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Amortization expense		1,500,000	2,500,000	4,200,000	7,600,000
Internal-Use Software Development [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Capitalized software costs		19,500,000		19,500,000			17,500,000
UK and Germany [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Revenues		11,500,000	$ 10,500,000	40,600,000	$ 36,700,000
Long-lived assets		$ 25,800,000		$ 25,800,000			$ 25,900,000
Consolidated Revenues [Member] | Customer Concentration Risk [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Number of customers representing more than 5% of consolidated revenues or accounts receivable | Customer		0	0	0	0
Accounts Receivable [Member] | Customer Concentration Risk [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Number of customers representing more than 5% of consolidated revenues or accounts receivable | Customer		0	0	0	0
Minimum [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Number of locations | Location		25		25
Minimum [Member] | Internal-Use Software Development [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Estimated useful life		3 years		3 years
Maximum [Member] | Internal-Use Software Development [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Estimated useful life		5 years		5 years

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Organization, Business and Summary of Significant Accounting Policies - Estimated Useful Lives of Assets (Detail)	Sep. 30, 2023
Property Plant And Equipment [Line Items]
Property, Plant, and Equipment, Useful Life, Term, Description [Extensible Enumeration]	us-gaap:UsefulLifeShorterOfTermOfLeaseOrAssetUtilityMember
Computer software and hardware | Minimum [Member]
Property Plant And Equipment [Line Items]
Estimated useful lives of assets	3 years
Computer software and hardware | Maximum [Member]
Property Plant And Equipment [Line Items]
Estimated useful lives of assets	5 years
Furniture, fixtures and other equipment | Minimum [Member]
Property Plant And Equipment [Line Items]
Estimated useful lives of assets	3 years
Furniture, fixtures and other equipment | Maximum [Member]
Property Plant And Equipment [Line Items]
Estimated useful lives of assets	5 years

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Organization, Business and Summary of Significant Accounting Policies - Summary of Revenue from Contracts with Customers (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Disaggregation Of Revenue [Line Items]
Revenues	$ 79,336	$ 74,544	$ 260,002	$ 231,633
Technology Solutions
Disaggregation Of Revenue [Line Items]
Revenues	66,354	68,066	227,991	211,287
Nebula
Disaggregation Of Revenue [Line Items]
Revenues	12,982	6,478	32,011	20,346
Legal Technology
Disaggregation Of Revenue [Line Items]
Revenues	71,059	66,444	234,630	205,451
Legal Technology | Technology Solutions
Disaggregation Of Revenue [Line Items]
Revenues	58,077	59,966	202,619	185,105
Legal Technology | Nebula
Disaggregation Of Revenue [Line Items]
Revenues	12,982	6,478	32,011	20,346
Data Recovery
Disaggregation Of Revenue [Line Items]
Revenues	8,277	8,100	25,372	26,182
Data Recovery | Technology Solutions
Disaggregation Of Revenue [Line Items]
Revenues	$ 8,277	$ 8,100	25,372	26,182
Data Recovery | Nebula
Disaggregation Of Revenue [Line Items]
Revenues

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Fair Value Measurements - Additional Information (Detail) - USD ($) $ in Millions	Sep. 30, 2023	Dec. 31, 2022
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value of warrants	$ 0.1	$ 0.6
Liability [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Warrants outstanding	6,350,000

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Leases - Additional Information (Detail)	9 Months Ended
	Sep. 30, 2023
Leases [Abstract]
Operating and capital lease agreements lease expiring year	2029

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Leases - Schedule of Future Minimum Payments for Finance and Operating Lease Obligations (Details) $ in Thousands	Sep. 30, 2023 USD ($)
Finance Leases
Remainder of 2023	$ 430
2024	164
Total undiscounted lease payments	594
Less: Interest	(6)
Present value of lease liabilities	588
Operating Leases
Remainder of 2023	2,075
2024	6,680
2025	3,456
2026	1,802
2027	403
Thereafter	346
Total undiscounted lease payments	14,762
Less: Interest	(1,562)
Present value of lease liabilities	$ 13,200

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Long Term Debt - Summary of Components of Long-term Debt (Detail) - USD ($) $ in Thousands		Sep. 30, 2023	Dec. 31, 2022
Debt Instrument [Line Items]
Total debt		$ 544,837	$ 539,558
Less: unamortized original issue discount		(6,917)	(10,751)
Less: unamortized debt issuance costs		(817)	(1,278)
Total debt, net		537,103	527,529
Current portion of debt		292,500	3,000
Less: current portion of unamortized original issue discount		(2,292)
Less: current portion of unamortized debt issuance costs		(493)
Total current portion of debt, net		289,715	3,000
Long-term debt, net		247,388	524,529
Convertible Debenture Notes Due 2024
Debt Instrument [Line Items]
Total debt		252,337	244,808
Amended 2021 Credit Agreement Due 2026
Debt Instrument [Line Items]
Total debt	[1],[2]	$ 292,500	$ 294,750

[1] The 2021 Credit Agreement was amended on March 3, 2023.

[2] The Amended 2021 Credit Agreement matures 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. As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Term Loan debt of $292.5 million is included in the current portion of long-term debt.

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Long term debt - Summary of Components of Long-term Debt (Parenthetical) (Detail) - USD ($) $ in Thousands		9 Months Ended
		Sep. 30, 2023	Dec. 31, 2022
Debt Instrument [Line Items]
Debt instrument, maturity description		The Amended 2021 Credit Agreement matures 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. As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Term Loan debt of $292.5 million is included in the current portion of long-term debt.
Term Loan debt		$ 544,837	$ 539,558
Amended 2021 Credit Agreement Due 2026
Debt Instrument [Line Items]
Term Loan debt	[1],[2]	292,500	$ 294,750
Amended 2021 Credit Agreement Due 2026 | Current Portion of Long Term Debt
Debt Instrument [Line Items]
Term Loan debt		$ 292,500

[1] The 2021 Credit Agreement was amended on March 3, 2023.

[2] The Amended 2021 Credit Agreement matures 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. As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Term Loan debt of $292.5 million is included in the current portion of long-term debt.

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Long Term Debt - Additional Information (Detail) - USD ($)			9 Months Ended
	Mar. 03, 2023	Dec. 19, 2019	Sep. 30, 2023	Dec. 31, 2022
Debt Instrument [Line Items]
Debt instrument, maturity description			The Amended 2021 Credit Agreement matures 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. As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Term Loan debt of $292.5 million is included in the current portion of long-term debt.
Debt amount, balance due			$ 544,837,000	$ 539,558,000
Convertible Debentures Due 2024 [Member]
Debt Instrument [Line Items]
Debt principal amount		$ 200,000,000
Term loan maturity date		Dec. 19, 2024
Debt amount, balance due			$ 252,337,000	$ 244,808,000
Debt interest rate in cash		4.00%
Debt interest rate in kind		4.00%
Debt periodic payment			bear interest at an annual rate of 4.00% in cash, payable quarterly, and 4.00% in kind, accrued quarterly, on the last business day of March, June, September and December.
Percentage of amount will add to principal amount			3.00%
Principal amount of debt redeemed		100.00%
Debt conversion price per share		$ 18
Percentage of principal amount paid in event of default			25.00%
Term Loans and Delayed Draw Term Loans [Member]
Debt Instrument [Line Items]
Floor interest rate	1.00%
Term loan balance due			$ 292,500,000
Adjusted SOFR Rate [Member] | Term Loans and Delayed Draw Term Loans [Member]
Debt Instrument [Line Items]
Loan variable interest rate			0.10%
SOFR [Member] | Term Loans and Delayed Draw Term Loans [Member]
Debt Instrument [Line Items]
Loan variable interest rate			6.50%
Term loan interest rate per annum during period			5.39008%
Amended 2021 Credit Agreement [Member]
Debt Instrument [Line Items]
Debt principal amount	$ 300,000,000
Delayed draw term loans	50,000,000		$ 0
Debt instrument, maturity description			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 Initial Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the Amended 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the Amended 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.
Debt instrument, closing fees	$ 8,000,000
Debt amount, balance due			$ 292,500,000
Amended 2021 Credit Agreement [Member] | Maximum [Member]
Debt Instrument [Line Items]
Debt instrument, net leverage ratio	7
Amended 2021 Credit Agreement [Member] | Minimum [Member]
Debt Instrument [Line Items]
Debt instrument, net leverage ratio	1
Amended 2021 Credit Agreement [Member] | Term Loans and Delayed Draw Term Loans [Member]
Debt Instrument [Line Items]
Loans amortize rate	1.00%
Quarterly installment	$ 800,000
Amended 2021 Credit Agreement [Member] | Adjusted SOFR Rate [Member] | Term Loans and Delayed Draw Term Loans [Member]
Debt Instrument [Line Items]
Loan variable interest rate	6.50%
Amended 2021 Credit Agreement [Member] | SOFR [Member]
Debt Instrument [Line Items]
Loan variable interest rate	0.10%
Amended 2021 Credit Agreement [Member] | SOFR [Member] | Term Loans and Delayed Draw Term Loans [Member]
Debt Instrument [Line Items]
Loan variable interest rate	0.10%
Amended 2021 Credit Agreement [Member] | Base Rate [Member] | Term Loans and Delayed Draw Term Loans [Member]
Debt Instrument [Line Items]
Loan variable interest rate	5.50%
Amended 2021 Credit Agreement [Member] | Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Revolving credit loans	$ 40,000,000		0
Amended 2021 Credit Agreement [Member] | Revolving Credit Facility [Member] | SOFR [Member]
Debt Instrument [Line Items]
Loan variable interest rate	4.00%
Amended 2021 Credit Agreement [Member] | Revolving Credit Facility [Member] | Base Rate [Member]
Debt Instrument [Line Items]
Loan variable interest rate	3.00%
Amended 2021 Credit Agreement [Member] | Letter of Credit [Member]
Debt Instrument [Line Items]
Revolving credit loans	$ 10,000,000		600,000
Amended 2021 Credit Agreement [Member] | Revolving Credit Loans [Member]
Debt Instrument [Line Items]
Revolving credit loans	$ 40,000,000
Available borrowing capacity			$ 39,400,000

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Equity Incentive Plan - Additional Information (Detail) $ / shares in Units, $ in Thousands	1 Months Ended	3 Months Ended			9 Months Ended
	Apr. 30, 2023 shares	Sep. 30, 2023 USD ($) Installment shares	Jun. 30, 2023 shares	Sep. 30, 2022 USD ($) Installment	Sep. 30, 2023 USD ($) Installment $ / shares shares	Sep. 30, 2022 USD ($) Installment $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation | $					$ 2,550	$ 3,656
Nebula
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation | $		$ 200		$ 100
Performance Based Restricted Stock Option [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Vesting maximum number of annual installments | Installment		3			3
Vested			(73,726)
Granted					369,056	463,000
Performance Based Restricted Stock Option [Member] | Annual Consolidated Revenue [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Vesting maximum number of annual installments | Installment		3		3	3	3
Share based compensation arrangement by share based payment award vest based on achievement					50.00%	50.00%
Performance Based Restricted Stock Option [Member] | Nebula
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Vesting maximum number of annual installments | Installment		3		3	3	3
Share based compensation arrangement by share based payment award achievement period					3 years
Share based compensation arrangement by share based payment award vest based on achievement					50.00%	50.00%
Time-Based Restricted Stock Units [Member] | Non Employee Director [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation | $		$ 200		$ 200	$ 600	$ 500
Time-Based Restricted Stock Units [Member] | Maximum [Member] | Non Employee Director [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Vesting period					3 years
Time-Based Restricted Stock Units [Member] | Minimum [Member] | Non Employee Director [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Vesting period					1 year
2019 Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Percentage of share increase					5.00%
Shares increases in period	2,146,006
Common stock options authorized under plan		13,906,684			13,906,684
Common stock options available for issuance		2,512,708			2,512,708
Options granted					990,296
2019 Plan [Member] | Time Based Vesting Stock Option [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Vesting period					3 years
Weighted average fair value granted | $ / shares					$ 0.95	$ 2.55
Stock-based compensation | $		$ 800		1,300	$ 2,600	$ 3,700
Unrecognized stock-based compensation expense | $		$ 2,300		$ 3,900	$ 2,300	$ 3,900
Unrecognized stock-based compensation expense, period					1 year 8 months 12 days	2 years
2019 Plan [Member] | Time Based Vesting Stock Option [Member] | Maximum [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Expiration period					10 years

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Equity Incentive Plan - Schedule of Stock Option Activity Under 2019 Plan (Detail) - 2019 Plan [Member] - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2023	Dec. 31, 2022
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning balance	5,757,779
Options granted	990,296
Options forfeited	(25,190)
Options expired	(160,942)
Options outstanding, ending balance	6,561,943	5,757,779
Options vested and exercisable	4,509,168
Options vested and expected to vest	6,561,943
Weighted average exercise price, beginning balance	$ 7.92
Weighted average exercise price, granted	1.05
Weighted average exercise price, forfeited	5.58
Weighted average exercise price, expired	8.08
Weighted average exercise price, ending balance	9.88	$ 7.92
Weighted average exercise price, vested and exercisable	8.22
Weighted average exercise price, vested and expected to vest	$ 9.88
Weighted average remaining contractual term, balance	7 years 3 months 29 days	7 years 7 months 6 days
Options vested and exercisable, September 30, 2023	6 years 8 months 1 day
Options vested and expected to vest, September 30, 2023	7 years 3 months 29 days
Aggregate intrinsic value, vested and Granted	$ 1,330,150
Aggregate intrinsic value, Ending balance	$ 1,330,150
Aggregate intrinsic value, vested and expected to vest	$ 1,330,150

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Equity Incentive Plan - Schedule of Additional Information on Stock Option Grants And Vesting (Detail) - 2019 Plan [Member] - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total fair value of stock options granted	$ 941	$ 2,898
Total fair value of options vested	$ 1,784	$ 944

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Equity Incentive Plan - Summary of Valuation Models of Fair Value of Awards Granted To Employees and Non-Employees Under 2019 Plan (Detail) - 2019 Plan [Member]	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Expected volatility, Minimum		42.78%
Expected volatility, Maximum		42.90%
Expected volatility	41.20%
Expected term (in years)	6 years	6 years
Dividend yield	0.00%	0.00%
Risk free interest rate	3.61%
Risk-free interest rate, Minimum		1.62%
Risk-free interest rate, Maximum		2.71%

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Equity Incentive Plan - Stock Based Compensation Expense Included In Condensed Consolidated Statements of Comprehensive Loss (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 841	$ 1,296	$ 2,551	$ 3,655
Cost of Revenues [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	228	396	699	1,158
General and administrative [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	422	556	1,319	1,475
Research and development [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	103	159	273	396
Sales and marketing [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 88	$ 185	$ 260	$ 626

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Equity Incentive Plan - Schedule of RSUs Activity for Performance-based RSUs Awarded to Employees Under 2019 Plan (Detail) - 2019 Plan [Member] - Restricted Stock Units [Member] - $ / shares	9 Months Ended	12 Months Ended
	Sep. 30, 2023	Dec. 31, 2022
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
RSUs non-vested, Beginning Balance	1,876,669
Granted	788,120
Vested	(190,059)
Forfeited	(27,642)
RSUs non-vested, Ending Balance	2,447,088	1,876,669
Weighted Average Exercise Price, RSUs non-vested Beginning Balance	$ 6.45
Weighted average fair value granted	2.03
Weighted Average Exercise Price,Vested	6.52
Weighted Average Exercise Price,Forfeited	6.44
Weighted Average Exercise Price, RSUs non-vested Ending Balance	$ 5.99	$ 6.45
Weighted Average Remaining Contractual Term	5 years 9 months 10 days	6 years 1 month 6 days

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Equity - Additional Information (Detail) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Dec. 31, 2022
Class Of Stock [Line Items]
Common stock, shares authorized	200,000,000		200,000,000	200,000,000
Common stock, par value	$ 0.0001		$ 0.0001	$ 0.0001
Preferred stock, shares authorized	1,000,000		1,000,000	1,000,000
Preferred Stock, per share	$ 0.0001		$ 0.0001	$ 0.0001
Common stock, voting rights			one vote for each share
Common stock, shares issued	0	0
Pivotal Acquisition Corp. [Member]
Class Of Stock [Line Items]
Description of warrants			Each warrant entitles the holder to purchase one share of Common Stock for $11.50 per share. If exercised by the initial purchaser of the Private Warrant or certain permitted transferees, the purchase can occur on a cashless basis. The Warrants will expire on December 19, 2024 or earlier upon redemption or liquidation.
Exercise price	$ 11.50		$ 11.50
Warrants expiration date	Dec. 19, 2024		Dec. 19, 2024
Sale price of common stock	$ 18.00		$ 18.00
Number of business days			3 days
Pivotal Acquisition Corp. [Member] | Minimum [Member]
Class Of Stock [Line Items]
Number of trading days			20 days
Pivotal Acquisition Corp. [Member] | Maximum [Member]
Class Of Stock [Line Items]
Number of trading days			30 days
Pivotal Acquisition Corp. [Member] | Common Stock [Member]
Class Of Stock [Line Items]
Number of securities eligible for each warrant	1		1
Pivotal Acquisition Holdings LLC [Member]
Class Of Stock [Line Items]
Recapitalization transaction (in shares)			550,000
Number of consecutive trading days			20 days
Reverse merger transaction, sale of common stock description			On December 19, 2019, in connection with the consummation of the Business Combination, 550,000 shares of common stock held by Pivotal Acquisition Holdings LLC and its permitted transferees were subjected to an additional lockup that will be released only if the last reported sale price of the common stock equals or exceeds $15.00 for a period of 20 consecutive trading days during the five-year period following the Closing Date. If the last reported sale price of common stock does not equal or exceed $15.00 within five years from the Closing Date, such shares will be forfeited to the Company for no consideration. These shares are reported as outstanding in the Company’s financial statements and continue to be subject to the additional lockup as of September 30, 2023.
Closing stock price period			5 years
Forfeited amount			$ 0
Pivotal Acquisition Holdings LLC [Member] | Minimum [Member]
Class Of Stock [Line Items]
Closing sale price of company's common stock	$ 15.00		$ 15.00
Pivotal Acquisition Holdings LLC [Member] | Maximum [Member]
Class Of Stock [Line Items]
Closing sale price of company's common stock	$ 15.00		$ 15.00
Public Warrants [Member] | Pivotal Acquisition Corp. [Member]
Class Of Stock [Line Items]
Warrants outstanding	23,000,000		23,000,000
Exercise price	$ 0.01		$ 0.01
Public Warrants [Member] | Pivotal Acquisition Corp. [Member] | Maximum [Member]
Class Of Stock [Line Items]
Minimum prior written notice period			30 days
Private Warrants [Member] | Pivotal Acquisition Corp. [Member]
Class Of Stock [Line Items]
Warrants outstanding	6,350,000		6,350,000

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Income Taxes - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Income Tax Disclosure [Abstract]
Income tax provision (benefit)	$ 1,061	$ 644	$ 1,538	$ 1,161
Effective tax rate	(10.70%)	(3.60%)	(7.90%)	(3.20%)

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Commitments and Contingencies - Additional Information (Detail) $ in Millions	Sep. 30, 2023 USD ($) LetterofCredit
Commitments And Contingencies Disclosure [Abstract]
Number of letters of credit | LetterofCredit	2
Letters of credit as additional security for lease guarantees | $	$ 0.6

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Related Parties - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Related Party Transaction [Line Items]
Interest expense	$ 17,235	$ 13,960	$ 49,197	$ 39,527
MGG Investment Group [Member] | Convertible Debenture [Member]
Related Party Transaction [Line Items]
Debt instrument outstanding	126,200		126,200
MGG Investment Group [Member] | Convertible Debenture [Member] | Related Party [Member]
Related Party Transaction [Line Items]
Interest expense	$ 3,700	$ 3,500	$ 11,000	$ 10,300